153556 Reed Report cover 3/3/05 5:48 pm Page 1
Indispensable Global Information
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Annual Reports and
Financial Statements 2004
For the Reed Elsevier Combined Businesses,
Reed Elsevier PLC and Reed Elsevier NV
153556 Reed Report cover 3/3/05 5:49 pm Page 2
Annual Reports and Financial Statements 2004
Contents
Financial highlights
Operating and financial review
Structure and corporate governance
Report of the audit committees
Directors’ remuneration report
> 01
> 03
> 22
> 28
> 31
Reed Elsevier combined financial statements
Accounting policies
Combined financial statements
Notes to the combined financial
statements
Independent auditors’ report
> 50
> 74
> 44
> 46
Reed Elsevier PLC annual
report and financial statements
Financial highlights
Directors’ report
Accounting policies
Financial statements
Notes to the financial statements
Independent auditors’ report
Reed Elsevier NV annual report
and financial statements
Financial highlights
The Supervisory Board’s report
The Executive Board’s report
Accounting policies
Financial statements
Notes to the financial statements
Independent auditors’ report
Other information
Adoption of International Financial
Reporting Standards
Adoption of IFRS
Reed Elsevier combined businesses
Reed Elsevier PLC
Reed Elsevier NV
Additional information for US investors
Reed Elsevier combined businesses
Reed Elsevier PLC
Reed Elsevier NV
Principal operating locations
> 76
> 77
> 80
> 81
> 85
> 92
> 94
> 95
> 95
> 96
> 98
> 101
> 109
> 109
> 112
> 115
> 134
> 137
> 142
> 147
> 149
> 151
This document contains Annual Reports
information and the Financial Statements in
respect of the Reed Elsevier combined
businesses and the two parent companies,
Reed Elsevier PLC and Reed Elsevier NV.
This, together with the separate summary
document Reed Elsevier Annual Review and
Summary Financial Statements 2004, forms
the Annual Reports and Financial Statements
of Reed Elsevier PLC and Reed Elsevier NV
for the year ended 31 December 2004 and the
two documents should be read together.
153556 pg001_21 report 3/3/05 5:51 pm Page 01
Reed Elsevier Annual Reports and Financial Statements 2004
01
Financial highlights
For the year ended 31 December 2004
Reed Elsevier combined businesses
Reported figures
Turnover
Operating profit
Profit before taxation
Net borrowings
Adjusted figures
Operating profit
Profit before taxation
Operating cash flow
Operating margin
Operating cash flow conversion
Interest cover (times)
Parent companies
Reported profit attributable
Adjusted profit attributable
Average US$: £/€ exchange rate
Reported earnings per share
Adjusted earnings per share
Dividend per share
Reed Elsevier PLC
2004
£m
152
402
1.83
12.0p
31.8p
13.0p
2003
£m
169
394
1.63
13.4p
31.2p
12.0p
£
2003
£m
4,925
661
519
2,372
1,178
1,010
1,028
24%
87%
7.0
2004
€m
7,074
1,024
826
3,570
1,704
1,510
1,544
24%
91%
8.8
Reed Elsevier NV
2004
€m
223
559
1.24
€0.28
€0.71
€0.33
2003
€m
242
540
1.12
€0.31
€0.69
€0.30
€
2003
€m
7,141
958
752
3,368
1,708
1,465
1,491
24%
87%
7.0
€
%
change
-8%
+4%
-10%
+3%
+10%
2004
£m
4,812
697
562
2,532
1,159
1,027
1,050
24%
91%
8.8
£
%
change
-10%
+2%
-10%
+2%
+8%
%
Change
at constant
currencies
+5%
+10%
+12%
+5%
+8%
+9%
0.2pts
%
Change
at constant
currencies
+8%
+8%
The Reed Elsevier combined businesses encompass the businesses of Reed Elsevier Group plc and Elsevier Reed Finance
BV, together with their two parent companies, Reed Elsevier PLC and Reed Elsevier NV (the “Reed Elsevier combined
businesses”). The results of Reed Elsevier PLC reflect its shareholders’ 52.9% economic interest in the Reed Elsevier
combined businesses. The results of Reed Elsevier NV reflect its shareholders’ 50% economic interest in the Reed Elsevier
combined businesses. The respective economic interests of the Reed Elsevier PLC and Reed Elsevier NV shareholders
take account of Reed Elsevier PLC’s 5.8% interest in Reed Elsevier NV.
The financial highlights presented refer to “adjusted” profit and cash flow figures. These figures are used by the Reed
Elsevier businesses as additional performance measures and are stated before the amortisation of goodwill and intangible
assets, exceptional items and related tax effects. Reconciliations between the reported and adjusted figures are provided
in the notes to the financial statements.
The percentage change at constant currencies refers to the movements at constant exchange rates, using 2003 full year
average rates.
153556 pg001_21 report 3/3/05 5:51 pm Page 02
02
Financial highlights
Reed Elsevier combined businesses
£ Turnover
m
0
2
0
,
5
£
m
5
2
9
,
4
£
m
2
1
8
,
4
£
m
0
6
5
,
4
£
m
8
6
7
,
3
£
Adjusted
operating profit
Adjusted
operating cash flow
Adjusted
pre-tax profit
m
8
7
1
,
1
£
m
3
3
1
,
1
£
m
9
5
1
,
1
£
m
0
9
9
m £
3
9
7
£
m
6
0
0
,
1
m £
5
7
7
£
m
0
1
0
,
1
£
m
8
2
0
,
1
£
m
0
5
0
,
1
£
m
0
1
0
,
1
£
m
7
2
0
,
1
£
m
7
2
9
£
m
8
4
8
m £
0
9
6
£
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
€
Turnover
m
2
8
9
,
7
€
m
2
4
3
,
7
€
m
1
4
1
,
7
€
m
4
7
0
,
7
€
m
0
8
1
,
6
€
Adjusted
operating profit
m
1
0
8
,
1
€
m
8
0
7
,
1
€
m
4
0
7
,
1
€
m
4
9
5
,
1
€
m
1
0
3
,
1
€
Adjusted
operating cash flow
Adjusted
pre-tax profit
m
0
2
6
,
1
€
m
6
0
6
,
1
€
m
4
4
5
,
1
€
m
1
9
4
,
1
€
m
1
7
2
,
1
€
m
4
7
4
,
1
€
m
5
6
4
,
1
€
m
0
1
5
,
1
€
m
5
6
3
,
1
€
m
2
3
1
,
1
€
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
Reed Elsevier PLC
Reed Elsevier NV
£ Adjusted
earnings per share
Full year
dividend
€
Adjusted
earnings per share
Full year
dividend
p
2
.
1
3
p
8
.
1
3
p
5
.
8
2
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1
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6
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3
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4
0
0
0
1
0
2
0
3
0
4
0
153556 pg001_21 report 3/3/05 5:51 pm Page 03
Reed Elsevier Annual Reports and Financial Statements 2004
03
Operating and financial review
Description of business
Reed Elsevier
Reed Elsevier is one of the world’s leading publishers and
information providers. The principal operations are in North
America and Europe and include science and medical,
legal, education and business publishing. Total revenues
for the year ended 31 December 2004 were £4,812
million/€7,074 million principally derived from
subscriptions, circulation and copy sales, advertising sales
and exhibition fees.
Reed Elsevier is well positioned in markets with attractive
growth prospects and has a clear investment led growth
strategy focused on building revenue momentum across
all our businesses.
Long term growth in our markets is expected to be
sustained by the continuing demand for professional
information. The increasing levels of scientific, medical,
legal and business activity as well as the commitment to
improved educational standards are generating more
demand for high quality, specialist information. Recently
these markets have been impacted by the late cycle effects
of global economic slowdown but are beginning to see
improvement, with most sectors showing positive growth
trends. In addition, professionals are looking for significant
improvements in productivity through access to highly
functional online services and associated workflow tools.
Our strategy is aimed at delivering accelerated sales
growth in these markets with innovative products based on
our content development skills and technology leadership
supported by strong sales and marketing capabilities. We
expect to see sustainable growth in our core information
offerings and to develop these further in new geographical
and commercial markets. Additionally we are expanding
through investment and acquisition into new and faster
growing contiguous markets. Our commitment to our
ongoing major investment programmes is aimed at
delivering highly functional information based products and
services that deliver greater productivity and success for
our business and professional customers.
Our strategy to deliver strong top line growth is
accompanied by continued commitment to outstanding
execution built on strong management, organisational
effectiveness and tight cost control.
We have established long term financial targets which are
to achieve above market revenue growth and double digit
adjusted earnings per share growth at constant currencies.
The business is strongly cash generative.
Elsevier
Elsevier comprises worldwide scientific, technical and
medical publishing and communications businesses.
Total revenues for the year ended 31 December 2004 were
£1,363 million/€2,004 million.
Growth in the scientific information market is driven by
ever increasing scientific research and discovery and the
demands for greater efficiency and productivity in the
research process. In healthcare, advances in medical
science and procedures and the demand for improved
medical outcomes give rise to the need for high quality
specialist information and associated online tools.
The Science & Technology division of Elsevier supplies
scientific and technical information for libraries, scientists
and professionals serving a wide range of research fields.
It is the leading global academic journal publisher and each
year publishes over 170,000 new research articles in some
1,200 journals and over 1,000 new book titles. Elsevier also
publishes secondary material in the form of supporting
bibliographic data, indexes and abstracts, and tertiary
information in the form of review and reference works.
Its flagship electronic product, ScienceDirect, is a full text
online research service holding 6.7 million scientific
articles and 40 major reference works. The fully searchable
database is accessed by over 10 million users each year
Forward looking statements
The Reed Elsevier Annual Reports and Financial Statements 2004 contain forward looking statements within the meaning
of Section 27A of the US Securities Act 1933, as amended, and Section 21E of the Securities Exchange Act 1934, as
amended. These statements are subject to a number of risks and uncertainties and actual results and events could differ
materially from those currently being anticipated as reflected in such forward looking statements. The terms ‘expect’,
‘should be’, ‘will be’, and similar expressions identify forward looking statements. Factors which may cause future
outcomes to differ from those foreseen in forward looking statements include, but are not limited to: general economic
conditions and business conditions in Reed Elsevier’s markets; exchange rate fluctuations; customers’ acceptance of its
products and services; the actions of competitors; legislative, fiscal and regulatory developments; changes in law and legal
interpretation affecting Reed Elsevier’s intellectual property rights and internet communications; and the impact of
technological change.
153556 pg001_21 report 3/3/05 5:51 pm Page 04
04
Operating and financial review
and has provided significant improvements in productivity
through quicker and easier access to high quality content.
Elsevier continues to develop its electronic product offering
and in 2004 launched Scopus, an abstract and index
database and navigational tool which significantly enhances
research productivity.
The Health Sciences division of Elsevier comprises an
international network of nursing, health professions and
medical publishing and communications businesses. The
division supplies healthcare and medical information to
medical researchers, practicing professionals and students.
It publishes over 10,000 book titles and clinical reference
works and over 500 journals. Elsevier is also seeing
acceleration in the development of electronic products.
These include multimedia products for use by both medical
faculties and students to support core textbooks as well as
online products for practitioner reference. Internationally,
Elsevier is leveraging both its print and online content into
new markets through foreign language versions. The
Excerpta Medica Communications business publishes
customised information for healthcare professionals,
medical societies and pharmaceutical companies.
LexisNexis
LexisNexis provides legal, tax, regulatory and business
information to professional, business and government
customers internationally. Total revenues for the year
ended 31 December 2004 were £1,292 million/
€1,899 million.
Legal and regulatory markets worldwide are seeing
continuing growth driven by the increasing level of
legislation and litigation, as well as the increasing number
of lawyers. Additional opportunities are also developing
beyond the core research market, through the delivery of
value added services to meet demands for greater legal
efficiency and productivity. Increasingly legal information
and services are being delivered online, with considerable
potential to deliver such products in markets outside the
United States where online migration is significantly lower
than in the US legal market. In recent years, LexisNexis
has, with its comprehensive US public records databases,
expanded in the market for risk solutions. This is growing
dramatically in the face of increasing credit card fraud
and identity theft.
LexisNexis North America offers legal information
products in electronic and print formats to law firms and
practitioners, law schools and state and local governments
in the United States and Canada. Its North American Legal
Markets division provides statutes and case law for all
50 US states and Canada as well as research, analysis and
citation services from Matthew Bender, Michie and
Shepard’s. The Martindale Hubbell Law Directory and
martindale.com databases provide access to the
qualifications and credentials of over one million lawyers
and law firms worldwide. LexisNexis also operates in fast
growing areas beyond its core research product. These
include electronic legal discovery applications as well as
electronic filing of documents with courts and electronic
access and monitoring of court records. The Corporate and
Federal Markets division offers LexisNexis products and
services to corporations, federal government agencies and
academic institutions together with news, business,
financial and public records content. Its risk management
applications are designed to assist customers in managing
risk through fraud detection and prevention, identity
verification, pre-employment screening and due diligence.
The 2004 acquisition of Seisint strengthens LexisNexis’
position as a leading provider of public record solutions in
the fast growing US risk management sector.
Outside North America, LexisNexis International serves
markets in Europe, Africa, Asia Pacific and Latin America
with a range of local and international legal, tax, regulatory
and business information solutions.
Harcourt Education
Harcourt Education publishes school textbooks and related
instructional and assessment materials, principally in the
United States, the United Kingdom, Australia, New Zealand
and southern Africa. Total revenues for the year ended
31 December 2004 were £868 million/€1,276 million.
The long standing commitment by governments to
improving educational standards remains strong and there
is a continuing requirement to deliver proven educational
programmes to support this. In recent years, there has also
been further emphasis on the measurement of the
educational results of students, both to monitor and assist
improvement in individual educational outcomes and to
improve accountability. Overall funding for education is
expected to continue to increase.
In the United States, Harcourt School Publishers is a
publisher of print and technology enabled instructional
materials for students in kindergarten to 6th grade. Holt,
Rinehart and Winston offers educational textbooks and
related instructional materials for students in middle and
secondary schools. Harcourt Achieve is a publisher of
supplemental school and adult education materials as
well as providing professional development services for
teachers. In 2004 Harcourt Achieve significantly extended
its capabilities in math supplemental materials through the
acquisition of Saxon Publishers. Greenwood-Heinemann
publishes monograph and reference lists and professional
resources for teachers. The Global Library business
publishes reference materials for school libraries. Harcourt
Education has achieved strong performance in recent years
both in the adoption states and open territories based on
strong curriculum product in key subjects such as reading
153556 pg001_21 report 3/3/05 5:51 pm Page 05
Reed Elsevier Annual Reports and Financial Statements 2004
05
and literature, science and health and elementary maths
and social studies.
Harcourt Assessment develops assessment products and
services for elementary, secondary and higher education
as well as tests for practising and research psychologists.
In educational testing, it provides a range of achievement,
aptitude and guidance testing services for measuring
student progress. It is well known for the Stanford
Achievement Test, now in its 10th edition, which is used
in school districts in every US state. In clinical testing, it
provides psychologists with assessment tests for many
aspects of human behaviour, intelligence and development.
The Wechsler products, including the Wechsler Preschool
and Primary Scale of Intelligence, are licensed for
publication in over 30 countries.
Outside the United States, Harcourt Education International
is a provider of textbooks and related instructional
materials to the UK primary and secondary schools market
through the Heinemann, Rigby and Ginn imprints and
other English language markets in Australia, New Zealand
and southern Africa.
Reed Business
The business division, Reed Business, provides information
and marketing solutions to business professionals in the
United States, the United Kingdom, continental Europe,
Australia and Asia. The division also organises trade
exhibitions internationally. Total revenues for the year ended
31 December 2004 were £1,289 million/€1,895 million.
Business to business magazines provide an effective
marketing channel through which advertisers reach their
target audiences, increasingly delivered through leading
brands in each sector. Alongside print magazines, demand
is growing for online products which provide improvements
in productivity through quicker and easier access to more
comprehensive and searchable data. Business to business
marketing spend has been driven historically by levels of
corporate profitability, which itself has followed overall
growth in GDP and business investment.
Reed Business Information publishes over 400 trade
magazines, directories, newsletters and loose leaf
publications. Important magazine titles include Variety and
Publishers Weekly in the United States, Computer Weekly,
Estates Gazette, Flight International and New Scientist in
the United Kingdom, and Elsevier and FEM in the
Netherlands. Reed Business Information also publishes
directories in selected markets, including the industrial
directory Kelly’s and The Bankers’ Almanac. Through its
Reed Construction Data business, it provides nationwide
coverage of construction project information for the
United States.
The majority of Reed Business Information’s magazines
drive further value through companion websites. In
addition, Reed Business Information has been particularly
successful in developing online products and services,
which have been growing at over 30% per annum and
contribute 9% of the division’s total revenues. These
products include totaljobs.com, the major online
recruitment site in the UK; ICIS-LOR, a global information
and pricing service for the petrochemicals sector; zibb.nl,
a business information service in the Netherlands; and
Kellysearch.com, an industrial search engine which is
being launched internationally.
Reed Exhibitions organises trade exhibitions and
conferences internationally, with over 420 events in
34 countries, attracting over 85,000 exhibitors and more
than 5 million visitors annually. Its exhibitions and
conferences encompass a wide range of sectors, including
IT, manufacturing, aerospace, defence, leisure, electronics,
food and hospitality, travel and entertainment. Increasingly
Reed Exhibitions is also developing online services to
increase the effectiveness and efficiency of its trade shows.
Further information on the performance of the individual
businesses in 2004 is set out below.
Risks
The key risks facing Reed Elsevier arise from the highly
competitive and rapidly changing nature of our markets,
the increasingly technological nature of our products and
services, the international nature of our operations, and
legal and regulatory uncertainties. Certain businesses are
also affected by the impact on publicly funded customers of
changes in funding and by cyclical pressures on advertising
and promotional spending.
Reed Elsevier has an established risk management
procedure that is embedded into the operations of the
businesses and is reviewed by the Boards and Audit
Committees. Important specific risks that have been
identified and are being addressed include:
• Reed Elsevier’s businesses are dependent on the
continued acceptance by our customers of our products
and services and the prices which we charge for them.
We cannot predict whether there will be changes in the
future which will affect the acceptability of products,
services and prices to our customers.
• We are investing significant amounts to develop and
promote electronic products and platforms. The
provision of these products and services is very
competitive and is to some extent subject to factors
outside our control such as competition from new
153556 pg001_21 report 3/3/05 5:51 pm Page 06
06
Operating and financial review
technologies and changes in regulation. There is no
assurance that this investment will produce satisfactory
long term returns.
• Reed Elsevier’s businesses are increasingly dependent
on electronic platforms and networks, primarily the
internet, for delivery of their products and services.
Although plans and procedures are in place to reduce
such risks, our businesses could be adversely affected
if their electronic delivery platforms and networks
experience a significant failure, interruption, or
security breach.
• Our products and services are largely comprised of
intellectual property content delivered through a variety
of media. We rely on trademark, copyright, patent and
other intellectual property laws to establish and protect
our proprietary rights in these products and services.
However, there is a risk that our proprietary rights
could be challenged, limited, invalidated or
circumvented.
• Our businesses operate in over 100 locations worldwide
and our earnings are subject to taxation in many
differing jurisdictions and at differing rates. We seek to
organise our affairs in a tax efficient manner, taking
account of the jurisdictions in which we operate.
However, tax laws that apply to Reed Elsevier
businesses may be amended by the relevant authorities.
Such amendments, or their application to Reed Elsevier
businesses, could adversely affect our reported results.
Our financial statements are expressed in pounds sterling
and euros and are, therefore, subject to movements in
exchange rates on the translation of the financial
information of businesses whose operational currencies
are other than our reporting currencies. The United States
is our most important market and, accordingly, significant
fluctuations in US dollar exchange rates could significantly
affect our reported results.
Further details on risk management and internal control
procedures are set out in the Structure and Corporate
Governance report on pages 22 to 27.
153556 pg001_21 report 3/3/05 5:51 pm Page 07
Operating review
Turnover
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Adjusted operating profit
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Reed Elsevier Annual Reports and Financial Statements 2004
07
£
2003
£m
1,381
1,318
898
1,328
4,925
467
301
174
236
1,178
2004
£m
1,363
1,292
868
1,289
4,812
460
308
164
227
1,159
€
2003
€m
2,002
1,911
1,302
1,926
7,141
677
437
252
342
1,708
2004
€m
2,004
1,899
1,276
1,895
7,074
676
453
241
334
1,704
%
Change
at constant
currencies
4%
7%
7%
2%
5%
3%
11%
5%
–
5%
Adjusted figures are used by Reed Elsevier as additional performance measures and are stated before amortisation of goodwill and intangible
assets and exceptional items.
The operating review refers to adjusted operating profit performance. Adjusted figures are used by Reed Elsevier as
additional performance measures and are stated before amortisation of goodwill and intangible assets and exceptional
items. Reported operating results, including amortisation of goodwill and intangible assets and exceptional items, are
analysed in note 1 to the combined financial statements and discussed further below in the Financial Review, and are
reconciled to the adjusted figures in note 10 to the combined financial statements.
Unless otherwise indicated, all percentage movements in the following commentary refer to constant currency rates,
using 2003 full year average rates, and are stated before the amortisation of goodwill and intangible assets and
exceptional items.
153556 pg001_21 report 3/3/05 5:51 pm Page 08
08
Operating and financial review
Elsevier
Turnover
Science & Technology
Health Sciences
Adjusted operating profit
Adjusted operating margin
£
2003
£m
789
592
1,381
467
33.8%
2004
£m
779
584
1,363
460
33.7%
€
2003
€m
1,144
858
2,002
677
33.8%
2004
€m
1,145
859
2,004
676
33.7%
%
Change
at constant
currencies
3%
6%
4%
3%
-0.1pts
The Elsevier science and medical business has seen
strong subscription renewals, growing online sales,
and a successful medical book publishing programme.
Underlying revenue growth at 4% was however a little
disappointing, held back by budgetary constraints in
academic institutions and some new product delay.
Growth should now improve with new products launched
and widening distribution, and some initial signs of
easing of budgetary pressures.
Revenue and adjusted operating profits were ahead by
4% and 3% respectively at constant exchange rates. Minor
acquisitions and disposals had little overall effect.
Underlying operating margins were broadly flat as further
cost efficiency funded increased development spend on
new product and customer service initiatives.
The Science & Technology division saw underlying revenue
growth of 3%. Strong journal subscription renewals at 96%
and growing online sales through ScienceDirect were
tempered by flat academic book sales and weak software
sales, including a delay in a significant new MDL software
product, Isentris, that was successfully launched in
December. Market growth has also been constrained
by pressures on institutional library budgets.
The number of research articles published in the year was
up 4%. Usage on ScienceDirect continues to grow strongly,
with article downloads up 41% to over 240 million before
taking into account usage in locally hosted networks in
developing markets such as China. New publishing and
expansion of the archive increased the number of research
articles on ScienceDirect by 25% to 6.7 million. The
increasing migration of academic and corporate library
customers to electronic subscriptions, is providing a strong
platform for further electronic product introduction; those
taking e-only contracts now account for some 35% of
journal subscriptions by value. E-subscriptions are also
providing an important opportunity to widen distribution
to smaller and medium sized institutions and expand in
geographies such as China.
The Health Sciences division saw underlying growth of 5%
with good growth from new book publishing, continued
strong backlist sales and journal advertising, and growing
online sales. Good journal subscription growth was in part
held back by non renewal of some society publishing
contracts relating to past performance issues. Revenues
from titles and electronic product serving the nursing and
allied health professions were particularly strong. The
International businesses outside the US saw growth of 6%
with the UK and Asia Pacific performing well, and strong
growth from pharmaceutical industry sponsored projects
and conferences.
The investments that Elsevier has made in new, innovative
products and technologies is substantial and ongoing, and
is having a significant impact on research productivity for
customers. In November, Elsevier launched a major new
electronic product, Scopus, which provides scientists with
the most comprehensive database and intuitive tool to
navigate their way quickly through the world’s accumulated
scientific research. The Scopus database has nearly 30
million abstracts of scientific research articles, from 14,000
peer reviewed publications. The navigational service was
developed in close collaboration with 20 library partners
around the world to ensure that the scientific community’s
emerging needs are well met. The initial demand for
Scopus is very encouraging.
During the year there has been considerable public debate
surrounding the scientific journal publishing model,
focusing on whether the current predominantly
subscription ‘user-pays’ model or alternative models, such
as ‘author-pays’, would best serve the scientific community.
We have engaged in this debate and been open to new
ideas, and we will continue to experiment and adapt. There
is, we believe, increasing recognition that the subscription
based ‘user-pays’ model does serve science well, by
providing high quality peer reviewed research articles
across the whole spectrum of scientific disciplines, with
quality the determining factor in generating subscription
demand. This model has also encouraged and enabled
substantial investments to be made in applying new
technologies to the distribution and navigation of research,
153556 pg001_21 report 3/3/05 5:51 pm Page 09
Elsevier
Turnover by business
Sterling
£
Euro€
Reed Elsevier Annual Reports and Financial Statements 2004
09
Science & Technology
£779m
€1,145m
Health Sciences
£584m
€859m
m
1
8
3
,
1
£
m
3
6
3
,
1
£
m
5
9
2
,
1
£
m
4
2
0
,
1
£
m
3
9
6
£
m
9
5
0
,
2
€
m
2
0
0
,
2
€
m
4
0
0
,
2
€
m
9
4
6
,
1
m €
7
3
1
,
1
€
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
significantly enhancing the productivity of scientific
endeavour. The UK government’s response to the
parliamentary science and technology committee review
and the recent archiving proposals by the US National
Institute of Health both acknowledge the importance of
these considerable benefits to science. We firmly believe
that the science business will continue its long record of
delivering both increasing value to customers and good
returns to shareholders.
Despite the challenges we faced in 2004, the outlook
for Elsevier is positive. In both Science & Technology
and Health Sciences, subscription renewals are strong,
book publishing is expanding, new electronic product is
developing well in the market, and distribution is widening.
Organic revenue growth of at least 5% is targeted for
2005 and beyond.
153556 pg001_21 report 3/3/05 5:51 pm Page 10
10
Operating and financial review
LexisNexis
Turnover
North America
International
Adjusted operating profit
Adjusted operating margin
£
2003
£m
992
326
1,318
301
22.8%
2004
£m
949
343
1,292
308
23.8%
€
2003
€m
1,438
473
1,911
437
22.8%
2004
€m
1,395
504
1,899
453
23.8%
%
Change
at constant
currencies
7%
6%
7%
11%
1.0pts
LexisNexis had a good year, with revenue growth building
as the investment programme pays back, delivering new
publishing, better product functionalities and more
powerful online services, as well as improved marketing
and sales effectiveness. Demand for products linked to
workflow applications and in risk management is also
accelerating growth, with recent acquisitions in these
areas performing well. The International business
outside the US grew particularly strongly.
Revenues and adjusted operating profits were up by 7% and
11% respectively at constant exchange rates, or 4% and 6%
before acquisitions and disposals. LexisNexis North
America saw revenues up 7% and adjusted operating
profits up 12% at constant exchange rates including good
contributions from recently acquired companies, notably
Applied Discovery (July 2003) and Seisint (September 2004).
Underlying revenue growth improved to 3%, up from 2% in
the prior year, and underlying adjusted operating profits
were up 4%. Outside the US, the International business
grew revenues, before minor disposals, by 7% and adjusted
operating profits by 10%. Adjusted operating margins were
1 percentage point ahead on the higher revenue growth
with continued cost actions funding increased investment.
Applied Discovery achieved a post tax return on capital well
in excess of 10% in its first full year of ownership.
In North American Legal, good online growth was seen in
the US small law firm market, state and local government,
electronic filing and court access services, in Canada, and
in electronic discovery tools for large law firms. Underlying
revenue growth was 3%, or 5% including Applied Discovery
on a proforma basis, with online revenues up 10%, and
print and CD broadly flat as the market continues to
migrate online. The legal directory business again
performed well through further penetration of the small
law firm market and expansion of online services. In US
Corporate and Federal, underlying revenue growth
improved to 4% from flat in the prior year. The risk
management business has continued to grow strongly with
underlying revenue growth before acquisitions of 20%,
whilst the corporate, federal and academic information
business was flat, a significant improvement on the prior
year 4% decline, as product improvements and marketing
initiatives countered continuing pressures on customer
budgets and industry consolidation.
The rapid growth in the risk management business is
driven by the burgeoning demand for identity
authentication, fraud prevention, credit and security risk
solutions from legal, commercial, government and law
enforcement customers. In September, this business was
significantly expanded through the $775m acquisition of
Seisint, which has developed leading data technologies for
acquiring, processing, linking and querying large public
record and related datasets which deliver both product and
cost leadership in this market. Seisint is achieving
exceptionally strong growth from low cost transactional
services driven by these industry leading technologies and
products, with proforma 2004 revenues up over 40% on the
prior year to $120m, ebitda nearly doubled to $54m, and
adjusted operating profits of $45m, all ahead of
expectations. The fit with the LexisNexis risk management
business is very strong, to provide an outstanding
technology and product platform and the leverage of the
combined sales forces from which to further expand
LexisNexis’ fast growing risk solutions business.
The LexisNexis International businesses outside North
America saw underlying revenue growth accelerate to 7%,
with strong growth from new publishing and the
introduction of more powerful online services, with online
revenues up 28%. Particularly good growth was seen in the
UK, South Africa, Netherlands, Poland, Latin America,
Hong Kong and Japan. France saw online legal revenues
more than double, albeit from a low base, with the
successful launch of the new global online delivery
platform. Online news and business services also saw good
growth in Europe with significant new content and product
improvements and more effective marketing. Adjusted
operating profits were 10% ahead whilst increasing
investment in Asia Pacific and in the launch of the new
online platform.
153556 pg001_21 report 3/3/05 5:51 pm Page 11
LexisNexis
Turnover by business
North America
£949m
€1,395m
International
£343m
€504m
Reed Elsevier Annual Reports and Financial Statements 2004
11
Sterling
£
Euro€
m
0
3
3
,
1
£
m
9
4
3
,
1
£
m
8
1
3
,
1
£
m
2
9
2
,
1
£
m
1
0
2
,
1
£
m
1
4
1
,
2
€
m
5
4
1
,
2
€
m
0
7
9
,
1
€
m
1
1
9
,
1
€
m
9
9
8
,
1
€
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
The investment that LexisNexis has been making in new
content and online services, and in expanding into related
workflow solutions through both organic development and
acquisition, is having a positive impact on revenue
momentum. We have added significantly to US case law
summaries and annotated state codes and introduced
major new content series in a number of jurisdictions; we
have expanded content licenses in a number of areas such
as with CCH for US tax and with news and business
sources; we have acquired an online tax and regulatory
publisher in China. The first phase of the global online
delivery platform, with its significantly enhanced product
functionality and efficiency, was completed and successfully
launched in France, Germany, Australia and the UK, with
roll out in all our other jurisdictions over the next two years.
We built a major new second data centre to safeguard
service continuity as our online operations grow. We built
new editorial systems and upgraded our infrastructure to
support continued growth and improve efficiency. We have
also selectively acquired a number of businesses that we
can leverage with the assets and customer relationships
we already have to accelerate our strategic progress,
particularly in the fast growing areas of workflow
productivity and risk management, and to deliver good
financial returns. These have included law firm practice
management, billing and client development tools for
which there is strong and sustained growth in demand,
and risk management solutions.
The outlook for LexisNexis is good. Revenue momentum is
building in the business with the cumulative impact of the
ongoing investment programme. New and emerging high
growth opportunities in our markets are being successfully
targeted, leveraging the LexisNexis asset platform and
customer relationships, to further accelerate growth both
in the US and internationally. Organic revenue growth of
at least 5% is targeted for 2005 and beyond.
153556 pg001_21 report 3/3/05 5:51 pm Page 12
12
Operating and financial review
Harcourt Education
Turnover
US Schools & Testing
International
Adjusted operating profit
Adjusted operating margin
£
2003
£m
810
88
898
174
19.4%
2004
£m
774
94
868
164
18.9%
€
2003
€m
1,175
127
1,302
252
19.4%
2004
€m
1,138
138
1,276
241
18.9%
%
Change
at constant
currencies
7%
6%
7%
5%
-0.5pts
The Harcourt Education business has performed well
against a weak US schools market which has seen the
last year of a three year trough in the state textbook
adoption cycle. New textbook programmes have
performed well and good growth was seen in the
assessment business and in international markets. The
business is very well placed for the strong rebound in
market growth in 2005 as the adoption cycle turns.
Revenues and adjusted operating profits increased by 7%
and 5% respectively at constant exchange rates, including a
part year contribution from the Saxon supplemental math
publisher acquired on 30 June. Underlying revenue growth
was 2% with adjusted operating profits 1% lower. Adjusted
operating margins were 0.5 percentage points lower due to
the low revenue growth, additional sales and marketing
expense incurred ahead of the strong 2005 adoption year,
and investment and a different sales mix in Harcourt
Assessment.
The Harcourt US K-12 schools business saw continued
market success, gaining the leading overall market share
of over 30% in state textbook adoptions, good growth in
open territories, and significant new Reading First
contracts. Revenues, before acquisitions, were however
flat against a market down 2-3% due to the reduction in
available adoption opportunities in 2004. Particular
successes in the Elementary market adoptions, where
Harcourt achieved a clear leadership position, were in
Florida math and South Carolina reading. In the Secondary
market, strong performances were seen in the science and
language arts adoptions but Harcourt’s overall position was
held back by the lack of a new high school math
programme which is due next year. The supplemental
businesses saw growth from new frontlist publishing which
is starting to come through as the publishing programme is
realigned to meet No Child Left Behind Act requirements.
Adjusted operating profits, before acquisitions, were 2%
lower, reflecting the sales and marketing spend ahead of
the 2005 adoptions.
On 30 June, Harcourt Education acquired Saxon Publishers,
a leading publisher of skills-based instructional material
for pre-kindergarten through high school students in math,
phonics and early childhood learning. The strength of
Saxon’s skills-based math programme fits well with
Harcourt’s supplemental business with its focus on reading
and language arts. Saxon has performed ahead of
expectations in the half year of our ownership, with
proforma 2004 revenues up over 10% to $86m and adjusted
operating profit up over 40% to $24m, with Saxon now fully
integrated within the business. With the repositioning of
Harcourt’s supplemental literacy front list and the strength
of the Saxon math programme, the business is well placed
to take full advantage of the strong market growth expected
in these two key areas.
Harcourt Assessment saw underlying revenue growth of
8% driven by new state testing contracts and good growth
on existing contracts. Adjusted operating profits were 1%
lower due to new product investment and a change in
sales mix after the heavy prior year clinical publishing
schedule. Good growth was seen in international markets
as local language editions of key titles were introduced.
Substantial investment is being made in the Stanford
Learning First classroom based interim assessment
product. The initial early version has been well received
and strong demand is expected from the release of further
modules later this year.
The Harcourt Education International business saw good
growth from new publishing in the UK and southern Africa
with revenues and adjusted operating profits up 6% and 8%
respectively. Management responsibility for the Greenwood
Heinemann and global library businesses has been brought
within Harcourt supplemental learning with which they are
more closely aligned. The prior year comparatives for the
International and US Schools & Testing segments have
been restated accordingly.
153556 pg001_21 report 3/3/05 5:51 pm Page 13
Harcourt Education
Turnover by business
Sterling
£
Euro€
Reed Elsevier Annual Reports and Financial Statements 2004
13
US Schools & Testing
£774m
€1,138m
International
£94m
€138m
m
3
9
9
£
m
8
9
8
£
m
8
6
8
£
m
9
7
5
£
m
2
0
2
£
m
9
7
5
,
1
€
m
2
0
3
,
1
€
m
6
7
2
,
1
€
m
2
3
9
€
m
1
3
3
€
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
The outlook for Harcourt Education is very positive. The
textbook adoption cycle turns up in 2005 and state budgets
are improving. New textbook programmes are expected to
perform well and Harcourt is improving its market
positioning in open territories. Continued good growth is
also expected in assessment and from new publishing in
supplemental education. Organic revenue growth of 9-10%
is targeted for 2005, and 6-7% over the three years
2005-2007 taking into account the adoption cycle.
153556 pg001_21 report 3/3/05 5:51 pm Page 14
14
Operating and financial review
Reed Business
Turnover
Reed Business Information
US
UK
Continental Europe
Asia Pacific
Reed Exhibitions
Adjusted operating profit
Adjusted operating margin
£
2003
£m
365
234
277
32
420
1,328
236
17.8%
2004
£m
323
244
268
33
421
1,289
227
17.6%
€
2003
€m
530
339
402
46
609
1,926
342
17.8%
2004
€m
475
359
394
48
619
1,895
334
17.6%
%
Change
at constant
currencies
-1%
5%
-2%
5%
4%
2%
–
-0.2pts
Reed Business saw recovery in its markets for the first
time in four years, and revenues moving ahead with 2%
growth, compared to a 5% decline in 2003. An increasing
number of sectors and geographies are seeing positive
growth momentum, and online services and exhibitions
are performing well. Faster growth is expected in 2005 as
markets continue to strengthen and we continue to focus
on market share, yield and new product introduction.
Revenues and adjusted operating profits were both up 2%
at constant exchange rates before minor acquisitions and
disposals. The magazines and information publishing
businesses were broadly flat whilst the exhibitions business
grew 6%. Adjusted operating margins were largely held
despite additional new product investment through further
cost actions.
In the US, Reed Business Information saw revenues up 1%
for the year for continuing titles, with the first half decline
of 3% reversed in the second half. Continued good growth
was seen in the media sector and, whilst the
manufacturing titles showed some further decline, the
electronics sector was up on the prior year. Online
revenues grew well with significant website development
and marketing initiatives. Adjusted operating profits grew
3% as further action was taken to improve margins.
In the UK, Reed Business Information revenues and
adjusted operating profits were both up 5% with revenue
growth of 10% or more in the property, personnel and
construction sectors, a return to growth in the technology
sector, and a continuing strong performance from online
recruitment advertising, with print recruitment advertising
also ahead. Overall display advertising, having been down
in the first half, recovered with good growth in online
display to end the year up 2%. Online revenues now
account for 28% of UK revenues and grew 26% in the year.
In Continental Europe, Reed Business Information did well
to limit underlying revenue and operating profit decline to
3% and 7% respectively, with demand impacted by
continued economic weakness in The Netherlands and
Germany in particular. The focus on market share
performance and yield management mitigated subscription
and advertising volume declines. In Asia Pacific underlying
revenue growth was 10% with strong performances in
Australia, Singapore and Japan.
Reed Exhibitions had a good year, with underlying revenue
growth of 6% and adjusted operating profits up 7%.
Revenue growth in annual exhibitions and from new
launches was 4%, with particularly strong performances
in the US security, jewellery and gaming shows, in the
international travel and property shows, and in France
and Asia Pacific. The net cycling in of non-annual shows
contributed 2 percentage points to revenue growth.
Reed Business has continued to expand its investment in
further developing its titles and exhibitions and in building
its online services to meet the strongly growing demand for
internet delivered information and marketing solutions.
2004 saw the launch of 10 titles, including Variety and
Interior Design, in China through joint ventures with IDG
and Chinese partners, strong growth in the recently
launched Design News Japan, and the development of Vlife
within the Variety portfolio. Online revenues grew by more
than 30% to over $200m with strongly growing advertising
and search demand in our title webzines, recruitment sites,
data services, and online search engines and directories,
including Kellysearch which was launched in the US
and Netherlands building on its UK success.
153556 pg001_21 report 3/3/05 5:51 pm Page 15
Reed Elsevier Annual Reports and Financial Statements 2004
15
Reed Business
Turnover by business
Reed Exhibitions
£421m
€619m
Continental
Europe
£268m
€394m
Sterling
£
m
2
7
6
,
1
£
m
7
2
6
,
1
£
m
3
8
3
,
1
£
m
8
2
3
,
1
£
m
9
8
2
,
1
£
Euro€
m
2
4
7
,
2
€
m
0
2
6
,
2
€
m
9
9
1
,
2
€
m
6
2
9
,
1
€
m
5
9
8
,
1
€
0
0
1
0
2
0
3
0
4
0
0
0
1
0
2
0
3
0
4
0
US
£323m
€475m
Asia Pacific
£33m
€48m
UK
£244m
€359m
The outlook for Reed Business is good. Markets overall are
improving, and innovation in new show and title launches
and in building online services is capturing growth in faster
growing segments. Organic revenue growth of 4-5% is
targeted for 2005, with at least 5% revenue growth targeted
in later years, given a reasonable market environment.
Significant cost actions over the last four years have
positioned the business well to see good operational
gearing as revenues increase.
153556 pg001_21 report 3/3/05 5:51 pm Page 16
16
Operating and financial review
Financial review
Reed Elsevier combined businesses
Reported figures
Turnover
Operating profit
Profit before taxation
Net borrowings
Adjusted figures
Operating profit
Operating margin
Profit before taxation
Operating cash flow
Operating cash flow conversion
Interest cover (times)
£
2003
£m
4,925
661
519
2,372
1,178
24%
1,010
1,028
87%
7.0
2004
£m
4,812
697
562
2,532
1,159
24%
1,027
1,050
91%
8.8
€
2003
€m
7,141
958
752
3,368
1,708
24%
1,465
1,491
87%
7.0
2004
€m
7,074
1,024
826
3,570
1,704
24%
1,510
1,544
91%
8.8
%
Change
at constant
currencies
5%
10%
12%
5%
0.2pts
8%
9%
Adjusted figures, which exclude the amortisation of goodwill and intangible assets and exceptional items, are used by Reed Elsevier as additional
performance measures. A reconciliation between the reported and adjusted figures is provided in note 10 to the combined financial statements.
Profit and loss account
The reported profit before tax for the Reed Elsevier
combined businesses, after the amortisation of goodwill
and intangible assets and exceptional items, was
£562m/€826m, which compares with a reported profit of
£519m/€752m in 2003. The increase principally reflects
higher underlying operating profits, lower goodwill and
intangible asset amortisation, as well as a reduced net
interest expense. The reported attributable profit of
£303m/€445m was £31m/€39m lower than in 2003,
which included exceptional tax credits of £84m/€122m
principally in respect of prior year disposals.
The continued decline of the US dollar since 2003 has had
adverse currency translation effects on the reported results
expressed in sterling and in euros. This translation effect
does not however impact the underlying performance of
the businesses.
Turnover decreased by 2% expressed in sterling to
£4,812m, and by 1% expressed in euros to €7,074m.
At constant exchange rates, turnover was 5% higher,
or 3% higher excluding acquisitions and disposals.
Adjusted operating profits, excluding the amortisation
of goodwill and intangible assets and exceptional items,
were down 2% expressed in sterling at £1,159m, and flat
expressed in euros at €1,704m. At constant exchange
rates, adjusted operating profits were up 5%, or 3%
excluding acquisitions and disposals. Adjusted operating
margins improved by 0.2 percentage points to 24.1%
reflecting the continued tight management of costs despite
increased investment.
The amortisation charge for intangible assets and goodwill,
including in joint ventures, amounted to £406m/€598m,
down £39m/€47m on the prior year as a result of currency
translation effects and some past acquisitions becoming
fully amortised.
Turnover by business segment
Turnover by geographical market
Turnover by source
Elsevier 28%
LexisNexis 27%
Harcourt Education 18%
Reed Business 27%
North America 58%
United Kingdom 11%
The Netherlands 4%
Rest of Europe 15%
Rest of world 12%
Subscriptions 38%
Circulation 33%
Advertising 13%
Exhibitions 9%
Other 7%
153556 pg001_21 report 3/3/05 5:51 pm Page 17
Reed Elsevier Annual Reports and Financial Statements 2004
17
Exceptional items showed a pre-tax charge of £59m/€86m,
comprising £38m/€56m of acquisition integration and
related costs, £18m/€26m in respect of restructuring
actions, and a £3m/€4m net loss on disposal of
businesses, investments and other fixed assets. After a tax
credit of £13m/€18m principally arising on the exceptional
costs, exceptional items showed a net post-tax loss of
£46m/€68m. This compares with a net post-tax exceptional
gain of £38m/€54m in 2003 including tax credits in respect
of prior year disposals.
Free cash flow - after interest and taxation but before
acquisition spend, exceptional receipts and payments and
dividends - was £680m/€1,000m, compared to
£669m/€970m in 2003. After dividends, free cash flow was
£371m/€546m compared to £377m/€547m in 2003. Net
exceptional cash payments of £24m/€34m comprise
acquisition related and restructuring payments of
£67m/€98m, less net proceeds from disposals of
businesses, investments and other fixed assets of
£12m/€18m and £31m/€46m of reduced tax payments.
Net interest expense, at £132m/€194m, was £36m/€49m
lower than in the prior year, reflecting the benefit of the
2003 free cash flow, lower interest rates and currency
translation effects. Net interest cover on an adjusted basis
increased to 8.8 times.
Adjusted profits before tax, before the amortisation of
goodwill and intangible assets and exceptional items, at
£1,027m/€1,510m, were up 2% expressed in sterling and
3% expressed in euros. At constant exchange rates,
adjusted profits before tax were up 8%.
In 2004, acquisitions were made for a total consideration
of £647m/€951m, including £7m/€10m deferred to future
years, and after taking account of net cash acquired of
£17m/€25m. The amounts capitalised in respect of
goodwill and intangible assets were £277m/€407m and
£310m/€456m respectively. Deferred consideration paid in
respect of prior year acquisitions totalled £4m/€6m. The
2004 acquisitions contributed £18m/€27m to adjusted
operating profit in the year and added £31m/€46m to net
cash inflow from operating activities for the part year under
Reed Elsevier ownership.
The effective tax rate on adjusted earnings was little
changed at 26%. The adjusted profit attributable to
shareholders of £760m/€1,117m was up 2% expressed in
sterling and 4% expressed in euros. At constant exchange
rates, the adjusted profit attributable to shareholders
was up 8%.
Net borrowings at 31 December 2004 were
£2,532m/€3,570m, an increase of £160m in sterling and
€202m in euros since 31 December 2003, reflecting
acquisition spend less free cash flow and favourable
exchange translation effects on net debt from the weaker
US dollar.
Cash flows and debt
Adjusted operating cash flow, before exceptional items, was
£1,050m/€1,544m representing a 91% conversion rate of
adjusted operating profits into cash. This compares with a
conversion rate in 2003 of 87% and reflects the continuing
focus on working capital management. Capital expenditure
in the year amounted to £203m/€298m, up from
£168m/€244m in the prior year, and included several major
IT platform and infrastructure projects. Depreciation was
broadly similar to the prior year at £126m/€185m.
Gross borrowings at 31 December 2004 amounted to
£2,757m/€3,887m, denominated mostly in US dollars, and
were partly offset by cash balances totalling £225m/€317m
invested in short term deposits and marketable securities.
After taking account of interest rate derivatives, a total of
63% of Reed Elsevier’s gross borrowings were at fixed
rates, including £1,209m/€1,705m of floating rate debt
fixed through the use of interest rate derivatives, and had a
weighted average interest coupon of 5.2% and an average
remaining life of 4.1 years.
Use of adjusted operating cash flow
Currency profile –
2004 adjusted pre-tax profit
Currency profile –
2004 net cash/borrowings
Net interest
£130m/€191m
Free cash flow
after dividends
£371m/€546m
Taxation
£240m/€353m
Dividends
£309m/€454m
Sterling 20%
Euro 33%
US Dollar 42%
Other 5%
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153556 pg001_21 report 3/3/05 5:51 pm Page 18
18
Operating and financial review
Accounting policies
Introduction
The accounting policies of the Reed Elsevier combined
businesses are described in the combined financial
statements. The Reed Elsevier combined financial
statements and the financial statements of Reed Elsevier
PLC and Reed Elsevier NV are presented in accordance
with UK Generally Accepted Accounting Principles (GAAP).
Under Article 362.1 of Book 2 Title 9 of the Netherlands
Civil Code, UK GAAP may be adopted by Dutch companies
with international operations for the preparation of financial
statements and, accordingly, UK GAAP has been adopted by
Reed Elsevier NV, ensuring consistency. Reed Elsevier NV,
by adopting UK GAAP in its statutory financial statements,
is required to present both group financial statements, in
which its investments in Reed Elsevier Group plc and
Elsevier Reed Finance BV are presented using the gross
equity method, and parent company financial statements,
in which its investments are presented using the historical
cost method.
The most significant accounting policies in determining
the financial condition and results of the combined
businesses, and those requiring the most subjective or
complex judgement, relate to the valuation and
amortisation of goodwill and intangible assets, taxation
and pensions.
Revenue recognition policies, while an area of management
focus, are generally straightforward in application as the
timing of product or service delivery and customer
acceptance for the various revenue types can be readily
determined. Allowances for product returns are deducted
from revenues based on historical return rates. Where
sales consist of two or more components that operate
independently, revenue is recognised as each component
is completed by performance, based on attribution of
relative value.
Pre-publication costs incurred in the creation of content
prior to production and publication are deferred and
expensed over their estimated useful lives based on sales
profiles. Such costs typically comprise direct internal
labour costs and externally commissioned editorial and
other fees. Estimated useful lives generally do not exceed
five years. Annual reviews are carried out to assess the
recoverability of carrying amounts.
Development spend embraces investment in new product
and other initiatives, ranging from the building of new
online delivery platforms, to launch costs of new services,
to building new infrastructure applications. Launch costs
and other operating expenses of new products and services
are expensed as incurred. The costs of building product
applications and infrastructure are capitalised as tangible
fixed assets and depreciated over their estimated useful
lives. Impairment reviews are carried out annually.
Goodwill and intangible assets
Reed Elsevier’s accounting policy is that, on acquisition
of a subsidiary, associate, joint venture or business, the
purchase consideration is allocated between the net
tangible and intangible assets other than goodwill on a
fair value basis, with any excess purchase consideration
representing goodwill. The valuation of intangible assets
other than goodwill represents the estimated economic
value in use, using standard valuation methodologies,
including as appropriate, discounted cash flow, relief from
royalty and comparable market transactions. Acquired
goodwill and intangible assets are capitalised and amortised
systematically over their estimated useful lives up to a
maximum of 40 years, subject to annual impairment review.
Appropriate amortisation periods are selected based on
assessments of the longevity of the brands and imprints,
the market positions of the acquired assets and the
technological and competitive risks that they face.
The carrying amounts of goodwill and intangible assets
are regularly reviewed, at least twice a year. The carrying
amounts of goodwill and intangible assets arising on all
significant acquisitions, on all acquisitions made in the
previous financial year, and on any acquisitions for which
there are indications of possible impairment are
compared with estimated values in use based on latest
management cash flow projections. Key areas of
judgement in estimating the values in use of businesses
are the forecast long term growth rates and the
appropriate discount rates to be applied to forecast
cash flows. Based on the latest value in use calculations,
no goodwill or intangible assets were impaired as
at 31 December 2004.
Taxation
The Reed Elsevier combined businesses seek to organise
their affairs in a tax efficient manner, taking account of the
jurisdictions in which they operate. Reed Elsevier’s policy
is to make prudent provision for tax uncertainties.
Reed Elsevier’s policy in respect of deferred taxation is
to provide in full for timing differences using the liability
method. Deferred tax assets are only recognised to the
extent that they are considered recoverable in the near
term based on an assessment of the forecast level of
taxable profits in jurisdictions where such assets have
arisen.
Pensions
Pension costs are accounted for in accordance with the
UK accounting standard SSAP24: Pension costs.
Accounting for pension schemes involves judgement about
uncertain events, including the life expectancy of the
153556 pg001_21 report 3/3/05 5:51 pm Page 19
Reed Elsevier Annual Reports and Financial Statements 2004
19
members, salary and pension increases, inflation, the
return on scheme assets and the rate at which the future
pension payments are discounted. Estimates for all of
these factors are used in determining the pension cost
and liabilities reported in the financial statements.
These best estimates of future developments are made in
conjunction with independent actuaries. Each scheme is
subject to a periodic review by the independent actuaries.
For defined contribution schemes, the profit and loss
account charge represents contributions payable.
Treasury policies
The boards of Reed Elsevier PLC and Reed Elsevier NV
have requested that Reed Elsevier Group plc and Elsevier
Reed Finance BV have due regard to the best interests of
Reed Elsevier PLC and Reed Elsevier NV shareholders in
the formulation of treasury policies.
Financial instruments are used to finance the Reed Elsevier
businesses and to hedge transactions. Reed Elsevier’s
businesses do not enter into speculative transactions. The
main treasury risks faced by Reed Elsevier are liquidity risk,
interest rate risk and foreign currency risk. The boards of the
parent companies agree overall policy guidelines for
managing each of these risks and the boards of Reed
Elsevier Group plc and Elsevier Finance SA agree policies
(in conformity with parent company guidelines) for their
respective business and treasury centres. These policies
were updated in 2004, mainly to reflect evolving treasury
market practice and in anticipation of International Financial
Reporting Standards, and are summarised below.
Funding
Reed Elsevier develops and maintains a range of borrowing
facilities and debt programmes to fund its requirements, at
short notice and at competitive rates. The significance of
Reed Elsevier Group plc’s US operations means that the
majority of debt is denominated in US dollars and is raised
in the US debt markets. A mixture of short term and long
term debt is utilised and Reed Elsevier maintains a
maturity profile to facilitate refinancing. Reed Elsevier’s
policy is that no more than US$1,000m of long term debt
should mature in any 12-month period. In addition,
minimum levels of net debt with maturities over three years
and five years are specified, depending on the level of the
total borrowings.
After taking account of the maturity of committed bank
facilities that back short term borrowings, at 31 December
2004, no debt (after utilising available cash resources)
matures in the first and second years, 14% in the third year,
58% in the fourth and fifth years, 16% in five to ten years,
and 12% beyond ten years.
At 31 December 2004, Reed Elsevier had access to
US$3,000 million (2003 US$3,000 million) of committed
bank facilities, of which US$79 million was drawn. These
facilities principally provide back up for short term debt
but also security of funding for future acquisition spend
in the event that commercial paper markets are not
available. Of the total committed facilities, US$750
million (2003: US$750 million) matures within one year,
US$2,250 million (2003: US$nil) within three to four
years, and US$nil (2003: US$2,250 million) within four
to five years.
Interest rate exposure management
Reed Elsevier’s interest rate exposure management policy is
aimed at reducing the exposure of the combined businesses
to changes in interest rates. The proportion of interest
expense that is fixed on net debt is determined by reference
to the level of net interest cover. Reed Elsevier uses fixed rate
term debt, interest rate swaps, forward rate agreements and
a range of interest rate options to manage the exposure.
Interest rate derivatives are used only to hedge an underlying
risk and no net market positions are held.
At 31 December 2004, US$4,145 million of Reed Elsevier’s
net debt was denominated in US dollars on which
approximately 80% of forecast net interest expense was
fixed or capped for the next 12 months. This fixed or
capped percentage reduces to approximately 60% by the
end of the third year and reduces thereafter with all the
interest rate derivatives which fix or cap expense and
approximately 90% of fixed rate term debt (not swapped
back to floating rate) having matured by the end of 2009
and 2011 respectively.
At 31 December 2004, fixed rate US dollar term debt (not
swapped back to floating rate) amounted to US$1.0 billion
and had a weighted average life remaining of 10.0 years
(2003: 13.0 years) and a weighted average interest coupon
of 6.8%. Interest rate derivatives in place at 31 December
2004 which fix or cap the interest cost on an additional
US$2.1 billion (2003: US$2.0 billion) of variable rate US
dollar debt, have a weighted average maturity of 1.5 years
(2003: 1.9 years) and a weighted average interest rate
of 4.4%.
Foreign currency exposure management
Translation exposures arise on the earnings and net assets
of business operations in countries other than those of
each parent company. These exposures are hedged, to a
significant extent, by a policy of denominating borrowings
in currencies where significant translation exposures exist,
most notably US dollars.
Currency exposures on transactions denominated in a
foreign currency are required to be hedged using forward
contracts. In addition, recurring transactions and future
153556 pg001_21 report 3/3/05 5:51 pm Page 20
20
Operating and financial review
investment exposures may be hedged, within defined limits,
in advance of becoming contractual. The precise policy
differs according to the commercial situation of the
individual businesses. Expected future net cash flows may
be covered for sales expected for up to the next 12 months
(50 months for Elsevier science and medical subscription
businesses up to limits staggered by duration). Cover takes
the form of foreign exchange forward contracts.
At the year-end, the amount of outstanding foreign
exchange cover in respect of future transactions was
US$1.1 billion.
Elsevier Reed Finance BV
Structure
Elsevier Reed Finance BV, the Dutch resident parent
company of the Elsevier Reed Finance BV group (“ERF”), is
directly owned by Reed Elsevier PLC and Reed Elsevier NV.
ERF provides treasury, finance and insurance services to
the Reed Elsevier Group plc businesses through its
subsidiaries in Switzerland: Elsevier Finance SA (“EFSA”),
Elsevier Properties SA (“EPSA”) and Elsevier Risks SA
(“ERSA”). These three Swiss companies are organised
under one Swiss holding company, which is in turn owned
by Elsevier Reed Finance BV.
Activities
EFSA, EPSA and ERSA each focus on their own specific
area of expertise.
EFSA is the principal treasury centre for the combined
businesses. It is responsible for all aspects of treasury
advice and support for Reed Elsevier Group plc’s
businesses operating in Continental Europe, South
America, the Pacific Rim and certain other territories,
and undertakes foreign exchange and derivatives dealing
services for the whole of Reed Elsevier. EFSA also arranges
or directly provides Reed Elsevier Group plc businesses
with financing for acquisitions and product development
and manages cash pools and investments on their behalf.
EPSA is responsible for the exploitation of tangible and
intangible property rights whilst ERSA is responsible for
insurance activities relating to risk retention.
Major developments
EFSA continued to diversify its debt maturity profile in 2004
with an additional US$290 million of term debt raised, the
proceeds of which were drawn down in 2005.
In 2004, EFSA renegotiated various banking and cash
pooling arrangements in Continental Europe and Asia and
continued to provide specialist advice to Reed Elsevier
Group plc companies regarding interest and foreign
currency exposures, implementation of International
Financial Reporting Standards, and electronic collections
and payment solutions.
The average balance of cash under management, on behalf
of Reed Elsevier Group plc and its parent companies, was
approximately $0.5 billion.
Liabilities and assets
At the end of 2004, 89% (2003: 88%) of ERF’s gross assets
were held in US dollars and 10% (2003: 12%) in euros,
including $8.4 billion (2003: $7.2 billion) and €0.7 billion
(2003: €0.7 billion) in loans to Reed Elsevier Group plc
subsidiaries. Loans made to Reed Elsevier Group plc
businesses are funded from equity, long term debt of
$1.0 billion and short term debt of $1.3 billion backed by
committed bank facilities. Term debt is derived from a
Swiss domestic public bond issue, bilateral term loans
and private placements. Short term debt is primarily
derived from euro and US commercial paper
programmes.
International Financial Reporting
Standards
Under a regulation adopted by the European Parliament,
the Reed Elsevier combined financial statements and the
financial statements of the two parent companies, Reed
Elsevier PLC and Reed Elsevier NV, will be prepared in
accordance with International Financial Reporting
Standards (IFRS) with effect from the 2005 financial year.
The adoption of IFRS requires changes in Reed Elsevier
accounting policies in six major areas:
• Goodwill and intangible assets;
• Employee benefits;
• Share based payments;
• Financial instruments;
• Deferred taxation; and
• Dividends.
Additional information on the adoption of IFRS, including
details of the new accounting policies and re-presentations
of the 2004 financial statements under IFRS, is set out on
pages 112 to 139.
The net effect of presenting the 2004 financial statements
under IFRS has been to increase the reported Reed
Elsevier combined attributable earnings by
£156m/€230m, an increase of 51% over the amounts
reported under UK GAAP, and to reduce combined
shareholders’ funds as at 31 December 2004 by
£603m/€850m. These are accounting effects only and
have no bearing on the cash flows in the business.
153556 pg001_21 report 3/3/05 5:51 pm Page 21
Reed Elsevier Annual Reports and Financial Statements 2004
21
Parent companies
Reported profit attributable
Adjusted profit attributable
Average US$: £/€ exchange rate
Reported earnings per share
Adjusted earnings per share
Dividend per share
Reed Elsevier PLC
2004
£m
152
402
1.83
12.0p
31.8p
13.0p
2003
£m
169
394
1.63
13.4p
31.2p
12.0p
£
%
change
–10%
+2%
–10%
+2%
+8%
Reed Elsevier NV
2004
€m
223
559
1.24
€0.28
€0.71
€0.33
2003
€m
242
540
1.12
€0.31
€0.69
€0.30
€
%
change
–8%
+4%
–10%
+3%
+10%
The results of Reed Elsevier PLC reflect its shareholders’ 52.9% economic interest in the Reed Elsevier combined businesses. The results
of Reed Elsevier NV reflect its shareholders’ 50% economic interest in the Reed Elsevier combined businesses. The respective economic
interests of the Reed Elsevier PLC and Reed Elsevier NV shareholders take account of Reed Elsevier PLC’s 5.8% interest in Reed Elsevier NV.
Both parent companies gross equity account for their respective interests in the Reed Elsevier combined businesses. Adjusted figures,
excluding the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional
performance measures and are reconciled to the reported figures in the notes to the respective financial statements.
Profit and loss account
Adjusted earnings per share, measured before the effect
of amortisation of goodwill and intangible assets,
exceptional items and related tax effects, for Reed Elsevier
PLC were 31.8p, up 2% on the previous year, and for Reed
Elsevier NV were €0.71, up 3% from 2003. The difference in
percentage change is attributable to the impact of currency
movements on the translation of reported results and
rounding effects. At constant rates of exchange, the
adjusted earnings per share of both companies would have
shown an increase of 8% over the previous year.
After their share of the charge in respect of goodwill and
intangible asset amortisation and of the exceptional items,
the reported earnings per share of Reed Elsevier PLC
after tax credit equalisation and Reed Elsevier NV were
12.0p and €0.28 respectively, compared to 13.4p and
€0.31 in 2003.
Dividends
Dividends to Reed Elsevier PLC and Reed Elsevier NV
shareholders are equalised at the gross level, including the
benefit of the UK attributable tax credit of 10% received by
certain Reed Elsevier PLC shareholders. The exchange
rate used for each dividend calculation – as defined in the
Reed Elsevier merger agreement – is the spot euro/sterling
exchange rate, averaged over a period of five business days
commencing with the tenth business day before the
announcement of the proposed dividend.
The Board of Reed Elsevier PLC has proposed a final
dividend of 9.6p, giving a total dividend of 13.0p for the year,
up 8% on 2003. The Boards of Reed Elsevier NV, in
accordance with the dividend equalisation arrangements,
have proposed a final dividend of €0.24. This results in a
total dividend of €0.33 for the year, up 10% on 2003.
Dividend cover for Reed Elsevier PLC, based on adjusted
earnings before the amortisation of goodwill and intangible
assets and exceptional items and related tax effects, was
2.4 times, and for Reed Elsevier NV was 2.2 times.
Measured for the combined businesses on a similar basis,
dividend cover was 2.3 times.
153556 pp022_42 report 3/3/05 5:51 pm Page 22
22
Structure and corporate governance
Structure and corporate governance
Structure
Corporate governance
Corporate structure
Reed Elsevier came into existence in January 1993, when
Reed Elsevier PLC and Reed Elsevier NV contributed their
businesses to two jointly owned companies, Reed Elsevier
Group plc, a UK registered company which owns the
publishing and information businesses, and Elsevier Reed
Finance BV, a Dutch registered company which owns the
financing activities. Reed Elsevier PLC and Reed Elsevier
NV have retained their separate legal and national
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.
Equalisation arrangements
Reed Elsevier PLC and Reed Elsevier NV each hold a 50%
interest in Reed Elsevier Group plc. Reed Elsevier PLC
holds a 39% interest in Elsevier Reed Finance BV, with
Reed Elsevier NV holding a 61% interest. Reed Elsevier
PLC additionally holds an indirect equity interest in Reed
Elsevier NV, reflecting the arrangements entered into
between the two companies at the time of the merger,
which determined the equalisation ratio whereby one
Reed Elsevier NV ordinary share is, in broad terms,
intended to confer equivalent economic interests to
1.538 Reed Elsevier PLC ordinary shares. The
equalisation ratio is subject to change to reflect share
splits and similar events that affect the number of
outstanding ordinary shares of either Reed Elsevier PLC
or Reed Elsevier NV.
Under the equalisation arrangements, Reed Elsevier PLC
shareholders have a 52.9% economic interest in Reed
Elsevier, and Reed Elsevier NV shareholders (other than
Reed Elsevier PLC) have a 47.1% economic interest in
Reed Elsevier. Holders of ordinary shares in Reed
Elsevier PLC and Reed Elsevier NV enjoy substantially
equivalent dividend and capital rights with respect to their
ordinary shares.
The boards of both Reed Elsevier PLC and Reed Elsevier
NV have agreed, except in exceptional circumstances, to
recommend equivalent gross dividends (including, with
respect to the dividend on Reed Elsevier PLC ordinary
shares, the associated UK tax credit), based on the
equalisation ratio. A Reed Elsevier PLC ordinary share
pays dividends in sterling and is subject to UK tax law
with respect to dividend and capital rights. A Reed Elsevier
NV ordinary share pays dividends in euros and is
subject to Dutch tax law with respect to dividend and
capital rights.
Compliance with codes of best practice
The boards of Reed Elsevier PLC and Reed Elsevier NV
have implemented standards of corporate governance and
disclosure policies applicable to companies listed on the
stock exchanges of the United Kingdom, the Netherlands
and the United States. The effect of this is that an
obligation applying to one will, where practicable and not
in conflict, also be observed by the other.
The boards of Reed Elsevier PLC and Reed Elsevier NV
support the principles and provisions of corporate
governance set out in the Combined Code on Corporate
Governance issued in July 2003 (the “UK Code”) and the
Dutch Corporate Governance Code issued in December
2003 (the “Dutch Code”). Save as explained below, Reed
Elsevier PLC, which has its primary listing on the London
Stock Exchange, has complied throughout the period under
review with the UK Code and Reed Elsevier NV, which has
its primary listing on Euronext in Amsterdam, has complied
throughout the period under review with the Dutch Code.
The ways in which the relevant principles of corporate
governance are applied and complied with within Reed
Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc
and Elsevier Reed Finance BV are described below.
The combined board of Reed Elsevier NV has adopted rules
governing the functioning of the boards and the relationship
with shareholders, reflecting the requirements of the
Dutch Code.
The boards
The boards of Reed Elsevier PLC, Reed Elsevier NV, Reed
Elsevier Group plc and Elsevier Reed Finance BV each
comprise a balance of executive and non-executive
directors who bring a wide range of skills and experience to
the deliberations of the boards. All non-executive directors
are independent of management and free from any
business or other relationship which could materially
interfere with the exercise of their independent judgment.
All directors have full and timely access to the information
required to discharge their responsibilities fully and
efficiently. They have access to the services of the
respective company secretaries, other members of Reed
Elsevier’s management and staff, and its external advisors.
Directors may take independent professional advice
in the furtherance of their duties, at the relevant
company’s expense.
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Reed Elsevier Annual Reports and Financial Statements 2004
23
The boards of Reed Elsevier PLC, Reed Elsevier NV and
Reed Elsevier Group plc are harmonised. Subject to
shareholders re-electing retiring directors and to the
appointment of Erik Engstrom to the executive board of
Reed Elsevier NV at its Annual General Meeting in 2005, all
the directors of Reed Elsevier Group plc will also be
directors of Reed Elsevier PLC and of Reed Elsevier NV.
The Reed Elsevier PLC and Reed Elsevier NV shareholders
maintain their rights to appoint individuals to the respective
boards, in accordance with the provisions of the Articles of
Association of these companies. Subject to this, no
individual may be appointed to the boards of Reed Elsevier
PLC, Reed Elsevier NV (either members of the Executive
Board or the Supervisory Board) or Reed Elsevier Group plc
unless recommended by the joint Nominations Committee,
although members of the Committee abstain when their
own re-appointment is being considered.
In order to safeguard the agreed board harmonisation, the
Articles of Association of Reed Elsevier NV provide that
appointments of board members other than in accordance
with nominations by the combined board, shall require a
2/3rd majority if less than 50% of the share capital is in
attendance. Given the still generally low attendance rate at
shareholders meetings in the Netherlands (30%), the
boards believe that this qualified majority requirement is
appropriate.
On appointment and at regular intervals, directors receive
training appropriate to their level of previous experience.
This includes the provision of a tailored induction
programme, so as to provide newly appointed directors with
information about the Reed Elsevier businesses and other
information to assist them in performing their duties.
Non-executive directors are encouraged to visit the Reed
Elsevier businesses to meet directors and senior
executives.
All Reed Elsevier PLC and Reed Elsevier NV directors
are subject to retirement at least every three years, and
are able then to make themselves available for
re-election by shareholders at the respective Annual
General Meetings.
As a general rule, non-executive directors of Reed Elsevier
PLC and members of the Reed Elsevier NV supervisory
board serve on the respective board for two, three year
terms, although the boards may invite individual directors
to serve up to one additional three year term.
Reed Elsevier PLC
The Reed Elsevier PLC board consists of six executive
directors: Sir Crispin Davis – Chief Executive Officer,
Mark Armour – Chief Financial Officer, Gerard van de Aast,
Erik Engstrom – appointed 23 August 2004, Andrew Prozes
and Patrick Tierney, and seven independent non-executive
directors: Morris Tabaksblat – Chairman, John Brock, Mark
Elliott, Cees van Lede, David Reid, Lord Sharman and Rolf
Stomberg – senior independent non-executive director. The
board met five times during the year. Mr Tabaksblat was
unable to attend one meeting, otherwise there was full
attendance.
At the Reed Elsevier PLC Annual General Meeting to be
held on 27 April 2005, Sir Crispin Davis, Messrs Armour,
Prozes and Brock will retire by rotation. Being eligible,
Sir Crispin Davis, Messrs Armour and Prozes offer
themselves for re-election. Mr Engstrom, having been
appointed to the board during the year, will also retire and,
being eligible, offers himself for re-election. Mr Brock will
not be seeking re-election.
Reed Elsevier NV
Reed Elsevier NV has a two-tier board structure comprising
a supervisory board of eight members, all of whom are
independent non-executives, and an executive board
currently comprising five members. The Executive Board is
responsible for the management of the company and the
Supervisory Board supervises the Executive Board. The
members of the Supervisory Board are Morris Tabaksblat –
Chairman, Dien de Boer-Kruyt, John Brock, Mark Elliott,
Cees van Lede, David Reid, Lord Sharman and Rolf
Stomberg. The Executive Board currently comprises
Sir Crispin Davis – Chief Executive Officer, Mark Armour –
Chief Financial Officer, Gerard van de Aast, Andrew Prozes
and Patrick Tierney. The boards met five times during the
year. Mr Tabaksblat and Mrs de Boer-Kruyt were unable to
attend one meeting, otherwise there was full attendance.
At the Reed Elsevier NV Annual General Meeting to be
held on 28 April 2005, Mr Brock will retire by rotation as a
member of the Supervisory Board, and Sir Crispin Davis,
Messrs Armour and Prozes will retire by rotation as
members of the Executive Board. Being eligible, Sir Crispin
Davis, Messrs Armour and Prozes offer themselves for
re-election. A resolution will also be submitted proposing
the appointment of Mr Engstrom to the Executive Board.
Mr Brock will not be seeking re-election.
Reed Elsevier Group plc
The Reed Elsevier Group plc board consists of six executive
directors: Sir Crispin Davis – Chief Executive Officer, Mark
Armour – Chief Finance Officer, Gerard van de Aast, Erik
Engstrom – appointed 23 August 2004, Andrew Prozes and
Patrick Tierney, and seven independent non-executive
directors: Morris Tabaksblat – Chairman, John Brock,
Mark Elliott, Cees van Lede, David Reid, Lord Sharman and
Rolf Stomberg. The board met seven times during the year.
Mr Tabaksblat was unable to attend two meetings and
Lord Sharman and Mr Brock were each unable to attend
one meeting, otherwise there was full attendance.
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24
Structure and corporate governance
Biographical information in respect of the current
members of the boards appears on page 13 of the Annual
Review and Summary Financial Statements.
Elsevier Reed Finance BV
Elsevier Reed Finance BV has a two-tier board structure
comprising a Supervisory Board and an Executive Board.
The Supervisory Board comprises Roelof Nelissen –
Chairman, Mark Armour and Dien de Boer-Kruyt, with
the management board consisting of Willem Boellaard
and Jacques Billy. Appointments to the supervisory and
management boards are made by the shareholders, in
accordance with the company’s Articles of Association. The
management board and the supervisory board met three
times during the year. Mr Boellaard was unable to attend
two meetings, otherwise there was full attendance.
Board committees
In accordance with the principles of good corporate
governance, the following committees, all of which have
written terms of reference, have been established by the
respective boards. The terms of reference of these
committees are published on the Reed Elsevier website,
www.reedelsevier.com.
Audit Committees
Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier
Group plc have established Audit Committees. The
Committees comprise only non-executive directors, all of
whom are independent. The Committees are chaired by
Lord Sharman, the other members being John Brock and
David Reid. A report of the Audit Committees, setting out
the role of the Committees and their main activities during
the year, appears on pages 28 to 30.
The Committees met five times during the year, and there
was full attendance.
The functions of an audit committee in respect of the
financing activities are carried out by the supervisory board
of Elsevier Reed Finance BV.
Corporate Governance Committee
Reed Elsevier PLC and Reed Elsevier NV have established
a joint Corporate Governance Committee, which comprises
only non-executive directors, all of whom are independent.
The Committee is chaired by Morris Tabaksblat,
the other members being Dien de Boer-Kruyt, John Brock,
Mark Elliott, Cees van Lede, David Reid, Lord Sharman and
Rolf Stomberg. The Committee met once during the year,
and there was full attendance.
In addition to reviewing ongoing developments and best
practice in corporate governance, the Committee is also
responsible for recommending the structure and operation
of the various committees of the boards and the
qualifications and criteria for membership of each
Committee, including the independence of members
of the boards.
During the period the Committee reviewed ongoing
developments and best practice in corporate governance.
The Committee assessed the performance of individual
executive directors and, led by the senior independent
director, also assessed the performance of the Chairman.
Using self-assessment questionnaires completed by all
directors, the Committee reviewed the functioning and
constitution of the boards and their Committees. Based
on these assessments, the Committee believes that the
performance of each director continues to be effective and
that they demonstrate commitment to their respective roles
in Reed Elsevier.
Nominations Committee
Reed Elsevier PLC and Reed Elsevier NV have established
a joint Nominations Committee, which provides a formal
and transparent procedure for the appointment of new
directors to the boards. The Committee comprises a
majority of independent non-executive directors. The
Committee is chaired by Morris Tabaksblat, the other
members being Sir Crispin Davis – Chief Executive Officer,
Cees van Lede, Lord Sharman and Rolf Stomberg.
Although he is not independent, the boards believe that
it is appropriate for the Chief Executive Officer to be a
member of the Committee since he provides a perspective
which assists the Committee in nominating candidates to
the board who will be able to work as a team with both the
executive and non-executive directors. The Committee met
six times during the year. Mr Tabaksblat was unable to
attend two meetings and Lord Sharman and Mr van Lede
were each unable to attend one meeting, otherwise there
was full attendance.
The Committee’s terms of reference include assuring board
succession and making recommendations to the boards of
Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier
Group plc concerning the appointment or reappointment
of directors to, and the retirement of directors from, those
boards. In conjunction with the Chairman of the Reed
Elsevier Group plc Remuneration Committee and external
consultants, the Committee is also responsible for
developing proposals for the remuneration and fees for
new directors.
Based on the assessment by the Corporate Governance
Committee of the qualifications and performance of each
individual director, the Nominations Committee
recommends the appointment of the directors seeking
election at the Annual General Meetings in 2005.
153556 pp022_42 report 3/3/05 5:52 pm Page 25
Reed Elsevier Annual Reports and Financial Statements 2004
25
The Committee uses the services of external search
consultants to identify potential candidates for appointment
to the boards. During the period the Committee
recommended to the boards of Reed Elsevier PLC,
Reed Elsevier NV and Reed Elsevier Group plc the
appointment of Erik Engstrom, an additional executive
director, as set out on page 23.
Remuneration Committee
Reed Elsevier Group plc has established a Remuneration
Committee which comprises only independent
non-executive directors. The Committee is chaired by Rolf
Stomberg, the other members being Mark Elliott and Cees
van Lede. The Committee met four times during the year,
and there was full attendance.
The Committee is responsible for recommending to the
board the remuneration in all its forms of executive
directors of Reed Elsevier Group plc, and provides advice
to the Chief Executive Officer on the remuneration of
executives at a senior level below the board. It also makes
recommendations to the board of Reed Elsevier PLC and
to the supervisory board of Reed Elsevier NV regarding the
remuneration of the executive directors of these
companies.
The fees of non-executive directors of Reed Elsevier PLC
are determined by the board of directors, within the limits
set out in the Articles of Association, as approved by
shareholders. A proposal establishing similar
arrangements will be submitted to the Annual General
Meeting of Reed Elsevier NV in April 2005.
A Directors’ Remuneration Report, which has been
approved by the boards of Reed Elsevier Group plc,
Reed Elsevier PLC and Reed Elsevier NV, appears on
pages 31 to 42. This report also serves as disclosure of the
directors’ remuneration policy, their remuneration and
interests in shares of the two parent companies, Reed
Elsevier PLC and Reed Elsevier NV.
Strategy Committee
Reed Elsevier Group plc has established a Strategy
Committee, comprising a majority of independent
non-executive directors. The Committee is chaired by
Morris Tabaksblat, the other members being Sir Crispin
Davis, Mark Elliott and David Reid. The Committee met
once during the year, and there was full attendance.
The Committee’s terms of reference include reviewing the
major features of the strategy proposed by the Chief
Executive Officer, and subsequently recommending the
proposed strategy to the board. The Committee is also
responsible for reviewing any acquisition or investment,
which would have major strategic or structural implications
for Reed Elsevier Group plc.
Relations with shareholders
Reed Elsevier PLC and Reed Elsevier NV participate in
regular dialogue with institutional shareholders, and
presentations on the Reed Elsevier combined businesses
are made after the announcement of the interim and full
year results. The boards of Reed Elsevier PLC and Reed
Elsevier NV commission periodic reports on the attitudes
and views of the companies’ institutional shareholders
and the results are the subject of formal presentations to
the respective boards. A trading update is provided at the
respective Annual General Meetings of the two
companies, and near the end of the financial year. The
Annual General Meetings provide an opportunity for the
boards to communicate with individual shareholders. The
Chairman, the Chief Executive Officer, the Chief Financial
Officer, the Chairmen of the board committees, other
directors and a representative of the external auditors
are available to answer questions from shareholders.
The interim and annual results announcements and
presentations, together with the trading updates and
other important announcements and corporate
governance documents concerning Reed Elsevier,
are published on the Reed Elsevier website,
www.reedelsevier.com.
Internal control
Parent companies
The boards of Reed Elsevier PLC and Reed Elsevier NV
exercise independent supervisory roles over the activities
and systems of internal control of Reed Elsevier Group plc
and Elsevier Reed Finance BV. The boards of Reed Elsevier
PLC and Reed Elsevier NV have each adopted a schedule of
matters which are required to be brought to them for
decision. In relation to Reed Elsevier Group plc and Elsevier
Reed Finance BV, the boards of Reed Elsevier PLC and
Reed Elsevier NV approve the strategy and the annual
budgets, and receive regular reports on the operations,
including the treasury and risk management activities, of
the two companies. Major transactions proposed by the
boards of Reed Elsevier Group plc or Elsevier Reed Finance
BV require the approval of the boards of both Reed Elsevier
PLC and Reed Elsevier NV.
The Reed Elsevier PLC and Reed Elsevier NV Audit
Committees meet on a regular basis to review the systems
of internal control and risk management of Reed Elsevier
Group plc and Elsevier Reed Finance BV.
Operating companies
The board of Reed Elsevier Group plc is responsible for the
system of internal control of the Reed Elsevier publishing
153556 pp022_42 report 3/3/05 5:52 pm Page 26
26
Structure and corporate governance
and information businesses, while the boards of Elsevier
Reed Finance BV are responsible for the system of internal
control in respect of the finance group activities. The boards
of Reed Elsevier Group plc and Elsevier Reed Finance BV
are also responsible for reviewing the effectiveness of their
system of internal control.
The boards of Reed Elsevier Group plc and Elsevier Reed
Finance BV have implemented an ongoing process for
identifying, evaluating, monitoring and managing the more
significant risks faced by their respective businesses. This
process has been in place throughout the year ended
31 December 2004 and up to the date of the approvals of
the Annual Reports and Financial Statements.
Reed Elsevier Group plc
Reed Elsevier Group plc has an established framework
of procedures and internal controls, which is set out in a
group Policies and Procedures Manual, and with which the
management of each business is required to comply. Group
businesses are required to maintain systems of internal
control, which are appropriate to the nature and scale of
their activities and address all significant operational and
financial risks that they face. The board of Reed Elsevier
Group plc has adopted a schedule of matters that are
required to be brought to it for decision.
Reed Elsevier Group plc has a Code of Ethics and Business
Conduct that provides a guide for achieving its business
goals and encourages officers and employees to behave in
an open, honest, ethical and principled manner. The Code
also outlines confidential procedures enabling employees
to report any concerns about compliance, or about Reed
Elsevier’s financial reporting practice.
Each Business Group has identified and evaluated its
major risks, the controls in place to manage those risks
and the level of residual risk accepted. Risk management
and control procedures are embedded into the operations
of the business and include the monitoring of progress in
areas for improvement that come to management and
board attention. The major risks identified include
business continuity, protection of IT systems and data,
challenges to intellectual property rights, management
of strategic and operational change, evaluation and
integration of acquisitions, and recruitment and retention
of personnel.
The major strategic risks facing the Reed Elsevier Group plc
businesses are considered by the Strategy Committee.
Litigation and other legal and regulatory matters are
managed by legal directors in Europe and the United States.
The Reed Elsevier Group plc Audit Committee receives
regular reports on the management of material risks and
reviews these reports. The Audit Committee also receives
regular reports from both internal and external auditors on
internal control matters. In addition, each Business Group
is required, at the end of the financial year, to review the
effectiveness of its internal controls and report its findings
on a detailed basis to the management of Reed Elsevier
Group plc. These reports are summarised and, as part of
the annual review of effectiveness, submitted to the Audit
Committee of Reed Elsevier Group plc. The Chairman of
the Audit Committee reports to the board on any significant
internal control matters arising.
Elsevier Reed Finance BV
Elsevier Reed Finance BV has established policy guidelines,
which are applied for all Elsevier Reed Finance BV
companies. The boards of Elsevier Reed Finance BV have
adopted schedules of matters that are required to be
brought to them for decision. Procedures are in place for
monitoring the activities of the finance group, including a
comprehensive treasury reporting system. The major risks
affecting the finance group have been identified and
evaluated and are subject to regular review. The controls in
place to manage these risks and the level of residual risk
accepted are monitored by the boards. The internal control
system of the Elsevier Reed Finance BV group is reviewed
each year by its external auditors.
Annual review
As part of the year end procedures, the boards of Reed
Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc
and Elsevier Reed Finance BV have reviewed the
effectiveness of the systems of internal control and risk
management during the last financial year. The objective of
these systems is to manage, rather than eliminate, the risk
of failure to achieve business objectives. Accordingly, they
can only provide reasonable, but not absolute, assurance
against material misstatement or loss. Subject to this, the
boards concluded that the systems of internal control and
risk management were adequate and effective in the
context of the business as a whole.
The Reed Elsevier businesses are in the process of
re-documenting key internal financial controls and
establishing a new controls testing regime to meet the
specific reporting and audit requirements of Section 404 of
the US Sarbanes-Oxley Act.
Responsibilities in respect of the
financial statements
The directors of Reed Elsevier PLC, Reed Elsevier NV,
Reed Elsevier Group plc and Elsevier Reed Finance BV are
required to prepare financial statements as at the end of
each financial period, which give a true and fair view of the
state of affairs, and of the profit or loss, of the respective
companies and their subsidiaries, joint ventures and
Reed Elsevier Annual Reports and Financial Statements 2004
27
Going concern
The directors of Reed Elsevier PLC and Reed Elsevier NV,
having made appropriate enquiries, consider that adequate
resources exist for the combined businesses to continue in
operational existence for the foreseeable future and that,
therefore, it is appropriate to adopt the going concern basis
in preparing the financial statements.
153556 pp022_42 report 3/3/05 5:52 pm Page 27
associates. They are responsible for maintaining proper
accounting records, for safeguarding assets, and for taking
reasonable steps to prevent and detect fraud and other
irregularities. The directors are also responsible for
selecting suitable accounting policies and applying them on
a consistent basis, making judgements and estimates that
are prudent and reasonable.
Applicable accounting standards have been followed and
the Reed Elsevier combined financial statements, which are
the responsibility of the directors of Reed Elsevier PLC and
Reed Elsevier NV, are prepared using accounting policies
which comply with UK Generally Accepted Accounting
Principles.
US certifications
As required by Section 302 of the US Sarbanes-Oxley Act
2002 and by related rules issued by the US Securities and
Exchange Commission, the Chief Executive Officer and
Chief Financial Officer of Reed Elsevier PLC and of Reed
Elsevier NV certify in the respective Annual Reports 2004
on Form 20-F filed with the Commission that they are
responsible for establishing and maintaining disclosure
controls and procedures and that they have:
• designed such disclosure controls and procedures to
ensure that material information relating to Reed
Elsevier is made known to them;
• evaluated the effectiveness of Reed Elsevier’s disclosure
controls and procedures;
• based on their evaluation, disclosed to the Audit
Committees and the external auditors all significant
deficiencies in the design or operation of disclosure
controls and procedures and any frauds, whether or not
material, that involve management or other employees
who have a significant role in Reed Elsevier internal
controls; and
• presented in the Reed Elsevier Annual Report 2004 on
Form 20-F their conclusions about the effectiveness of
the disclosure controls and procedures.
A Disclosure Committee, comprising the company
secretaries of Reed Elsevier PLC and Reed Elsevier NV and
other senior Reed Elsevier managers, provides assurance
to the Chief Executive Officer and Chief Financial Officer
regarding their certifications.
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28
Report of the Audit Committees
Report of the Audit Committees
This report has been prepared by the Audit Committees of
Reed Elsevier PLC and Reed Elsevier NV, in conjunction
with the Audit Committee of Reed Elsevier Group plc, (the
“Committees”) and has been approved by the respective
boards.
The report meets the requirements of The Combined Code
of Corporate Governance, issued by the UK Financial
Services Authority.
Audit Committees
The main role and responsibilities of the Committees in
relation to the respective companies are set out in written
terms of reference and include:
(i)
to monitor the integrity of the financial statements of the
company, and any formal announcements relating to the
company’s financial performance, reviewing significant
financial reporting judgements contained in them;
(ii) to review the company’s internal financial controls and
the company’s internal control and risk management
systems;
(iii) to monitor and review the effectiveness of the
company’s internal audit function;
(iv) to make recommendations to the board, for it to put to
the shareholders for their approval in general meetings,
in relation to the appointment, re-appointment and
removal of the external auditor and to approve the
remuneration and terms of engagement of the external
auditor;
(v) to review and monitor the external auditor’s
independence and objectivity and the effectiveness of
the audit process, taking into consideration relevant
professional and regulatory requirements; and
(vi) to develop and recommend policy on the engagement of
the external auditor to supply non audit services, taking
into account relevant ethical guidance regarding the
provision of non audit services by the external audit
firm, and to monitor compliance.
The Committees report to the respective boards on their
activities identifying any matters in respect of which they
consider that action or improvement is needed and making
recommendations as to the steps to be taken.
The Reed Elsevier Group plc Audit Committee fulfils this
role in respect of the publishing and information operating
business. The functions of an audit committee in respect
of the financing activities are carried out by the supervisory
board of Elsevier Reed Finance BV. The Reed Elsevier PLC
and Reed Elsevier NV Audit Committees fulfil their roles
from the perspective of the parent companies and both
Committees have access to the reports to and the work of
the Reed Elsevier Group plc Audit Committee and the
Elsevier Reed Finance BV supervisory board in this respect.
The Committees have explicit authority to investigate any
matters within their terms of reference and have access to
all resources and information that they may require for this
purpose. The Committees are entitled to obtain legal and
other independent professional advice and have the
authority to approve all fees payable to such advisers.
A copy of the terms of reference of each Audit Committee is
published on the Reed Elsevier website,
www.reedelsevier.com.
Committee membership
The Committees each comprise at least three independent
non-executive directors. The current members of each of
the Committees are: Lord Sharman (Chairman of the
Committees), John Brock and David Reid. Lord Sharman
and David Reid are considered to have significant, recent
and relevant financial experience.
Lord Sharman (62), a chartered accountant, spent his
professional career at KPMG and now serves as non-
executive Chairman of Aegis Group plc. He is a member
of the Supervisory Board of ABN-AMRO and a non-
executive director of BG Group plc, Group 4 Securicor plc
and Aviva plc. He was elected UK senior partner of KPMG
in 1994 and served as Chairman of KPMG Worldwide
between 1997 and 1999. John Brock (56) is Chief
Executive Officer of InBev SA and a non-executive director
of Campbell Soup Company. David Reid (58), a chartered
accountant, was appointed non-executive Chairman of
Tesco PLC in April 2004. Prior to this appointment, he
was executive Deputy Chairman, with responsibility for
strategy, business development and international
operations; he was previously the finance director of
Tesco PLC.
Appointments to the Committees are made on the
recommendation of the Nominations Committee and are
for periods of up to three years, extendable by no more than
two additional three-year periods, so long as the member
continues to be independent. Details of the remuneration
policy in respect of members of the Committees and the
remuneration paid to members for the year ended
31 December 2004 are set out in the Directors’
Remuneration Report on pages 31 to 42.
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Reed Elsevier Annual Reports and Financial Statements 2004
29
Committee activities
The Committees typically hold meetings five times a year:
around January, February, June, August and December,
and report on these meetings to the respective boards at
the next board meetings. The principal business of these
meetings includes:
-
January: review of critical accounting policies and
practices, and significant financial reporting issues
and judgements made in connection with the annual
financial statements; review of internal control
effectiveness; reviewing and approving the internal
audit plan; review of internal audit findings
- February: review and approval of annual financial
statements, results announcement and related formal
statements; review of external audit findings
-
June: monitoring and assessing the qualification,
performance, expertise, resources, objectivity and
independence of the external auditors and the
effectiveness of the external and internal audit process;
agreeing the external audit plan; reviewing significant
financial reporting issues and judgements arising in
connection with the interim financial statements; review
of risk management activities; review of report from
external auditors on control matters; review of internal
audit findings
- August: review and approval of the interim financial
statements, results announcement and related formal
statements; review of external audit findings; review of
internal audit findings
- December: review of year end financial reporting and
accounting issues; review of significant external
financial reporting and regulatory developments; review
of external audit findings to date; review of internal
audit findings.
The Audit Committee meetings are typically attended
by the chief financial officer, group chief accountant,
director of internal audit and senior representatives of
the external auditors. Additionally, the managing director
and senior representatives of the external auditors of
Elsevier Reed Finance BV attend the August and February
meetings of the parent company Audit Committees. At
two or more of the meetings each year, the Committees
additionally meet separately with the external auditors
without management present, and also with the director
of internal audit.
(i) received and discussed reports from the Reed Elsevier
Group plc group chief accountant that set out areas of
significance in the preparation of the financial
statements, including: review of the carrying values of
goodwill and intangible assets for possible impairment,
review of estimated useful lives of goodwill and
intangible assets, pensions accounting and related
assumptions, accounting treatment for acquisitions and
disposals and exceptional items, application of revenue
recognition and cost capitalisation and provisioning
policies, review of tax reserves and provisions for lease
obligations. Discussion of reporting matters has
additionally focused on the adoption of International
Financial Reporting Standards with effect from the 2005
financial year and the related disclosures.
(ii) reviewed the critical accounting policies and compliance
with applicable accounting standards and other
disclosure requirements and have received regular
update reports on accounting and regulatory
developments, including in relation to International
Financial Reporting Standards (IFRS). The review of
critical accounting policies and financial statement
presentation includes those in relation to IFRS.
(iii) received and discussed regular reports on the
management of material risks and reviewed the
effectiveness of the systems of internal control. As part
of this review, detailed internal control evaluation and
self-certification is obtained from management across
the operating businesses, reviewed by internal audit
and discussed with the Committees.
(iv) received and discussed regular reports from the
director of internal audit summarising the status of
the Reed Elsevier risk management activities and the
findings from internal audit reviews and the actions
agreed with management. An area of focus in 2004 has
been the development and agreement of plans to meet
the new requirements of Section 404 of the US
Sarbanes-Oxley Act relating to the documentation and
testing of internal financial controls.
(v) reviewed and approved the internal audit plan for 2004
and monitored execution. Reviewed the resources and
budget of the internal audit function.
The external auditors have attended all meetings of the
Committees. They have provided written reports at the
August, December and February meetings summarising
the most significant findings from their audit work. These
reports have been discussed by the Committees and
actions agreed where necessary.
In discharging their principal responsibilities in respect of
the 2004 financial year, the Committees have:
The external auditors have confirmed their independence
from management and compliance with the Reed Elsevier
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30
Report of the Audit Committees
policy on auditor independence. This policy sets out inter
alia the requirements for rotation of the lead, review
and other senior partners, as well as guidelines for the
provision of permitted non audit services. The Committees
have reviewed and agreed the non audit services provided
by the external auditors, together with the associated fees.
The external auditors’ fees for audit services have been
reviewed and approved by the Committees.
At their meeting in June 2004, the Committee conducted a
formal review of the performance of the external auditors
and the effectiveness of the audit process for both the
external and internal audit activities. Based on this review,
and on their subsequent observations on the planning and
execution of the external audit for the year ended
31 December 2004, the Committees have recommended
to the respective boards that resolutions for the
re-appointment of the external auditors be proposed
at the forthcoming Annual General Meetings.
Lord Sharman of Redlynch
Chairman of the Audit Committees
16 February 2005
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Directors’ remuneration report
Reed Elsevier Annual Reports and Financial Statements 2004
31
This report has been prepared by the Remuneration
Committee (the “Committee”) of Reed Elsevier Group plc
and approved by the boards of Reed Elsevier Group plc,
Reed Elsevier PLC and Reed Elsevier NV. The report has
been prepared in accordance with the UK Directors’
Remuneration Report Regulations 2002 (the “UK
Regulations”) and the Dutch Corporate Governance Code
issued in December 2003 (the “Dutch Code”). It describes
how the principles of good governance relating to directors’
remuneration have been applied, and meets the
requirements of the UK Combined Code of Corporate
Governance issued in July 2003 (the “UK Code”), the Dutch
Code and the Netherlands Civil Code.
Information relating to the emoluments of the directors on
pages 35 to 37 and directors’ interests in share options on
pages 38 to 41 has been audited.
Remuneration Committee
The Committee is responsible for recommending to the
boards the remuneration (in all its forms), and the terms of
the service contracts and all other terms and conditions of
employment of the executive directors, and for providing
advice to the Chief Executive Officer on major policy issues
affecting the remuneration of executives at a senior level
below the board. A copy of the terms of reference of the
Committee is published on the Reed Elsevier website,
www.reedelsevier.com.
Throughout 2004 the Committee consisted wholly of
independent non-executive directors: Rolf Stomberg
(Chairman of the Committee); Mark Elliott; and Cees van
Lede. At the invitation of the Chairman, the Chief Executive
Officer attends meetings of the Committee, except when
his own remuneration is under consideration.
The Committee has appointed Towers Perrin, an external
consultancy which has wide experience of executive
remuneration in multinational companies, to advise in
developing its performance-related remuneration policy.
Towers Perrin also provides actuarial and other Human
Resources consultancy services direct to some Reed
Elsevier companies.
In addition to Towers Perrin, the following provided material
advice or services to the Committee during the year:
Jean-Luc Augustin, Human Resources Director (until June
2004); Phil Wills, Director, Compensation and Benefits; and
Sir Crispin Davis, Chief Executive Officer.
Remuneration policy
The remuneration policy is set out below in paragraphs (a)
and (b). In accordance with the UK Regulations and the
Dutch Code, a resolution will be submitted to the respective
Annual General Meetings of Reed Elsevier PLC and Reed
Elsevier NV to approve the remuneration policy.
Objectives
(a)
The principal objectives of the remuneration policy are to
attract, retain and motivate people of the highest calibre
and experience needed to shape and execute strategy and
deliver shareholder value in the context of an ever more
competitive and increasingly global employment market.
The Board and the Committee believes that this requires:
(i) a competitive package of pay and benefits,
commensurate with comparable packages available
within other leading multinational companies operating
in global markets; the Committee believes this needs to
deliver upper quartile total remuneration for clearly
superior levels of performance and to provide a
consistent approach toward senior executives, including
the directors, irrespective of geographical location;
(ii) to link reward to individual directors’ performance,
company performance and share price performance
so as to align the interests of the directors with those
of Reed Elsevier and the shareholders of the parent
companies and to avoid rewarding failure; and
(iii) to ensure that it encourages enhanced performance
by directors and fairly recognises the contribution of
individual directors to the attainment of the results of
Reed Elsevier in the short term, and in the longer term,
whilst also encouraging a team approach which will
work towards achieving the long term strategic
objectives of Reed Elsevier.
In order to meet the above objectives, the remuneration
of executive directors comprises a balance between
“fixed” remuneration and “variable performance-related”
incentives. The policy is that the predominant proportion
of reward potential should be linked to performance, and
the remuneration structure for 2004 shows that for
superior performance over 70% of the total remuneration
is performance related. Since January 2003 the Committee
has operated a policy of common levels, irrespective of
geographical location, for both annual and longer term
incentives for executive directors, reflecting the global
nature of the role of each director.
(b) Remuneration elements
Executive directors’ remuneration consists of the following
elements:
• Base salary, which is based on comparable positions in
leading multinational businesses of similar size and
complexity. To reflect the geographical diversity of the
business, the Committee reviews market practice in
relation to major UK corporations with particular
reference to the FTSE 50 for the UK, the AEX top 10
group of companies in the Netherlands and, in the US,
the practice of major media companies. Salaries are
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Directors’ remuneration report
reviewed annually by the Committee to take into account
both market movement and individual performance.
• A variable annual cash bonus, based on achievement of
three financial performance measures (revenue, profit and
cash flow conversion rate) and individual key performance
objectives. Targets are set at the beginning of the year by
the Committee and are aligned with the annual budget
and strategic business objectives. For 2004, no bonus will
become payable in respect of an individual financial
performance measure unless 94% of the set target for that
measure is achieved. Up to 90% of salary may be earned
for the achievement of highly stretching targets set by the
Committee. For exceptional performance beyond these
stretching targets, the Committee has the discretion to
award up to 110% of salary.
• Bonus investment plan (“BIP”), under which directors
and other senior executives were able to invest up to
half of their annual performance related bonus in Reed
Elsevier PLC/Reed Elsevier NV shares. Approximately
100 senior executives participated in the BIP in respect
of their 2003 bonus. Subject to continuing to hold the
shares and remaining in employment, at the end of a
three year period the participants will be awarded an
equivalent number of Reed Elsevier PLC/Reed Elsevier
NV shares at nil cost. Awards under the BIP are made
annually, and in 2004 are subject to a performance
condition requiring the achievement of compound
growth in the average of the Reed Elsevier PLC and
Reed Elsevier NV adjusted EPS (ie before amortisation
of goodwill and intangible assets, exceptional items and
UK tax credit equalisation) measured at constant
exchange rates (“adjusted EPS”) of at least 6% per
annum compound during the three year vesting period.
• Share options (“ESOS”), where the directors and other
senior executives are granted options annually over
shares in Reed Elsevier PLC and Reed Elsevier NV at
the market price at the date of grant. The Committee
approves the grant of any option and sets performance
conditions attaching to options. At executive director
level grants in 2004 were up to 3 times salary, and the
awards are subject to a performance condition requiring
the achievement of at least 6% per annum compound
growth in adjusted EPS at constant exchange rates
during the three years following the grant. There will be
no re-testing of the 3 year EPS performance period. The
overall size of the annual grant pool is determined by
the Committee by reference to the compound annual
growth in adjusted EPS over the three years prior to
grant, with individual grant size determined by the
Committee based on individual performance. At
compound growth of between 8% and 10% per annum,
the pool of options available for the 2005 grant will be
approximately 80% of the 2004 pool.
• Long term incentives (“LTIS”), where the Committee
made the first awards to directors and a small number
of key senior executives (approximately 40) during 2004.
This award covers the period 2004 to 2006 during which
time no further awards under the LTIS will be made to
existing participants. Approximately 50% of the total
implied value of grants took the form of nil cost
conditional shares and 50% took the form of
conventional market value options. This resulted in a
grant to directors of 2.5 times salary in conditional
shares and 5.5 times salary in conventional share
options. Grants are subject to the achievement of
compound annual adjusted EPS growth at constant
exchange rates, achieved over a three-year
performance period from 2004 to 2006, of between 8%
and 12%. At 8% compound annual adjusted EPS growth
25% of the award will vest; at 10% compound annual
adjusted EPS growth 100% of the award will vest; and
at 12% compound annual adjusted EPS growth 125%
of the award would vest. Awards will vest on a straight-
line basis between each of these points. There will be
no re-testing of the three year performance period.
Acceptance of an award under the LTIS by any
individual automatically terminated any award under
the Senior Executive Long Term Incentive Plan,
introduced in 2000 (“LTIP”). Participants in the LTIS are
required to build up a significant personal shareholding
in Reed Elsevier PLC and/or Reed Elsevier NV. At
executive director level, the requirement is that they
should own shares equivalent to 1.5 times salary, to be
acquired over a three year period. In view of this
shareholding obligation, the Committee believes that it
is not appropriate to require directors to retain shares
acquired under nil cost options for a period of five
years after vesting, as required by the Dutch Code. The
Committee decided in favour of earnings per
share (EPS) as a performance measurement rather
than total shareholder return (TSR), as the Committee
believes this measure better reflects management’s
contribution to operational performance, whereas TSR
is significantly influenced by market factors outside
management’s control.
• Post-retirement pensions, where different retirement
schemes apply depending on local competitive market
practice, length of service and age of the director. The
only element of remuneration that is pensionable is
base salary. The Committee considers the effect of
any salary increases for directors on their pension
provisions and on the salaries for other staff in the
business and is assessing what, if any, impact the new
UK pension legislation will have on its approach to the
provision of pensions for UK based executive directors.
No loans, advances or guarantees have been provided on
behalf of any director.
153556 pp022_42 report 3/3/05 5:52 pm Page 33
The Committee considers that a successful remuneration
policy needs to be sufficiently flexible to take account of
future changes in Reed Elsevier’s business environment
and in remuneration practice. Consequently, the above
policy will apply in 2005 but may require to be amended.
Any changes in policy will be described in future Directors’
Remuneration Reports.
Total shareholder return
The graphs below show the Reed Elsevier PLC and
Reed Elsevier NV total shareholder return performance,
assuming dividends were reinvested. The graphs, which
have been prepared in accordance with the UK Regulations,
compare the Reed Elsevier PLC performance with the
performance achieved by the FTSE 100, and the Reed
Elsevier NV performance with the performance achieved by
the Euronext Amsterdam (“AEX”) Index, over the five years
2000–2004. As Reed Elsevier PLC and Reed Elsevier NV are
members of the FTSE 100 and AEX Index respectively, the
Committee considers these indices to be appropriate for
comparison purposes.
For the five year period since 1 January 2000, the total
shareholder return for Reed Elsevier PLC was 27%,
significantly outperforming the FTSE 100 which saw a
negative return of 18%. For Reed Elsevier NV, in the same
five year period total shareholder return was 8%, also
significantly outperforming the AEX Index which had a
negative return of 37%.
Reed Elsevier PLC total
shareholder return v
FTSE 100 2000–2004
180
160
140
120
100
80
60
40
Reed Elsevier PLC
FTSE 100
Dec 99
Dec 00
Dec 01
Dec 02
Dec 03
Dec 04
Source: FTSE International
Reed Elsevier Annual Reports and Financial Statements 2004
33
Reed Elsevier NV total
shareholder return v
AEX Index 2000–2004
180
160
140
120
100
80
60
40
Reed Elsevier NV
AEX Index
Dec 99
Dec 00
Dec 01
Dec 02
Dec 03
Dec 04
Source: Datastream
The total shareholder return set out above is calculated on
the basis of the average share price in the 30 trading days
prior to the respective year ends and on the assumption
that dividends were reinvested.
Appointment of executive director
During the year, Mr Engstrom was appointed Chief
Executive Officer of the Elsevier division. On appointment
Mr Engstrom’s remuneration comprised:
• a base salary of $1,000,000 per annum;
• participation in the annual cash bonus plan, with a
guaranteed minimum bonus of 80% of salary for 2004
(pro-rated to his period of service) and 2005;
• participation in the Bonus Investment Plan on the same
terms as the other executive directors;
• participation in the Executive Share Option Scheme on
the same terms as the other executive directors; on
23 August 2004, Mr Engstrom received an award under
this scheme for 2004 (pro-rated to his period of service);
• a one off grant under the Long Term Incentive Share
Option Scheme of 5.5 times annual salary in
conventional market value options and 2.5 times annual
salary in nil cost conditional shares, which was awarded
on 23 August 2004;
• an annual contribution in respect of pension of 19.5% of
annual salary paid in to Mr Engstrom’s designated
retirement account;
• a one-off grant of restricted shares equal in value
to $2,000,000, vesting in three annual tranches, to
compensate Mr Engstrom in respect of the loss of long
term incentive benefits with his previous employer.
153556 pp022_42 report 3/3/05 5:52 pm Page 34
34
Directors’ remuneration report
In the event that Mr Engstrom’s employment is terminated
by Reed Elsevier prior to the second anniversary (other than
by reason of his voluntary resignation or dismissal for
cause), then the Remuneration Committee may permit
Mr Engstrom to retain the options after termination provided
that vesting will only be permitted if the performance
conditions are met.
Service contracts
Each of the executive directors has a service contract, the
notice periods of which are described below:
G J A van de Aast was appointed a director in December
2000. His service contract, which is dated 15 November
2000, is subject to English law and provides for a notice
period of 12 months.
M H Armour was appointed a director in July 1996. His
service contract, which is dated 7 October 1996, as
amended in June 2003 in relation to a reduction in his
notice period, is subject to English law and provides for
a notice period of 12 months.
Sir Crispin Davis was appointed a director in September 1999.
His service contract, which is dated 19 July 1999, is subject to
English law and provides for a notice period of 12 months.
E Engstrom was appointed a director of Reed Elsevier
Group plc and Reed Elsevier PLC on 23 August 2004. His
service contract, which is dated 25 June 2004, is subject to
English law and provides for an initial notice period of
24 months, reducing to 12 months after one year’s service.
A Prozes was appointed a director in August 2000. His
service contract, which is dated 5 July 2000, is subject to
New York law and provides that, in the event of termination
without cause by the company, 12 months’ base salary
would be payable.
P Tierney was appointed a director in April 2003. His
service contract, which is dated 19 November 2002, is
subject to New York law and provides that, in the event of
termination without cause by the company, 12 months’
base salary would be payable.
The notice periods in respect of individual directors have
been reviewed by the Committee. The Committee believes
that as a general rule notice period should be twelve
months, and that the directors should, subject to practice
within the country in which the director is based, be
required to mitigate their damages in the event of
termination. The Committee will, however, have regard to
local market conditions so as to ensure that the terms
offered are appropriate to recruit and retain key executives
operating in a global business.
As a condition of receiving an award in 2004 under the LTIS,
ESOS and BIP, the service contracts of Sir Crispin Davis
and Messrs van de Aast, Armour, Prozes and Tierney were
amended during the year to incorporate additional
restrictive covenants. These covenants prevent a director
from working with specified competitors, recruiting Reed
Elsevier employees and soliciting Reed Elsevier customers
for a period of 12 months after leaving employment. In
addition, in the event of a director resigning, he will
immediately lose all rights to any options awarded under
the LTIS, ESOS and BIP granted from 2004 onwards,
whether or not such awards have vested. Furthermore, in
the event that a director joins a specified competitor within
12 months of termination, any gains made in the six
months prior to termination on the exercise of an LTIS,
ESOS and BIP award made in 2004, shall be repayable to
the Company. In the case of Mr Engstrom, his service
contract dated 25 June 2004 contains identical covenants.
External appointments
Executive directors may, subject to the approval of the
Chairman and the Chief Executive Officer, serve as non-
executive directors on the boards of up to two non-associated
companies (of which only one may be to the board of a major
company). The Committee believes that Reed Elsevier can
benefit from the broader experience gained by executive
directors in such appointments. Directors may retain
remuneration arising from such non-executive directorships.
Sir Crispin Davis is a non-executive director of
GlaxoSmithKline plc, and received a fee of £57,260/€84,172
during the year from that company in such capacity. Erik
Engstrom is a non-executive director of Eniro AB, and
received a fee of £8,150/€11,981 from 23 August 2004 to
31 December 2004 from that company in such capacity.
Remuneration of non-executive directors
The remuneration of the non-executive directors for 2004
was determined by the boards of Reed Elsevier Group plc,
Reed Elsevier PLC and Reed Elsevier NV, with the aid of
external professional advice from Towers Perrin. Non-
executive directors receive an annual fee and are
reimbursed expenses incurred in attending meetings. They
do not receive any performance related bonuses, pension
provisions, share options or other forms of benefit.
With effect from 1 May 2003 the fees paid to the
non-executive directors (other than the Chairman) who
serve on the boards of Reed Elsevier Group plc, Reed
Elsevier PLC and Reed Elsevier NV were reviewed for the
first time since 1999 and were increased to
£45,000/€65,000. The respective Chairmen of the
Remuneration Committee and Audit Committee also
receive an additional fee of £7,000/€12,000 in respect of
those additional duties.
With effect from 1 January 2004 the fees paid to the
member of the supervisory board of Reed Elsevier NV, who
does not serve on the boards of either Reed Elsevier PLC or
Reed Elsevier Group plc, were reviewed and increased to
reflect her time commitment to other companies within the
Reed Elsevier combined businesses.
153556 pp022_42 report 3/3/05 5:52 pm Page 35
Reed Elsevier Annual Reports and Financial Statements 2004
35
The non-executive directors serve under letters of appointment, and do not have contracts of service.
Emoluments of the directors
The emoluments of the directors of Reed Elsevier PLC and Reed Elsevier NV (including any entitlement to fees or
emoluments from either Reed Elsevier Group plc or Elsevier Reed Finance BV) were as follows:
(a) Aggregate emoluments
Salaries and fees
Benefits
Annual performance-related bonuses
Pension contributions
Pension to former director
Payment to former directors
Total
£
2003
£000
3,473
93
2,254
243
213
95
6,371
2004
£000
3,684
475
3,027
54
190
10
7,440
2004
€000
5,416
698
4,450
79
279
15
10,937
€
2003
€000
5,035
134
3,269
352
307
139
9,236
No compensation payments have been made for loss of office or termination in 2003 and 2004.
Details of share options exercised by the directors over shares in Reed Elsevier PLC and Reed Elsevier NV during the year
are shown on pages 38 to 41. The aggregate notional pre-tax gain made by the directors on the exercise of share options
during the year was £2,001/€2,942 (2003: £5,201,190/€7,541,726).
(b)
Individual emoluments of executive directors
£
€
G J A van de Aast
M H Armour
Sir Crispin Davis
E Engstrom
D J Haank
(until 18 June 2003)
A Prozes
P Tierney
(from 8 April 2003)
Total
Salary
405,900
503,970
991,725
195,966 388,065 155,701
Total 2003
Total 2004
Bonus
Benefits
835,222
681,009
18,592
410,730
998,402 857,230
23,699 470,733
31,340 926,370 1,949,435 1,718,379
–
739,732
Salary
596,673
740,836
1,457,836
Bonus
Total 2003
Benefits
Total 2004
27,330
987,463
603,773 1,227,776
34,838 691,978 1,467,652 1,242,984
46,070 1,361,764 2,865,670 2,491,650
–
288,069 570,455 228,880 1,087,404
–
545,082
–
– 207,131
7,739 527,531 1,080,352 1,022,230
–
–
801,270
–
– 300,340
11,377 775,470 1,588,117 1,482,234
–
545,082
5,574 536,415 1,087,071 852,399
3,187,725 475,009 3,027,480 6,690,214 5,338,378
801,270
8,193 788,530 1,597,993 1,235,979
4,685,954 698,263 4,450,395 9,834,612 7,740,650
Benefits include the provision of a company car, medical insurance and life assurance and, in the case of Mr Engstrom,
one-off relocation expenses.
Sir Crispin Davis was the highest paid director in 2004. He did not exercise any share options during 2004.
Pensions
(c)
The Committee reviews the pension arrangements for the executive directors to ensure that the benefits provided are
consistent with those provided by other multinational companies in its principal countries of operation.
Executive directors based in the United Kingdom are provided with pension benefits at a normal retirement age of 60,
equivalent to two thirds of base salary in the 12 months prior to retirement, provided they have completed 20 years’ service with
Reed Elsevier or at an accrual rate of 1/30th of pensionable salary per annum if employment is for less than 20 years. The
target pension for Sir Crispin Davis at normal retirement age of 60 is 45% of base salary in the 12 months prior to retirement.
In 1989, the Inland Revenue introduced a cap on the amount of pension that can be provided from an approved pension
scheme. The pension benefits of Sir Crispin Davis and Messrs Armour and van de Aast will be provided from a combination
of the Reed Elsevier Pension Scheme and the company’s unapproved, unfunded pension arrangements.
153556 pp022_42 report 3/3/05 5:52 pm Page 36
36
Directors’ remuneration report
The target pension for A Prozes, a US based director, is US$300,000 per annum, which becomes payable on retirement
only if he completes a minimum of seven years’ service. The pension will be reduced in amount by the value of any other
retirement benefits payable by the company or which become payable by any former employer, other than those
attributable to employee contributions.
The target pension for P Tierney, a US based director, after completion of five years pensionable service is US$440,000
per annum, inclusive of any other retirement benefits from any former employer. In the event of termination of employment
before completion of five years’ pensionable service, the pension payable will be reduced proportionately, subject to a
minimum pension of US$220,000 per annum in the event of termination of employment for reasons other than resignation
or dismissal for cause.
The pension arrangements for the above directors include life assurance cover whilst in employment, an entitlement to
a pension in the event of ill health or disability and a spouse’s and/or dependants’ pension on death.
The increase in the transfer value of the directors’ pensions, after deduction of contributions, is shown below:
Transfer
Transfer
value
value
of accrued
of accrued
pension
pension
Directors’ 31 December 31 December
Age
31 December
2003
333,533
2004 contributions)
2004 contributions
172,798
3,803
510,134
3,803 1,378,566 1,722,165
339,796
3,803 2,748,864 3,961,740 1,209,073
–
247,163
–
–
–
– 1,325,718 1,427,994
47
50
55
58
59
Increase in
transfer
value during
the period
(net of
Accrued
annual
pension
directors’ 31 December
2004
55,269
166,554
249,323
–
136,539
Transfer
Transfer
value
value
of accrued
of accrued
pension
pension
Directors’ 31 December 31 December
2003
483,623
2004 contributions)
contributions
254,013
5,590
749,897
5,590 1,998,920 2,531,583
499,500
5,590 3,985,853 5,823,758 1,777,337
–
363,329
–
–
–
– 1,922,292 2,099,151
Increase in
transfer
value during
the period
(net of
Accrued
annual
pension
directors’ 31 December
2004
81,245
244,834
366,505
–
200,712
G J A van de Aast
M H Armour
Sir Crispin Davis
A Prozes
P Tierney
G J A van de Aast
M H Armour
Sir Crispin Davis
A Prozes
P Tierney
£
Increase in
accrued
annual
pension
during
the period
Transfer
value
of increase
in accrued
annual
pension
during the
period (net
of inflation
(net of and directors’
inflation) contributions)
146,296
16,262
230,787
22,688
804,674
50,880
–
–
286,999
24,044
€
Increase in
accrued
annual
pension
during
the period
Transfer
value
of increase
in accrued
annual
pension
during the
period (net
of inflation
(net of and directors’
inflation) contributions)
215,055
23,905
33,351
339,257
74,794 1,182,871
–
421,889
–
35,344
Increase in
accrued
annual
pension
during
the period
17,324
26,598
56,285
–
24,044
Increase in
accrued
annual
pension
during
the period
25,466
39,099
82,739
–
35,344
Transfer values have been calculated in accordance with the guidance note “GN11” published by the UK Institute of
Actuaries and Faculty of Actuaries.
The transfer value in respect of individual directors represents a liability in respect of directors’ pensions entitlement,
and is not an amount paid or payable to the director.
E Engstrom, a Dutch based director, is not a member of a company pension scheme and the company makes a
contribution to Mr Engstrom’s designated retirement account, equivalent to 19.5% of his annual salary.
153556 pp022_42 report 3/3/05 5:52 pm Page 37
Reed Elsevier Annual Reports and Financial Statements 2004
37
(d)
Individual emoluments of non-executive directors
G J de Boer-Kruyt
J F Brock
M W Elliott (from 8 April 2003)
C J A van Lede (from 8 April 2003)
R J Nelissen (until 8 April 2003)
S Perrick (until 8 April 2003)
D E Reid (from 8 April 2003)
Lord Sharman
R W H Stomberg
M Tabaksblat
Total
£
€
2004
22,993
44,218
45,000
44,218
–
–
45,000
52,000
52,381
2003
15,758
43,448
36,742
36,897
10,172(i)
10,172
36,742
48,544
49,655
190,476 193,103
496,286 481,233
2004
33,800
65,000
66,150
65,000
–
–
66,150
76,440
77,000
2003
22,850
63,000
53,276
53,500
14,750(i)
14,750
53,276
70,388
72,000
280,000 280,000
729,540 697,790
(i) R J Nelissen has served as Chairman of the Supervisory Board of Elsevier Reed Finance BV throughout the year. During the period
he received fees of £10,204/€15,000 in such capacity.
Share options and interests in shares
Shareholders of Reed Elsevier PLC and Reed Elsevier NV approved the introduction of new share option schemes at their
respective Annual General Meetings in 2003. The Schemes are the Reed Elsevier Group plc Share Option Scheme, which
followed on from the Reed Elsevier Group plc Executive Share Option Scheme adopted by shareholders in 1993 (together
“ESOS”); the Reed Elsevier Group plc Bonus Investment Plan, which followed on from the Reed Elsevier Group plc Bonus
Investment Plan adopted by the boards in 2002 (together “BIP”); the Reed Elsevier Group plc Long Term Incentive Share
Option Scheme (“LTIS”), which followed on from the Reed Elsevier Group plc Senior Executive Long Term Incentive Scheme
adopted by shareholders in 2000 (“LTIP”); and the Reed Elsevier Group plc SAYE Share Option Scheme, which followed on
from the Reed Elsevier Group plc SAYE Share Option Scheme adopted by shareholders in 1993.
Options granted under ESOS are normally exercisable between three and ten years from the date of grant, at the market
price at the date of grant. Until 2003, options granted under ESOS were subject to a performance condition that required
the compound growth, at constant exchange rates, in adjusted EPS in the three years immediately preceding vesting to
exceed the compound growth in the average of the UK and Dutch retail price indices by a minimum of 6%. From 2004, the
number of shares available for grant in any year will be determined by reference to a pool of shares, the size of which will
vary according to EPS performance during the three years immediately preceding the grant. Approximately 2,500 executives
received an award under ESOS in 2004. In addition to the pre-grant performance condition, grants made to executive
directors incorporate a post-grant performance measure, requiring growth, at constant exchange rates, in adjusted EPS
in the three years following the date of grant of at least 6% p.a. compound.
Options granted under BIP are normally exercisable three years from the date of grant, at nil cost. From 2004, in order for
a BIP award to vest growth, at constant exchange rates, in adjusted EPS in the three years following the date of grant must
be at least 6% p.a. compound.
Awards under the LTIS take the form of nil cost conditional shares and conventional market price options. The awards
normally vest after three years, subject to the achievement of growth, at constant exchange rates, in adjusted EPS.
At 8% compound annual adjusted EPS growth 25% of the award would vest, at 10% compound annual adjusted EPS growth
100% of the award would vest, and at 12% compound annual adjusted EPS growth 125% of the award would vest.
In respect of awards made from 2004 onwards under ESOS, BIP and LTIP, there will be no re-testing of the three year
post-grant EPS performance measure. The performance conditions applicable to the ESOS, BIP and LTIS were chosen
in order to provide an appropriate balance between operational focus and producing a sustainable improvement
in shareholder value over the longer term.
All options granted under the LTIP lapsed during the year unexercisable as a condition of accepting an award under
the LTIS.
153556 pp022_42 report 4/3/05 12:30 pm Page 38
38
Directors’ remuneration report
Options under the SAYE scheme, in which all eligible UK employees are invited to participate, are granted at a maximum
discount of 20% to the market price at the time of grant, and are normally exercisable after the expiry of three or five years
from the date of grant. No performance targets attach to options granted under this scheme, as it is an all employee
scheme. Approximately 1,300 employees participated in SAYE during 2004.
Details of options and restricted shares held by directors in Reed Elsevier PLC and Reed Elsevier NV during the period are
shown below. There have been no changes in the options or restricted shares held by directors since 31 December 2004.
(a)
In Reed Elsevier PLC
1 January
2004
Granted
during
the year
Exercised
during
the year
Lapsed
during
the year
Market
price at
exercise 31 December
2004
date
509,404
509,404
50,940
49,317
58,000
81,728
124,956
31,217
229,087
104,130
729,375
39,600
30,000
52,000
66,900
33,600
88,202
62,974
74,000
104,319
155,147
11,327
19,225
Exercisable
from
Exercisable
until
1 Dec 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
26 Mar 2007
1 Dec 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
26 Mar 2007
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
26 Apr 1998
23 Apr 1999
21 Apr 2000
17 Aug 2001
21 Feb 2003
2 May 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
26 Apr 2005
23 Apr 2006
21 Apr 2007
17 Aug 2008
19 Apr 2009
2 May 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
882,016
3,924(iii)
481.00p
284,437
129,289
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
4,329
1 Aug 2009
31 Jan 2010
Option
price
638.00p
659.00p
600.00p
451.50p
487.25p
Nil
638.00p
487.25p
Nil
400.75p
585.25p
565.75p
523.00p
537.50p
436.50p
659.00p
600.00p
451.50p
487.25p
Nil
Nil
436.50p
487.25p
Nil
430.00p
377.60p
50,940
49,317
58,000
81,728
509,404(ii)
749,389
39,600
30,000
52,000
66,900
33,600
88,202
62,974
74,000
104,319
11,327
882,016(ii)
3,924
124,956
31,217
229,087
104,130
489,390
155,147
19,225
284,437
129,289
4,329
1,448,862
592,427
3,924
882,016
1,155,349
160,599
80,300
80,300
171,821
122,914
148,500
209,192
22,731
1,718,213(ii)
5,019
305,303
39,554
559,722
254,419
467.00p
467.00p
467.00p
436.50p
659.00p
600.00p
451.50p
487.25p
Nil
Nil
436.50p
487.25p
Nil
336.20p
1,718,213
160,599
80,300
80,300
171,821
122,914
148,500
209,192
305,303
22,731
39,554
21 Feb 2003
1 Sept 2003
1 Sept 2004
2 May 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
1 Sept 2009
1 Sept 2009
1 Sept 2009
2 May 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
559,722
254,419
5,019
19 Feb 2007
19 Feb 2007
1 Aug 2005
19 Feb 2014
19 Feb 2007
31 Jan 2006
G J A van de Aast
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
Total
M H Armour
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
– SAYE
Total
Sir Crispin Davis
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
– SAYE
Total
2,719,589
1,158,998
1,718,213
2,160,374
153556 pp022_42 report 3/3/05 5:52 pm Page 39
Reed Elsevier Annual Reports and Financial Statements 2004
39
(a)
In Reed Elsevier PLC continued
1 January
2004
188,281
83,785
103,722
132,142
20,040
941,406(ii)
E Engstrom
– ESOS
– LTIS (options)
– LTIS (shares)
– Restricted shares
Total
A Prozes
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
Total
P Tierney – ESOS
1,469,376
396,426
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
1,321,420(ii)
Total
1,717,846
Granted
during
the year
63,460(i)
318,398(i)
144,726(i)
115,781(i)
642,365
162,666
20,104
298,221
135,555
616,546
162,666
19,572
298,221
135,555
616,014
Option
price
478.00p
478.00p
Nil
Nil
566.00p
659.00p
600.00p
451.50p
487.25p
Nil
Nil
566.00p
487.25p
Nil
451.50p
487.25p
Nil
451.50p
487.25p
Nil
Exercised
during
the year
Lapsed
during
the year
Market
price at
exercise 31 December
2004
date
63,460
318,398
144,726
115,781
642,365
188,281
83,785
103,722
132,142
162,666
20,040
20,104
Exercisable
from
Exercisable
until
23 Aug 2007
23 Aug 2007
23 Aug 2007
23 Aug 2005
23 Aug 2014
23 Aug 2014
23 Aug 2007
23 Aug 2007
9 Aug 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
9 Aug 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
941,406
298,221
135,555
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
941,406
1,144,516
1,321,420
396,426
162,666
19,572
21 Feb 2006
19 Feb 2007
26 Mar 2007
21 Feb 2013
19 Feb 2014
26 Mar 2007
298,221
135,555
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
1,321,420
1,012,440
(i) At 23 August 2004, being the date of appointment as a director of Reed Elsevier Group plc and Reed Elsevier PLC.
(ii) Options lapsed unexercised during the year.
(iii) Retained an interest in all of the shares.
The middle market price of a Reed Elsevier PLC ordinary share during the year was in the range 450.0p to 542.5p
and at 31 December 2004 was 480.5p.
153556 pp022_42 report 4/3/05 12:30 pm Page 40
40
Directors’ remuneration report
(b)
In Reed Elsevier NV
1 January
2004
Granted
during
the year
G J A van de Aast
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
Total
M H Armour
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
Total
Sir Crispin Davis
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
35,866
35,148
40,699
58,191
12,057
358,658(ii)
540,619
20,244
61,726
44,882
51,926
74,276
8,030
617,256(ii)
878,340
95,774
47,888
47,888
120,245
87,601
104,204
148,946
16,115
1,202,446(ii)
Total
1,871,107
E Engstrom
– ESOS
– LTIS (options)
– LTIS (shares)
– Restricted shares
Total
85,805
157,309
71,504
314,618
106,536
12,842
195,317
88,780
403,475
209,645
26,421
384,349
174,704
795,119
43,866(i)
220,090(i)
100,040(i)
80,032(i)
444,028
Option
price
€14.87
€14.75
€13.94
€9.34
€10.57
Nil
€14.87
€10.57
Nil
€13.55
€10.73
€14.75
€13.94
€9.34
€10.57
Nil
Nil
€10.73
€10.57
Nil
€12.00
€12.00
€12.00
€10.73
€14.75
€13.94
€9.34
€10.57
Nil
Nil
€10.73
€10.57
Nil
€10.30
€10.30
Nil
Nil
Exercised
during
the year
Lapsed
during
the year
Market
price at
exercise 31 December
2004
date
Exercisable
from
Exercisable
until
35,866
35,148
40,699
58,191
85,805
12,057
1 Dec 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
1 Dec 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
157,309
71,504
496,579
20,244
61,726
44,882
51,926
74,276
106,536
8,030
12,842
195,317
88,780
664,559
95,774
47,888
47,888
120,245
87,601
104,204
148,946
209,645
16,115
26,421
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
21 Feb 2003
2 May 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
19 Apr 2009
2 May 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
21 Feb 2003
1 Sept 2003
1 Sept 2004
2 May 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
1 Sept 2009
1 Sept 2009
1 Sept 2009
2 May 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
384,349
174,704
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
358,658
358,658
617,256
617,256
1,202,446
1,202,446
1,463,780
23 Aug 2007
23 Aug 2007
23 Aug 2007
23 Aug 2005
23 Aug 2014
23 Aug 2014
23 Aug 2007
23 Aug 2007
43,866
220,090
100,040
80,032
444,028
153556 pp022_42 report 3/3/05 5:52 pm Page 41
Reed Elsevier Annual Reports and Financial Statements 2004
41
(b)
In Reed Elsevier NV continued
1 January
2004
Granted
during
the year
A Prozes
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
Total
P Tierney
– ESOS
– BIP
– LTIP
– LTIS (options)
– LTIS (shares)
131,062
59,714
72,783
94,086
14,552
655,310(ii)
1,027,507
282,258
940,860(ii)
Total
1,223,118
111,699
13,612
204,782
93,083
423,176
111,699
13,252
204,782
93,083
422,816
Option
price
€13.60
€14.75
€13.94
€9.34
€10.57
Nil
Nil
€13.60
€10.57
Nil
€9.34
€10.57
Nil
€9.34
€10.57
Nil
Exercised
during
the year
Lapsed
during
the year
Market
price at
exercise 31 December
2004
date
Exercisable
from
Exercisable
until
9 Aug 2003
23 Feb 2004
22 Feb 2005
21 Feb 2006
19 Feb 2007
21 Mar 2006
26 Mar 2007
9 Aug 2010
23 Feb 2011
22 Feb 2012
21 Feb 2013
19 Feb 2014
21 Mar 2006
26 Mar 2007
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
131,062
59,714
72,783
94,086
111,699
14,552
13,612
204,782
93,083
795,373
282,258
111,699
13,252
21 Feb 2006
19 Feb 2007
26 Mar 2007
21 Feb 2013
19 Feb 2014
26 Mar 2007
19 Feb 2007
19 Feb 2007
19 Feb 2014
19 Feb 2007
204,782
93,083
705,074
655,310
655,310
940,860
940,860
(i) At 23 August 2004, being the date of appointment as a director of Reed Elsevier Group plc and Reed Elsevier PLC.
(ii) Options lapsed unexercised during the year.
The market price of a Reed Elsevier NV ordinary share during the year was in the range €9.61 to €12.19
and at 31 December 2004 was €10.03.
153556 pp022_42 report 3/3/05 5:52 pm Page 42
42
Directors’ remuneration report
Shareholdings
(c)
The interests of the directors of Reed Elsevier PLC and Reed Elsevier NV in the issued share capital of the respective
companies at the beginning and end of the year are shown below. There have been no changes in the interests of the
directors since 31 December 2004.
G J A van de Aast
M H Armour
G J de Boer-Kruyt
J F Brock
Sir Crispin Davis
M W Elliott
E Engstrom
C J A van Lede
A Prozes
D E Reid
Lord Sharman
R W H Stomberg
M Tabaksblat
P Tierney
Reed Elsevier PLC
ordinary shares
1 January 31 December
2004
18,600
46,926
–
3,000
473,467
–
–
–
76,808
–
–
–
–
26,692
2004
–
31,738
–
3,000
450,293
–
–(i)
–
96,525
–
–
–
–
12,000
Reed Elsevier NV
ordinary shares
1 January 31 December
2004
19,684
29,846
–
–
298,261
–
–
11,100
63,454
–
–
–
8,000
17,952
2004
19,684
22,284
–
–
282,704
–
–(i)
11,100
67,774
–
–
–
8,000
8,000
(i) At 23 August 2004, being the date of appointment as a director of Reed Elsevier Group plc and Reed Elsevier PLC.
Any ordinary shares required to fulfil entitlements under nil cost restricted share awards are provided by the Employee
Benefit Trust (“EBT”) from market purchases. As a potential beneficiary under the EBT in the same way as other
employees of Reed Elsevier, each executive director is deemed to be interested in all the shares held by the EBT which,
at 31 December 2004, amounted to 8,313,746 Reed Elsevier PLC ordinary shares and 3,708,599 Reed Elsevier NV
ordinary shares.
Approved by the board of Reed Elsevier Group plc
on 16 February 2005
Rolf Stomberg
Chairman of the Remuneration Committee
Approved by the board of Reed Elsevier PLC
on 16 February 2005
Approved by the Combined Board of Reed Elsevier NV
on 16 February 2005
Rolf Stomberg
Non-executive director
Rolf Stomberg
Member of the Supervisory Board
153556 pp043_74 report 3/3/05 5:52 pm Page 43
Reed Elsevier
Combined financial statements
Accounting policies
Combined profit and loss account
Combined cash flow statement
Combined balance sheet
Combined statement of total
recognised gains and losses
Combined shareholders’ funds
reconciliation
Notes to the combined financial
statements
Independent auditors’ report
> 44
> 46
> 47
> 48
> 49
> 49
> 50
> 74
153556 pp043_74 report 3/3/05 5:52 pm Page 44
44
Combined financial statements
Accounting policies
These financial statements are presented under the
historical cost convention and in accordance with applicable
UK Generally Accepted Accounting Principles (GAAP).
Under Article 362.1 of Book 2 Title 9 of the Netherlands
Civil Code, UK GAAP may be adopted by Dutch companies
with international operations for the preparation of financial
statements, and accordingly, UK GAAP has been so
adopted, ensuring consistency.
Basis of preparation
The equalisation agreement between Reed Elsevier PLC
and Reed Elsevier NV has the effect that their shareholders
can be regarded as having the interests of a single
economic group. The Reed Elsevier combined financial
statements (“the combined financial statements”)
represent the combined interests of both sets of
shareholders and encompass the businesses of Reed
Elsevier Group plc and 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”).
These financial statements form part of the statutory
information to be provided by Reed Elsevier NV, but are
not for a legal entity and do not include all the information
required to be disclosed by a company in its financial
statements under the UK Companies Act 1985 or the
Netherlands Civil Code. Additional information is given in
Annual Reports and Financial Statements of the parent
companies set out on pages 76 to 109. A list of principal
businesses is set out on page 151.
In addition to the figures required to be reported by
applicable accounting standards, adjusted profit and
operating cash flow figures have been presented as
additional performance measures. Adjusted profit is shown
before the amortisation of goodwill and intangible assets
and exceptional items. Adjusted operating cash flow is
measured after dividends from joint ventures, tangible fixed
asset spend and proceeds from the sale of tangible fixed
assets, but before exceptional payments and proceeds.
Foreign exchange translation
The combined financial statements are presented in both
pounds sterling and euros.
Balance sheet items are translated at year end exchange
rates and profit and loss account and cash flow items are
translated at average exchange rates. Exchange translation
differences on foreign equity investments and the related
foreign currency net borrowings and on differences
between balance sheet and profit and loss account rates
are taken to reserves.
Transactions entered into in foreign currencies are
recorded at the exchange rates applicable at the time
of the transaction. The results of hedging transactions
for profit and loss amounts in foreign currency are
accounted for in the profit and loss account to match
the underlying transaction.
The principal exchange rates used are set out in note 27.
Turnover
Turnover represents the invoiced value of sales less
anticipated returns on transactions completed by
performance, excluding customer sales taxes and sales
between the combined businesses.
Revenues are recognised for the various categories of
turnover as follows: subscriptions – on periodic despatch
of subscribed product or ratably over the period of the
subscription where performance is not measurable by
despatch; circulation – on despatch; advertising – on
publication or period of online display; exhibitions – on
occurrence of the exhibition; educational testing contracts –
over the term of the contract on percentage completed
against contract milestones. Where sales consist of two or
more independent components, revenue is recognised on
each component, as it is completed by performance, based
on attribution of relative value.
Development spend
Development spend incurred on the launch of new products
or services is expensed to the profit and loss account as
incurred.
The cost of developing application infrastructure and
product delivery platforms is capitalised as a tangible fixed
asset and written off over the estimated useful life.
Pensions
The expected costs of pensions in respect of defined benefit
pension schemes are charged to the profit and loss account
so as to spread the cost over the service lives of employees
in the schemes. Actuarial surpluses and deficits are
allocated over the average expected remaining service lives
of employees. Pension costs are assessed in accordance
with the advice of qualified actuaries. For defined
contribution schemes, the profit and loss account charge
represents contributions payable.
Taxation
Deferred taxation is provided in full for timing differences
using the liability method. No provision is made for tax
which would become payable on the distribution of retained
profits by foreign subsidiaries, associates or joint ventures,
unless there is an intention to distribute such retained
earnings giving rise to a charge. Deferred tax assets are
only recognised to the extent that they are considered
recoverable in the short term. Deferred taxation balances
are not discounted.
153556 pp043_74 report 3/3/05 5:52 pm Page 45
Reed Elsevier Annual Reports and Financial Statements 2004
45
to publication, are expensed systematically reflecting the
sales profile over the estimated economic lives of the related
products, generally up to five years.
Finance leases
Assets held under leases which confer rights and
obligations similar to those attaching to owned assets are
capitalised as tangible fixed assets and the corresponding
liability to pay rentals is shown net of interest in the
accounts as obligations under finance leases. The
capitalised values of the assets are written off on a straight
line basis over the shorter of the periods of the leases or
the useful lives of the assets concerned. The interest
element of the lease payments is allocated so as to
produce a constant periodic rate of charge.
Operating leases
Operating lease rentals are charged to the profit and loss
account on a straight line basis over the period of the leases.
Financial instruments
Payments and receipts on interest rate hedges are
accounted for on an accruals basis over the lives of the
hedges and included within interest payable and interest
receivable in the profit and loss account. Gains and losses
on foreign exchange hedges, other than in relation to net
currency borrowings hedging equity investments, are
recognised in the profit and loss account on maturity of the
underlying transaction. Gains and losses on net currency
borrowings hedging equity investments are taken to
reserves. Gains and losses arising on hedging instruments
that are closed out due to the cessation of the underlying
exposure are taken directly to the profit and loss account.
Currency swap agreements are valued at exchange rates
ruling at the balance sheet date with net gains and losses
being included within short term investments or
borrowings, as appropriate. Interest payable and receivable
arising from these swaps are accounted for on an accruals
basis over the life of the swap.
Finance costs associated with debt issuances are
charged to the profit and loss account over the life of the
related borrowings.
Goodwill and intangible assets
On the acquisition of a subsidiary, associate, joint venture
or business, the purchase consideration is allocated
between the underlying net tangible and intangible assets
on a fair value basis, with any excess purchase
consideration representing goodwill.
Acquired goodwill and intangible assets are capitalised
and amortised systematically over their estimated useful
lives up to a maximum of 40 years, subject to annual
impairment review. In view of the longevity of certain of the
goodwill and intangible assets relating to acquired science
and medical and educational publishing businesses, the
presumption under UK GAAP that goodwill and intangible
assets have a maximum useful life of 20 years has been
rebutted in respect of these assets and a maximum
estimated useful life of 40 years determined. The longevity
of these assets is evidenced by their long established and
well regarded brands and imprints, and their
characteristically stable market positions.
Intangible assets comprise publishing rights and titles,
databases, exhibition rights and other intangible assets,
which are stated at fair value on acquisition and are not
subsequently revalued.
Tangible fixed assets
Tangible fixed assets are stated in the balance sheet at cost
less accumulated depreciation. No depreciation is provided
on freehold land.
Freehold buildings and long leases are depreciated over
their estimated useful lives up to a maximum of 50 years.
Short leases are written off over the duration of the lease.
Depreciation is provided on other tangible fixed assets on
a straight line basis over their estimated useful lives:
leasehold improvements – shorter of life of lease and 10
years; plant – 3 to 20 years; office furniture, fixtures and
fittings – 5 to 10 years; computer systems, communication
networks and equipment – 3 to 7 years.
Investments
Fixed asset investments in joint ventures and associates
are accounted for under the gross equity and equity
methods respectively. Other fixed asset investments are
stated at cost, less provision, if appropriate, for any
impairment in value. Short term investments are stated
at the lower of cost and net realisable value.
Inventories and pre-publication costs
Inventories and pre-publication costs are stated at the lower
of cost, including appropriate attributable overheads, and
estimated net realisable value. Pre-publication costs,
representing costs incurred in the origination of content prior
153556 pp043_74 report 3/3/05 5:52 pm Page 46
46
Combined financial statements
Combined profit and loss account
For the year ended 31 December 2004
Turnover
Including share of turnover of joint ventures
Less: share of turnover of joint ventures
Continuing operations before acquisitions
Acquisitions
Cost of sales
Gross profit
Operating expenses
Before amortisation and exceptional items
Amortisation of goodwill and intangible assets
Exceptional items
Operating profit (before joint ventures)
Continuing operations before acquisitions
Acquisitions
Share of operating profit of joint ventures
Operating profit including joint ventures
Non operating exceptional items
Net (loss)/profit on disposal of businesses and fixed assets
Profit on ordinary activities before interest
Net interest expense
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
Profit on ordinary activities after taxation
Minority interests
Profit attributable to parent companies’ shareholders
Equity dividends paid and proposed
Retained (loss)/profit taken to combined reserves
Adjusted figures
Note
1
2
2
6
1,5
6
7
8
26
9
Note
1,10
Adjusted operating profit
Adjusted profit before tax
10
Adjusted profit attributable to parent companies’ shareholders 10
£
2003
£m
5,006
(81)
4,925
4,925
–
(1,764)
3,161
(2,516)
(2,002)
(442)
(72)
645
645
–
16
661
26
687
(168)
519
(183)
336
(2)
334
(304)
30
£
2003
£m
1,178
1,010
744
2004
£m
4,906
(94)
4,812
4,751
61
(1,733)
3,079
(2,404)
(1,944)
(404)
(56)
675
699
(24)
22
697
(3)
694
(132)
562
(257)
305
(2)
303
(330)
(27)
2004
£m
1,159
1,027
760
€
2003
€m
7,259
(118)
7,141
7,141
–
(2,558)
4,583
(3,648)
(2,902)
(641)
(105)
935
935
–
23
958
37
995
(243)
752
(265)
487
(3)
484
(441)
43
€
2003
€m
1,708
1,465
1,079
2004
€m
7,212
(138)
7,074
6,984
90
(2,548)
4,526
(3,534)
(2,858)
(594)
(82)
992
1,027
(35)
32
1,024
(4)
1,020
(194)
826
(378)
448
(3)
445
(485)
(40)
2004
€m
1,704
1,510
1,117
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax
effects, are presented as additional performance measures, and are reconciled to the reported figures in note 10 to the
combined financial statements.
153556 pp043_74 report 3/3/05 5:52 pm Page 47
Reed Elsevier Annual Reports and Financial Statements 2004
47
Combined cash flow statement
For the year ended 31 December 2004
Net cash inflow from operating activities before exceptional items 11
Payments relating to exceptional items charged to operating profit 6
Net cash inflow from operating activities
Note
£
2003
£m
1,163
(98)
1,065
2004
£m
1,221
(67)
1,154
€
2003
€m
1,686
(142)
1,544
2004
€m
1,794
(98)
1,696
Dividends received from joint ventures
15
17
14
25
20
Interest and similar income received
Interest and similar charges paid
Returns on investments and servicing of finance
Taxation before exceptional items
Exceptional items
Taxation
Purchase of tangible fixed assets
Purchase of fixed asset investments
Proceeds from sale of tangible fixed assets
Exceptional proceeds from disposal of fixed assets
Capital expenditure and financial investment
Acquisitions
Exceptional net proceeds from disposal of businesses
Acquisitions and disposals
16
(146)
(130)
(240)
31
(209)
(192)
(13)
4
10
(191)
(647)
2
(645)
17
(194)
(177)
(182)
36
(146)
(155)
(7)
6
19
(137)
(258)
77
(181)
24
(215)
(191)
(353)
46
(307)
(282)
(19)
7
15
(279)
(951)
3
(948)
25
(282)
(257)
(264)
52
(212)
(225)
(10)
10
28
(197)
(374)
112
(262)
6
15
6
11
6
Equity dividends paid to shareholders of the parent companies
(309)
(292)
(454)
(423)
Cash (outflow)/inflow before changes in short term
investments and financing
Decrease/(increase) in short term investments
Financing
Decrease in cash
11
11
11
(313)
402
(90)
(1)
146
(165)
(86)
(105)
(458)
589
(132)
(1)
213
(240)
(125)
(152)
Short term investments include deposits of under one year if the maturity or notice period exceeds 24 hours, commercial
paper investments and interest bearing securities that can be realised without significant loss at short notice.
Adjusted figures
Adjusted operating cash flow
Adjusted operating cash flow conversion
Note
10
£
2003
£m
1,028
87%
2004
£m
1,050
91%
€
2003
€m
1,491
87%
2004
€m
1,544
91%
Reed Elsevier businesses focus on adjusted operating cash flow as a key cash flow measure. Adjusted operating cash flow
is measured after dividends from joint ventures, tangible fixed asset spend and proceeds from the sale of tangible fixed
assets but before exceptional payments and proceeds, and is reconciled to the reported figures in note 10 to the combined
financial statements. Adjusted operating cash flow conversion expresses adjusted operating cash flow as a percentage of
adjusted operating profit.
153556 pp043_74 report 3/3/05 5:52 pm Page 48
48
Combined financial statements
Combined balance sheet
As at 31 December 2004
Fixed assets
Goodwill and intangible assets
Tangible fixed assets
Investments
Investments in joint ventures:
Share of gross assets
Share of gross liabilities
Share of net assets
Other investments
Current assets
Inventories and pre-publication costs
Debtors – amounts falling due within one year
Debtors – amounts falling due after more than one year
Cash and short term investments
Creditors: amounts falling due within one year
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Provisions for liabilities and charges
Minority interests
Net assets
Capital and reserves
Combined share capitals
Combined share premium accounts
Combined shares held in treasury
Combined reserves
Combined shareholders’ funds
£
2003
£m
5,153
482
101
118
(58)
60
41
2004
£m
5,006
519
108
115
(57)
58
50
€
2003
€m
7,317
684
144
168
(83)
85
59
2004
€m
7,058
732
153
162
(80)
82
71
5,633
5,736
7,943
8,145
541
1,098
239
225
2,103
(3,357)
(1,254)
4,379
(1,971)
(128)
(13)
2,267
191
1,805
(66)
337
2,267
526
1,044
249
638
2,457
(3,474)
(1,017)
4,719
(2,105)
(168)
(12)
2,434
190
1,784
(37)
497
2,434
763
1,548
337
317
2,965
(4,733)
(1,768)
6,175
(2,779)
(180)
(20)
3,196
269
2,545
(93)
475
3,196
747
1,482
354
906
3,489
(4,933)
(1,444)
6,701
(2,989)
(239)
(17)
3,456
270
2,533
(53)
706
3,456
Note
13
14
15
16
17
18
19
20
21
24
26
Approved by the boards of Reed Elsevier PLC and Reed Elsevier NV, 16 February 2005.
153556 pp043_74 report 3/3/05 5:52 pm Page 49
Combined statement of total recognised gains and losses
For the year ended 31 December 2004
Reed Elsevier Annual Reports and Financial Statements 2004
49
Profit attributable to parent companies’ shareholders
Exchange translation differences
Total recognised gains and losses for the year
2004
£m
303
(143)
160
Combined shareholders’ funds reconciliation
For the year ended 31 December 2004
Profit attributable to parent companies’ shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Net decrease in combined shareholders’ funds
Combined shareholders’ funds at 1 January
Combined shareholders’ funds at 31 December
2004
£m
303
(330)
21
(29)
11
(143)
(167)
2,434
2,267
£
2003
£m
334
(232)
102
£
2003
£m
334
(304)
14
(18)
–
(232)
(206)
2,640
2,434
€
2003
€m
484
(620)
(136)
€
2003
€m
484
(441)
20
(26)
–
(620)
(583)
4,039
3,456
2004
€m
445
(224)
221
2004
€m
445
(485)
31
(43)
16
(224)
(260)
3,456
3,196
153556 pp043_74 report 3/3/05 5:52 pm Page 50
50
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
1 Segment analysis
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Geographical origin
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Geographical origin
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Turnover
Operating profit
2004
£m
2003
£m
1,363
1,292
868
1,289
4,812
2,656
846
503
545
262
4,812
1,381
1,318
898
1,328
4,925
2,822
823
502
541
237
4,925
2004
£m
386
110
90
111
697
238
155
181
83
40
697
2003
£m
375
95
91
100
661
225
168
162
73
33
661
Turnover
Operating profit
2004
€m
2003
€m
2,004
1,899
1,276
1,895
7,074
3,904
1,244
739
801
386
7,074
2,002
1,911
1,302
1,926
7,141
4,092
1,193
728
784
344
7,141
2004
€m
567
162
132
163
1,024
350
227
266
122
59
1,024
2003
€m
544
138
132
144
958
326
244
235
106
47
958
Adjusted
operating profit
2004
£m
2003
£m
Capital employed
2004
£m
2003
£m
460
308
164
227
1,159
571
204
200
140
44
1,159
467
301
174
236
1,178
603
210
189
136
40
1,178
1,380
2,147
1,379
650
5,556
4,634
473
(42)
473
18
5,556
1,476
1,985
1,390
763
5,614
4,639
432
2
516
25
5,614
Adjusted
operating profit
2004
€m
2003
€m
Capital employed
2004
€m
2003
€m
676
453
241
334
1,704
839
300
294
206
65
1,704
677
437
252
342
1,708
874
305
274
197
58
1,708
1,946
3,027
1,944
917
7,834
6,534
667
(59)
667
25
7,834
2,096
2,819
1,974
1,083
7,972
6,587
613
3
733
36
7,972
Adjusted operating profit is presented as an additional performance measure and is shown after share of operating profit
of joint ventures and before amortisation of goodwill and intangible assets and exceptional items.
Turnover is analysed before the £94m/€138m (2003: £81m/€118m) share of joint ventures’ turnover, of which £19m/€28m
(2003: £20m/€29m) relates to LexisNexis, principally Giuffrè, and £75m/€110m (2003: £61m/€89m) relates to Reed
Business, principally exhibition joint ventures.
Share of operating profit in joint ventures of £22m/€32m (2003: £16m/€23m) comprises £4m/€6m (2003: £5m/€7m)
relating to LexisNexis and £18m/€26m (2003: £11m/€16m) relating to Reed Business.
153556 pp043_74 report 3/3/05 5:52 pm Page 51
Reed Elsevier Annual Reports and Financial Statements 2004
51
1 Segment analysis continued
Analysis of turnover by geographical market
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Reconciliation of capital employed to combined shareholders’ funds
Capital employed
Taxation
Dividends and net interest
Net borrowings
Minority interests
Combined shareholders’ funds
2004
£m
2003
£m
2004
€m
2003
€m
2,779
545
202
725
561
4,812
2004
£m
5,556
(476)
(268)
(2,532)
(13)
2,267
2,921
551
207
695
551
4,925
2003
£m
5,614
(549)
(247)
(2,372)
(12)
2,434
4,085
801
297
1,066
825
7,074
4,235
799
300
1,008
799
7,141
2004
€m
2003
€m
7,834
(671)
(377)
(3,570)
(20)
3,196
7,972
(780)
(351)
(3,368)
(17)
3,456
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Capital expenditure
Depreciation
Amortisation
2004
£m
66
87
22
28
203
2003
£m
46
83
14
25
168
2004
£m
29
59
12
26
126
2003
£m
30
61
13
30
134
2004
£m
65
178
57
106
406
2003
£m
72
185
63
125
445
Capital expenditure
Depreciation
Amortisation
2004
€m
97
128
32
41
298
2003
€m
67
120
20
37
244
2004
€m
42
87
18
38
185
2003
€m
43
89
19
43
194
2004
€m
95
263
84
156
598
2003
€m
104
268
91
182
645
153556 pp043_74 report 3/3/05 5:52 pm Page 52
52
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
2 Cost of sales and operating expenses
Before Amortisation
amortisation of goodwill
and
and
exceptional
items
£m
intangible Exceptional
items
£m
assets
£m
Cost of sales
Continuing operations
Acquisitions
Total
Distribution and selling costs
Continuing operations
Acquisitions
Administrative expenses
Continuing operations
Acquisitions
Operating expenses
Continuing operations
Acquisitions
Total
1,714
19
1,733
1,052
13
1,065
868
11
879
1,920
24
1,944
–
–
–
–
–
–
381
23
404
381
23
404
–
–
–
–
–
–
37
19
56
37
19
56
Before Amortisation
amortisation of goodwill
and
and
exceptional
items
€m
intangible Exceptional
items
€m
assets
€m
Cost of sales
Continuing operations
Acquisitions
Total
Distribution and selling costs
Continuing operations
Acquisitions
Administrative expenses
Continuing operations
Acquisitions
Operating expenses
Continuing operations
Acquisitions
Total
2,520
28
2,548
1,546
20
1,566
1,277
15
1,292
2,823
35
2,858
–
–
–
–
–
–
560
34
594
560
34
594
–
–
–
–
–
–
54
28
82
54
28
82
2004
Total
£m
1,714
19
1,733
1,052
13
1,065
1,286
53
1,339
2,338
66
2,404
2004
Total
€m
2,520
28
2,548
1,546
20
1,566
1,891
77
1,968
3,437
97
3,534
Before Amortisation
of goodwill
and
amortisation
and
exceptional
items
£m
intangible Exceptional
items
£m
assets
£m
1,764
–
1,764
1,100
–
1,100
902
–
902
2,002
–
2,002
–
–
–
–
–
–
442
–
442
442
–
442
–
–
–
–
–
–
72
–
72
72
–
72
Before Amortisation
of goodwill
and
amortisation
and
exceptional
items
€m
intangible Exceptional
items
€m
assets
€m
–
–
–
–
–
–
641
–
641
641
–
641
–
–
–
–
–
–
105
–
105
105
–
105
2,558
–
2,558
1,595
–
1,595
1,307
–
1,307
2,902
–
2,902
2003
Total
£m
1,764
–
1,764
1,100
–
1,100
1,416
–
1,416
2,516
–
2,516
2003
Total
€m
2,558
–
2,558
1,595
–
1,595
2,053
–
2,053
3,648
–
3,648
153556 pp043_74 report 3/3/05 5:52 pm Page 53
Reed Elsevier Annual Reports and Financial Statements 2004
53
3 Personnel
Number of people employed
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Geographical location
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
At 31 December
2004
2003
Average during
the year
2004
2003
6,900
13,200
5,400
10,100
35,600
20,000
5,700
2,600
4,100
3,200
35,600
6,800
12,800
5,300
10,100
35,000
19,600
5,900
2,700
3,900
2,900
35,000
6,800
12,900
5,300
10,100
35,100
19,800
5,700
2,600
4,000
3,000
35,100
6,700
13,100
5,400
10,400
35,600
20,200
5,900
2,700
3,900
2,900
35,600
4 Pension schemes
A number of pension schemes are operated around the world. The major schemes are of the defined benefit type with
assets held in separate trustee administered funds. The two largest schemes, which cover the majority of employees,
are in the UK and US. The main UK scheme was subject to a triennial valuation by Watson Wyatt Partners as at 5 April
2003. The main US scheme is valued annually and was subject to a valuation by Towers Perrin as at 1 January 2004.
The principal valuation assumptions for the main UK scheme were:
Actuarial method
Annual rate of return on investments
Annual increase in total pensionable remuneration
Annual increase in present and future pensions in payment
Projected unit method
6.8%
4.5%
2.5%
The principal valuation assumptions used for the US scheme were a rate of return on investments of 7.75%, increase
in pensionable remuneration of 4.5%, and increase in present and future pensions in payment of 3.0%, applied under
the projected unit method. Assessments for accounting purposes in respect of other funded schemes, including the
Netherlands scheme, have been carried out by external qualified actuaries using prospective benefit methods. The
principal valuation assumptions for the Netherlands scheme were a rate of return on investments of 6.2%, increase in
pensionable remuneration of 2.5%, and increase in present and future pensions in payment of 2.5%.
The actuarial values placed on scheme assets under SSAP24 as at their last valuation date were sufficient to cover 113%,
119% and 90% of the benefits that had accrued to members of the main UK, US and Netherlands schemes respectively.
Actuarial surpluses and deficits are spread as a level amount over the average remaining service lives of employees. The
actuarial values of the schemes’ assets as at the valuation dates, excluding assets held in respect of members’ additional
voluntary contributions, were £1,350m/€1,958m, £287m/€405m and £280m/€395m in respect of the UK, US and
Netherlands schemes respectively.
The liabilities in respect of unfunded schemes have been determined by actuaries. As at 31 December 2004 £53m/€74m
(2003: £52m/€74m) has been provided for within creditors.
153556 pp043_74 report 3/3/05 5:52 pm Page 54
54
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
4 Pension schemes continued
The net pension charge was £57m/€84m (2003: £59m/€86m). Pension contributions made in the year amounted to
£79m/€116m (2003: £49m/€72m), including £11m/€16m in respect of defined contribution schemes. The net SSAP24
charge on the main UK scheme comprises a regular cost of £23m/€34m (2003: £23m/€33m), less amortisation of the
net actuarial surplus of £13m/€19m (2003: £13m/€19m). Based on the advice of the scheme actuaries, and with the
agreement of the scheme trustees, employer contributions to the main UK scheme with effect from 1 January 2004, will be
made at a rate of 5% of pensionable salaries until the next triennial valuation in 2006. Employer contributions to the
Netherlands scheme will be made at a rate of 9% of pensionable salaries for 2005.
A prepayment of £115m/€162m (2003: £115m/€163m), representing the excess of the net pension credit to the profit and
loss account since 1988 and the amounts funded to the main UK scheme, is included in debtors falling due after one year.
Other prepayments of £22m/€31m (2003: £nil/€nil) are included in debtors falling due within one year.
Pension costs are accounted for in accordance with the UK accounting standard, SSAP24. The UK financial reporting
standard, FRS17: Retirement Benefits requires additional information to be disclosed based on methodologies set out in
the standard which are different from those used under SSAP24 and by the scheme actuaries in determining funding
arrangements.
The assumed rates of return on scheme assets, the fair value of those assets and the present value of the scheme
liabilities based on the methodologies and presentation prescribed by FRS17 were as follows:
2004
Equities
Bonds
Other
Total fair value of assets
Present value of scheme liabilities
Net deficit
Related deferred tax
Net pension liability
2003
Equities
Bonds
Other
Total fair value of assets
Present value of scheme liabilities
Net deficit
Related deferred tax
Net pension liability
Assumed rate of
return on assets
Main UK Scheme
£m
€m
Assumed rate of
return on assets
Aggregate of Schemes
£m
€m
7.8%
4.6%
4.3%
1,075
498
72
1,645
(1,688)
(43)
13
(30)
1,516
702
101
2,319
(2,380)
(61)
19
(42)
7.9%
4.7%
4.4%
1,404
713
87
2,204
(2,525)
(321)
109
(212)
1,980
1,005
123
3,108
(3,561)
(453)
154
(299)
Assumed rate of
return on assets
Main UK Scheme
£m
€m
Assumed rate of
return on assets
Aggregate of Schemes
£m
€m
7.8%
4.8%
4.3%
1,050
442
38
1,530
(1,588)
(58)
17
(41)
1,491
628
54
2,173
(2,255)
(82)
24
(58)
8.0%
5.0%
4.6%
1,341
639
50
2,030
(2,281)
(251)
84
(167)
1,904
907
72
2,883
(3,239)
(356)
119
(237)
At 31 December 2004, the aggregate net deficit in respect of the defined benefit schemes under FRS17 comprised
£254m/€358m (2003: £189m/€268m) in respect of funded schemes and liabilities of £67m/€95m (2003: £62m/€88m) in
respect of unfunded schemes, of which £53m/€74m (2003: £52m/€74m) is provided for within creditors under SSAP24.
At 31 December 2002, for the aggregate of schemes, the fair value of equities, bonds and other assets, and the related
assumed rates of return for those asset classes were £1,068m/€1,634m, £670m/€1,025m and £53m/€81m and 9.0%,
4.9% and 3.8% respectively.
153556 pp043_74 report 3/3/05 5:52 pm Page 55
Reed Elsevier Annual Reports and Financial Statements 2004
55
4 Pension schemes continued
The movement in the net FRS17 deficit before taxation during the year in respect of defined benefit schemes was as follows:
Net deficit in schemes at beginning of the year
Movement in the year:
Total operating charge
Contributions
Finance income
Actuarial loss
Exchange translation differences
Net deficit in schemes at end of the year
Main UK Scheme
£m
(58)
(41)
10
17
29
–
(43)
€m
(82)
(60)
15
25
43
(2)
(61)
Aggregate of Schemes
€m
£m
(251)
(356)
(83)
68
12
(74)
7
(321)
(122)
100
18
(109)
16
(453)
The principal assumptions made in valuing pension scheme liabilities for the purposes of FRS17 were:
Main UK Scheme
2004
2003
Aggregate of Schemes
2004
2003
2.9%
Inflation
4.4%
Rate of increase in salaries
2.8%
Rate of increase in pensions in payment
Discount rate
5.6%
The combined profit and loss reserves as at 31 December 2004 of £337m/€475m (2003: £497m/€706m) would have been
£66m/€93m (2003: £285m/€405m), had the accounting methodologies of FRS17 been applied.
2.8%
4.4%
2.8%
5.4%
2.8%
4.8%
2.8%
5.4%
2.8%
4.8%
2.8%
5.5%
The operating charge, the amount credited to other finance income and the amounts recognised in the statement of total
recognised gains and losses in the financial year based on the methodologies and presentation prescribed by FRS17
would have been as follows:
Main UK Scheme
£m
€m
Aggregate of Schemes
€m
£m
2004
Charged to operating profit
Current service cost
Past service cost
Total operating charge
Credited to other finance income
Expected return on pension scheme assets
Interest on pension scheme liabilities
Net return
Amounts recognised in the statement of total recognised
gains and losses
Actual return less expected return on pension
scheme assets
Experience losses arising on the scheme liabilities
Changes in assumptions underlying the present value
of the scheme liabilities
Actuarial gain/(loss)
(41)
–
(41)
103
(86)
17
57
–
(28)
29
(60)
–
(60)
151
(126)
25
84
–
(41)
43
(83)
–
(83)
139
(127)
12
66
(18)
(122)
(74)
(122)
–
(122)
204
(186)
18
97
(26)
(180)
(109)
153556 pp043_74 report 3/3/05 5:52 pm Page 56
56
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
4 Pension schemes continued
Main UK Scheme
£m
€m
Aggregate of Schemes
€m
£m
2003
Charged to operating profit
Current service cost
Past service cost
Total operating charge
Credited to other finance income
Expected return on pension scheme assets
Interest on pension scheme liabilities
Net return
Amounts recognised in the statement of total
recognised gains and losses
Actual return less expected return on pension
scheme assets
Experience losses arising on the scheme liabilities
Changes in assumptions underlying the present
value of the scheme liabilities
Actuarial loss
(32)
–
(32)
96
(73)
23
125
(57)
(169)
(101)
(46)
–
(46)
139
(106)
33
181
(83)
(244)
(146)
(76)
11
(65)
131
(114)
17
153
(96)
(170)
(113)
(94)
–
(94)
190
(165)
25
222
(139)
(247)
(164)
The difference between the actual and expected returns on scheme assets, the experience losses arising on scheme
liabilities, and the total actuarial loss that would have been recognised under FRS17 in the statement of total recognised
gains and losses, expressed as a percentage of scheme assets and liabilities as appropriate, were as follows:
Actual return less expected return on
scheme assets, as a percentage of
scheme assets
Experience losses arising on scheme
liabilities, as a percentage of the
present value of scheme liabilities
Total actuarial (gain)/loss that would
have been recognised in the
statement of total recognised
gains and losses, as a
percentage of the present value
of the scheme liabilities
Main UK Scheme
Aggregate of Schemes
2004
2003
2002
2004
2003
2002
3%
8%
(19%)
3%
8%
(20%)
–
4%
2%
1%
4%
1%
(2%)
6%
14%
3%
5%
17%
153556 pp043_74 report 3/3/05 5:52 pm Page 57
Reed Elsevier Annual Reports and Financial Statements 2004
57
5 Operating profit
Operating profit is stated after the following:
Hire of plant and machinery
Other operating lease rentals
Depreciation (including £8m/€12m (2003: £7m/€10m) in respect
of assets held under finance leases)
Amortisation
Amortisation of goodwill and intangible assets
Amortisation of goodwill and intangible assets in joint ventures
Total amortisation
Staff costs
Wages and salaries
Social security costs
Pensions
Total staff costs
Auditors’ remuneration
For audit services
For non audit services
Note
4
2004
£m
9
96
126
404
2
406
1,227
130
57
1,414
3.0
1.2
2003
£m
9
94
134
442
3
445
1,255
136
59
1,450
2.5
2.1
2004
€m
13
141
185
594
4
598
1,804
191
84
2,079
4.4
1.8
2003
€m
13
136
194
641
4
645
1,820
197
86
2,103
3.6
3.2
Auditors’ remuneration for non audit services comprises £0.4m/€0.6m (2003: £0.8m/€1.2m) for audit related services,
£0.2m/€0.3m (2003: £0.6m/€0.9m) for due diligence and other transaction related services, £0.6m/€0.9m (2003:
£0.6m/€0.9m) for tax compliance and advisory work, and £nil/€nil (2003: £0.1m/€0.2m) for other non audit services.
Included in auditors‘ remuneration for non audit services is £0.1m/€0.2m (2003: £0.4m/€0.6m) paid to Deloitte & Touche
LLP and its associates in the UK.
Information on directors’ remuneration, share options, longer term incentive plans, pension contributions and entitlements
is set out in the Directors’ Remuneration Report on pages 31 to 42.
153556 pp043_74 report 3/3/05 5:52 pm Page 58
58
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
6 Exceptional items
Reorganisation costs
Acquisition related costs
Charged to operating profit
Net (loss)/profit on disposal of businesses and fixed assets
Exceptional charge before tax
Net tax credit
Total exceptional (charge)/credit
Note
(i)
(ii)
(iii)
(iv)
2004
£m
(18)
(38)
(56)
(3)
(59)
13
(46)
2003
£m
(23)
(49)
(72)
26
(46)
84
38
2004
€m
(26)
(56)
(82)
(4)
(86)
18
(68)
2003
€m
(33)
(72)
(105)
37
(68)
122
54
(i) Reorganisation costs relate to employee severance actions taken in the year, principally in Reed Business and Elsevier.
(ii) Acquisition related costs include employee severance and other costs arising on the integration of Seisint, Saxon and
other recent acquisitions.
(iii) The net loss relates to minor disposals.
(iv) The net tax credit arises principally in respect of tax relief related to restructuring and acquisition integration costs,
and, in 2003, additionally in respect of prior year disposals.
Cash flows in respect of exceptional items were as follows:
Reorganisation costs
Acquisition related costs
Exceptional operating cash outflow
Net proceeds from disposal of businesses and fixed assets
Exceptional cash outflow before tax
Exceptional tax cash inflow
Total exceptional cash (outflow)/inflow
7 Net interest expense
Interest receivable and similar income
Interest payable and similar charges
Promissory notes and bank loans
Other loans
Other interest and similar charges
Total
Interest cover (times)
2004
£m
(37)
(30)
(67)
12
(55)
31
(24)
2004
£m
16
(41)
(106)
(1)
(132)
8.8
2003
£m
(51)
(47)
(98)
96
(2)
36
34
2003
£m
18
(46)
(139)
(1)
(168)
7.0
2004
€m
(54)
(44)
(98)
18
(80)
46
(34)
2004
€m
23
(60)
(156)
(1)
(194)
8.8
2003
€m
(74)
(68)
(142)
140
(2)
52
50
2003
€m
26
(67)
(201)
(1)
(243)
7.0
Interest cover is calculated as the number of times adjusted operating profit is greater than the net interest expense.
153556 pp043_74 report 3/3/05 5:52 pm Page 59
Reed Elsevier Annual Reports and Financial Statements 2004
59
8 Tax on profit on ordinary activities
Current tax
United Kingdom
The Netherlands
Rest of world
Total current tax
Deferred tax
Origination and reversal of timing differences
Sub-total
Share of tax attributable to joint ventures
Total
2004
£m
73
52
60
185
65
250
7
257
2003
£m
2
58
57
117
60
177
6
183
2004
€m
107
77
88
272
96
368
10
378
A reconciliation of the notional current tax charge based on average standard rates of tax (weighted in proportion to
accounting profits) to the actual current tax charge is set out below:
Profit on ordinary activities before tax
Tax at average standard rates
Net impact of amortisation of goodwill and intangible assets
Prior year disposals
Permanent differences and other items
Origination and reversal of timing differences
Current tax charge
9 Equity dividends paid and proposed
Reed Elsevier PLC
Reed Elsevier NV
Total
2004
£m
562
167
97
–
(14)
(65)
185
2004
£m
163
167
330
2003
£m
519
152
108
(76)
(7)
(60)
117
2003
£m
152
152
304
2004
€m
826
245
143
–
(20)
(96)
272
2004
€m
241
244
485
2003
€m
3
84
83
170
87
257
8
265
2003
€m
752
220
157
(110)
(10)
(87)
170
2003
€m
220
221
441
Dividends comprise a total dividend for Reed Elsevier PLC of 13.0p (2003: 12.0p) per ordinary share and a total dividend
for Reed Elsevier NV of €0.33 (2003: €0.30) per ordinary share.
Dividends paid to Reed Elsevier PLC and Reed Elsevier NV shareholders are equalised at the gross level inclusive of the
UK tax credit of 10% received by certain Reed Elsevier PLC shareholders.
153556 pp043_74 report 3/3/05 5:52 pm Page 60
60
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
10 Adjusted figures
Adjusted profit and cash flow figures are used by the Reed Elsevier businesses as additional performance measures.
The adjusted figures are stated before the amortisation of goodwill and intangible assets, exceptional items and related
tax effects, and are derived as follows:
Operating profit including joint ventures
Adjustments:
Amortisation of goodwill and intangible assets (including joint ventures)
Reorganisation costs
Acquisition related costs
Adjusted operating profit
Profit before tax
Adjustments:
Amortisation of goodwill and intangible assets (including joint ventures)
Reorganisation costs
Acquisition related costs
Net loss/(profit) on disposal of businesses and fixed assets
Adjusted profit before tax
Profit attributable to parent companies’ shareholders
Adjustments:
Amortisation of goodwill and intangible assets (including joint ventures)
Reorganisation costs
Acquisition related costs
Net loss/(profit) on disposal of businesses and fixed assets
Adjusted profit attributable to parent companies’ shareholders
Net cash inflow from operating activities
Dividends received from joint ventures
Purchase of tangible fixed assets
Proceeds from sale of tangible fixed assets
Payments in relation to exceptional items charged to operating profit
Adjusted operating cash flow
2004
£m
697
406
18
38
1,159
2003
£m
661
445
23
49
1,178
2004
€m
1,024
598
26
56
1,704
2003
€m
958
645
33
72
1,708
562
519
826
752
406
18
38
3
1,027
303
411
15
29
2
760
1,154
17
(192)
4
67
1,050
445
23
49
(26)
1,010
334
448
17
32
(87)
744
1,065
14
(155)
6
98
1,028
598
26
56
4
1,510
645
33
72
(37)
1,465
445
484
604
22
43
3
1,117
1,696
25
(282)
7
98
1,544
649
24
47
(125)
1,079
1,544
20
(225)
10
142
1,491
153556 pp043_74 report 3/3/05 5:52 pm Page 61
Reed Elsevier Annual Reports and Financial Statements 2004
61
11 Cash flow statement
Reconciliation of operating profit to net cash inflow
from operating activities
Operating profit (before joint ventures)
Exceptional charges to operating profit
Operating profit before exceptional items
Amortisation of goodwill and intangible assets
Depreciation
Total non cash items
Increase in inventories and pre-publication costs
Increase in debtors
Increase in creditors
Movement in working capital
Note
6
2004
£m
675
56
731
404
126
530
(39)
(66)
65
(40)
Net cash inflow from operating activities before exceptional items
Payments relating to exceptional items charged to operating profit 6
Net cash inflow from operating activities
1,221
(67)
1,154
Acquisitions
Purchase of businesses
Payment of non operating liabilities assumed
on acquisition of Harcourt
Deferred consideration of prior year acquisitions
Total
Financing
Net movement in promissory notes and bank loans
Repayment of other loans
Issuance of other loans
Repayment of finance leases
Issue of ordinary shares
Purchase of treasury shares
Total
Note
12
2004
£m
(640)
(3)
(4)
(647)
2004
£m
(162)
(3)
102
(19)
(82)
21
(29)
(90)
2003
£m
645
72
717
442
134
576
(51)
(112)
33
(130)
1,163
(98)
1,065
2003
£m
(223)
(23)
(12)
(258)
2003
£m
(46)
(118)
94
(12)
(82)
14
(18)
(86)
2004
€m
992
82
1,074
594
185
779
(58)
(97)
96
(59)
2003
€m
935
105
1,040
641
194
835
(75)
(162)
48
(189)
1,794
(98)
1,696
1,686
(142)
1,544
2004
€m
(941)
(4)
(6)
(951)
2004
€m
(238)
(4)
150
(28)
(120)
31
(43)
(132)
2003
€m
(323)
(33)
(18)
(374)
2003
€m
(67)
(171)
136
(17)
(119)
20
(26)
(125)
The issuance of other loans relates to term debt raised by a subsidiary of Elsevier Reed Finance BV.
153556 pp043_74 report 3/3/05 5:52 pm Page 62
62
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
11 Cash flow statement continued
Reconciliation of net borrowings
Net borrowings at 1 January
Decrease in cash
(Decrease)/increase in short term investments
Decrease in borrowings
Change in net borrowings resulting from cash flows
Borrowings in acquired businesses
Inception of finance leases
Exchange translation differences
Net borrowings at 31 December
Net borrowings at 1 January
Decrease in cash
(Decrease)/increase in short term investments
Decrease in borrowings
Change in net borrowings resulting from cash flows
Borrowings in acquired businesses
Inception of finance leases
Exchange translation differences
Net borrowings at 31 December
Cash
£m
68
(1)
–
–
(1)
–
–
(1)
66
Cash
€m
97
(1)
–
–
(1)
–
–
(3)
93
Short term
investments
£m
Borrowings
£m
2004
£m
2003
£m
570
(3,010)
(2,372)
(2,732)
–
(402)
–
(402)
–
–
(9)
159
–
–
82
82
(2)
(11)
184
(2,757)
(1)
(402)
82
(321)
(2)
(11)
174
(2,532)
(105)
165
82
142
(9)
(13)
240
(2,372)
Short term
investments
€m
Borrowings
€m
2004
€m
2003
€m
809
(4,274)
(3,368)
(4,180)
–
(589)
–
(589)
–
–
4
224
–
–
120
120
(3)
(16)
286
(3,887)
(1)
(589)
120
(470)
(3)
(16)
287
(3,570)
(152)
240
119
207
(13)
(19)
637
(3,368)
Net borrowings comprise cash and short term investments, loan capital, finance leases, promissory notes and bank
and other loans, and are analysed further in notes 19 to 22.
153556 pp043_74 report 3/3/05 5:52 pm Page 63
Reed Elsevier Annual Reports and Financial Statements 2004
63
12 Acquisitions
During the year a number of acquisitions were made for a total consideration amounting to £647m/€951m, including
£7m/€10m deferred to future years, and after taking account of cash acquired of £17m/€25m. The most significant
acquisitions were Seisint, a leading risk management business in the US, and Saxon, a supplemental educational
publishing business in the US, for net consideration of £414m/€609m and £117m/€172m respectively.
The net assets of the businesses acquired are incorporated at their fair value to the combined businesses.
The fair values of the consideration given and the assets and liabilities acquired are summarised below:
Goodwill
Intangible fixed assets
Tangible fixed assets
Investments
Current assets
Current liabilities
Deferred tax
Borrowings
Net assets acquired
Consideration (after taking account of £17m cash acquired)
Less: deferred to future years
Net cash flow
Goodwill
Intangible fixed assets
Tangible fixed assets
Investments
Current assets
Current liabilities
Deferred tax
Borrowings
Net assets acquired
Consideration (after taking account of €25m cash acquired)
Less: deferred to future years
Net cash flow
Book value
on acquisition
£m
Fair value
adjustments
£m
–
3
14
5
44
(25)
–
(2)
39
277
307
–
–
–
–
24
–
608
Book value
on acquisition
€m
Fair value
adjustments
€m
–
4
21
7
65
(37)
–
(3)
57
407
452
–
–
–
–
35
–
894
Fair
value
£m
277
310
14
5
44
(25)
24
(2)
647
647
(7)
640
Fair
value
€m
407
456
21
7
65
(37)
35
(3)
951
951
(10)
941
The fair value adjustments in relation to the acquisitions made in 2004 relate principally to the valuation of publishing
rights and titles, editorial content, technology and other intangible assets. Goodwill represents the excess of the
consideration over the net tangible and intangible assets acquired. The businesses acquired in 2004 contributed
£61m/€90m to turnover, £18m/€27m to adjusted operating profit, before the amortisation of goodwill and intangible
assets and exceptional items, and £31m/€46m to net cash inflow from operating activities for the part year under
Reed Elsevier ownership.
153556 pp043_74 report 3/3/05 5:52 pm Page 64
64
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
13 Goodwill and intangible assets
Cost
At 1 January 2004
Acquisitions
Disposal of businesses
Exchange translation differences
At 31 December 2004
Accumulated amortisation
At 1 January 2004
Disposal of businesses
Charge for the year
Exchange translation differences
At 31 December 2004
Net book amount
At 1 January 2004
At 31 December 2004
Goodwill
£m
Intangible
assets
£m
Total
£m
Goodwill
€m
Intangible
assets
€m
Total
€m
4,250
277
(5)
(260)
4,262
1,813
(5)
204
(99)
1,913
4,091
310
(13)
(236)
4,152
1,375
(13)
200
(67)
1,495
8,341
587
(18)
(496)
8,414
3,188
(18)
404
(166)
3,408
6,035
407
(7)
(426)
6,009
2,574
(7)
300
(170)
2,697
5,809
456
(19)
(391)
5,855
11,844
863
(26)
(817)
11,864
1,953
(19)
294
(119)
2,109
4,527
(26)
594
(289)
4,806
2,437
2,349
2,716
2,657
5,153
5,006
3,461
3,312
3,856
3,746
7,317
7,058
At 31 December 2004, the weighted average remaining estimated useful life of goodwill and intangible assets was 23 years
(2003: 24 years).
14 Tangible fixed assets
Cost
At 1 January 2004
Acquisitions
Capital expenditure
Disposals
Exchange translation differences
At 31 December 2004
Accumulated depreciation
At 1 January 2004
Acquisitions
Disposals/write off on acquisitions
Charge for the year
Exchange translation differences
At 31 December 2004
Net book amount
At 1 January 2004
At 31 December 2004
Computer
systems,
plant and
equipment
£m
Land and
buildings
£m
185
7
14
(13)
(11)
182
72
1
(3)
7
(5)
72
113
110
1,085
12
189
(88)
(60)
1,138
716
4
(70)
119
(40)
729
369
409
Total
£m
1,270
19
203
(101)
(71)
1,320
788
5
(73)
126
(45)
801
482
519
Computer
systems,
plant and
equipment
€m
Land and
buildings
€m
Total
€m
1,803
28
298
(148)
(120)
1,861
1,119
7
(107)
185
(75)
1,129
1,540
18
277
(129)
(102)
1,604
1,016
6
(103)
175
(67)
1,027
524
577
684
732
263
10
21
(19)
(18)
257
103
1
(4)
10
(8)
102
160
155
At 31 December 2004 and 2003, all assets were included at cost. No depreciation was provided on freehold land.
The net book amount of tangible fixed assets includes £19m/€27m (2003: £29m/€41m) in respect of assets held under
finance leases.
153556 pp043_74 report 3/3/05 5:52 pm Page 65
Reed Elsevier Annual Reports and Financial Statements 2004
65
15 Fixed asset investments
At 1 January 2004
Share of attributable profit
Amortisation of goodwill and intangible assets
Dividends received from joint ventures
Additions
Acquisitions
Disposals
Exchange translation differences
At 31 December 2004
Investments in
Other
joint ventures investments
£m
£m
60
17
(2)
(17)
–
–
–
–
58
41
–
–
–
13
5
(5)
(4)
50
Total
£m
101
17
(2)
(17)
13
5
(5)
(4)
108
Investments in
Other
joint ventures investments
€m
€m
85
26
(4)
(25)
–
–
–
–
82
59
–
–
–
19
7
(7)
(7)
71
The principal joint venture at 31 December 2004 is Giuffrè (an Italian legal publisher in which Reed Elsevier has a 40%
shareholding). The cost and net book amount of goodwill and intangible assets in joint ventures were £37m/€52m
and £17m/€24m respectively (2003: £37m/€53m and £19m/€27m).
16 Inventories and pre-publication costs
Raw materials
Pre-publication costs
Finished goods
Total
2004
£m
12
340
189
541
2003
£m
13
322
191
526
2004
€m
17
479
267
763
Total
€m
144
26
(4)
(25)
19
7
(7)
(7)
153
2003
€m
18
457
272
747
17 Debtors – amounts falling due within one year
Trade debtors
Other debtors
Prepayments and accrued income
Total
2004
£m
901
68
129
1,098
2003
£m
852
85
107
1,044
2004
€m
1,270
96
182
1,548
2003
€m
1,210
120
152
1,482
18 Debtors – amounts falling due after more than one year
Trade debtors
Pension prepayment
Prepayments, accrued income and other debtors
Deferred taxation assets
Total
Note
4
24
2004
£m
4
115
23
97
239
2003
£m
8
115
30
96
249
2004
€m
6
162
32
137
337
2003
€m
11
163
44
136
354
153556 pp043_74 report 3/3/05 5:52 pm Page 66
66
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
19 Cash and short term investments
Cash at bank and in hand
Short term investments
Total
2004
£m
66
159
225
2003
£m
68
570
638
2004
€m
93
224
317
2003
€m
97
809
906
Short term investments include deposits of under one year if the maturity or notice period exceeds 24 hours, commercial
paper investments and interest bearing securities that can be realised without significant loss at short notice.
20 Creditors: amounts falling due within one year
Borrowings
Promissory notes and bank loans
Other loans
Obligations under finance leases
Trade creditors
Other creditors
Taxation
Proposed dividends
Accruals and deferred income
Total
Note
23
2004
£m
2003
£m
2004
€m
2003
€m
965
78
8
1,051
232
141
299
248
1,386
3,357
1,180
2
16
1,198
228
144
323
226
1,355
3,474
1,361
110
11
1,482
327
198
422
350
1,954
4,733
1,675
3
23
1,701
324
204
459
321
1,924
4,933
21 Creditors: amounts falling due after more than one year
Note
2004
£m
2003
£m
2004
€m
2003
€m
Borrowings
Loans repayable:
Within one to two years
Within two to five years
After five years
Obligations under finance leases
23
Other creditors
Taxation
Accruals and deferred income
Total
317
680
701
8
1,706
5
198
62
1,971
84
1,067
654
7
1,812
9
229
55
2,105
447
959
987
12
2,405
8
279
87
2,779
119
1,515
929
10
2,573
13
325
78
2,989
153556 pp043_74 report 3/3/05 5:52 pm Page 67
Reed Elsevier Annual Reports and Financial Statements 2004
67
22 Financial instruments
Details of the objectives, policies and strategies pursued by Reed Elsevier in relation to financial instruments are set out in
the Operating and Financial Review on pages 3 to 21.
For the purpose of the disclosures which follow in this note, short term debtors and creditors have been excluded, as
permitted under FRS13: Derivatives and Other Financial Instruments.
Currency and interest rate profile of financial liabilities
The currency and interest rate profile of the aggregate financial liabilities of £2,808m/€3,959m (2003: £3,074m/€4,365m),
after taking account of interest rate and currency derivatives, is set out below:
2004
US dollar
Sterling
Euro
Other currencies
Total
Floating rate
financial
liabilities
£m
Fixed rate
financial
liabilities
£m
Floating rate
financial
liabilities
€m
Fixed rate
financial
liabilities
€m
Fixed rate financial liabilities
Weighted
average
Weighted
average
interest rate term (years)
682
1
344
56
1,083
1,579
–
146
–
1,725
962
1
485
79
1,527
2,226
–
206
–
2,432
5.2%
–
5.6%
–
5.2%
4.2
–
1.9
–
4.1
Floating rate
financial
liabilities
£m
Fixed rate
financial
liabilities
£m
Floating rate
financial
liabilities
€m
Fixed rate
financial
liabilities
€m
Fixed rate financial liabilities
Weighted
average
term (years)
Weighted
average
interest rate
2003
6.0
US dollar
–
Sterling
2.8
Euro
–
Other currencies
Total
5.8
Included within fixed rate financial liabilities as at 31 December 2004 are £78m/€110m (2003: £nil/€nil) of US dollar term
debt and £382m/€539m (2003: £421m/€598m) of interest rate swaps and options denominated principally in US dollars
that mature within one year.
2,540
–
222
–
2,762
957
7
540
99
1,603
1,789
–
156
–
1,945
674
5
380
70
1,129
6.3%
–
5.4%
–
6.3%
Currency and interest rate profile of financial assets
The currency and interest rate profile of the aggregate financial assets of £289m/€407m (2003: £702m/€997m),
after taking account of interest rate swaps, is set out below:
2004
US dollar
Sterling
Euro
Other currencies
Total
Interest Non interest
bearing
bearing
financial
financial
assets
assets
£m
£m
Interest Non interest
bearing
bearing
financial
financial
assets
assets
€m
€m
67
42
79
37
225
49
5
3
7
64
95
59
111
52
317
69
7
4
10
90
153556 pp043_74 report 3/3/05 5:52 pm Page 68
68
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
22 Financial instruments continued
Interest Non interest
bearing
bearing
financial
financial
assets
assets
£m
£m
Interest Non interest
bearing
bearing
financial
financial
assets
assets
€m
€m
2003
US dollar
Sterling
Euro
Other currencies
Total
At 31 December 2004 there were interest rate swaps in place with a principal amount totalling £100m/€141m
(2003: £100m/€142m) and interest rate floors in place with a principal amount totalling £nil/€nil (2003: £50m/€71m)
denominated in sterling that mature within one year.
125
463
273
45
906
88
326
192
32
638
54
–
6
4
64
77
–
9
5
91
Floating rate interest rates payable on US commercial paper are based on US dollar commercial paper rates. Other
floating rate financial assets and liabilities bear interest by reference to LIBOR or other national LIBOR equivalent interest
rates. Included within non interest bearing financial assets are £50m/€71m (2003: £41m/€58m) of investments
denominated principally in sterling and US dollars which have no maturity date.
Forward starting interest rate derivatives
At 31 December 2004, agreements totalling £1,022m/€1,441m (2003: £653m/€927m) were in place to enter into interest
rate swaps at future dates. Of these, individual swap agreements totalling £907m/€1,278m (2003: £449m/€638m) were to
fix the interest expense on US dollar borrowings commencing in 2005 or 2006 for periods of up to 42 months, at a
weighted average interest rate of 3.9%. A further £115m/€162m (2003: £104m/€148m) of interest rate swap agreements
starting in 2005 was to swap US dollar fixed rate debt issues, to be drawn down in 2005, to floating rate debt for periods
of 10 years and 12 years. There were no forward starting agreements in place to fix the interest income on sterling short
term investments (2003: £100m/€142m).
At 31 December 2004, forward rate agreements totalling £130m/€183m (2003: £253m/€359m) were in place. All of these
agreements were to fix the interest expense on short term US dollar borrowings commencing in 2006 for periods of three
months only, at a weighted average interest rate of 2.7%.
Maturity profile of financial liabilities
The maturity profile of financial liabilities at 31 December comprised:
Repayable:
Within one year
Within one to two years
Within two to five years
After five years
Total
2004
£m
2003
£m
2004
€m
2003
€m
1,051
341
701
715
2,808
1,198
107
1,099
670
3,074
1,482
481
988
1,008
3,959
1,701
152
1,561
951
4,365
Financial liabilities repayable within one year include US commercial paper and euro commercial paper. Short term
borrowings are supported by committed facilities and by centrally managed cash and short term investments. As at
31 December 2004, a total of £1,555m/€2,193m (2003: £1,684m/€2,372m) of committed facilities was available, of which
£41m/€58m (2003: £51m/€72m) was drawn and is included in financial liabilities repayable within one year. Of the total
committed facilities, £389m/€548m (2003: £421m/€598m) matures within one year, £1,166m/€1,644m (2003: £nil/€nil)
within three to four years and £nil/€nil (2003: £1,263m/€1,794m) within four to five years. Secured borrowings under
finance leases were £16m/€23m (2003: £23m/€33m).
153556 pp043_74 report 3/3/05 5:52 pm Page 69
Reed Elsevier Annual Reports and Financial Statements 2004
69
22 Financial instruments continued
Currency exposure
The business policy is to hedge all significant transaction exposures on monetary assets and liabilities fully and
consequently there are no material currency exposures that would give rise to gains and losses in the profit and loss
account in the functional currencies of the operating units.
Fair values of financial assets and liabilities
The notional amount, book value and fair value of financial instruments are as follows:
Notional
amount Book value
£m
£m
2004
Fair value
£m
Notional
amount Book value
£m
£m
2003
Fair value
£m
Primary financial instruments held or issued to
finance operations
Investments
Cash
Short term investments
Other financial assets
Short term borrowings and current portion of
long term borrowings
Long term borrowings
Other financial liabilities
Provisions
Derivative financial instruments held to manage
interest rate and currency exposure
Interest rate swaps
Interest rate options
Interest rate floors
Forward rate agreements
Forward foreign exchange contracts
Total financial instruments
50
66
159
14
50
66
159
14
(1,051)
(1,706)
(11)
(40)
(2,519)
(1,052)
(1,744)
(11)
(40)
(2,558)
2,072
259
–
130
380
2,841
2,841
(6)
(1)
–
–
–
(7)
(2,526)
(32)
(11)
–
–
2
(41)
(2,599)
1,405
618
50
253
52
2,378
2,378
41
68
570
23
(1,198)
(1,812)
(13)
(51)
(2,372)
(7)
(4)
–
–
–
(11)
(2,383)
41
68
570
23
(1,197)
(1,903)
(13)
(51)
(2,462)
(54)
(33)
–
–
5
(82)
(2,544)
153556 pp043_74 report 3/3/05 5:52 pm Page 70
70
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
22 Financial instruments continued
Primary financial instruments held or issued
to finance operations
Investments
Cash
Short term investments
Other financial assets
Short term borrowings and current portion of
long term borrowings
Long term borrowings
Other financial liabilities
Provisions
Derivative financial instruments held to manage
interest rate and currency exposure
Interest rate swaps
Interest rate options
Interest rate floors
Forward rate agreements
Forward foreign exchange contracts
Total financial instruments
Notional
amount Book value
€m
€m
2004
Fair value
€m
Notional
amount Book value
€m
€m
2003
Fair value
€m
70
93
224
20
70
93
224
20
(1,482)
(2,405)
(16)
(56)
(3,552)
(1,482)
(2,459)
(16)
(56)
(3,606)
2,922
365
–
183
536
4,006
4,006
(8)
(2)
–
–
–
(10)
(3,562)
(45)
(16)
–
–
3
(58)
(3,664)
1,995
878
71
359
74
3,377
3,377
58
97
809
33
(1,701)
(2,573)
(19)
(72)
(3,368)
(10)
(6)
–
–
–
(16)
(3,384)
58
97
809
33
(1,700)
(2,702)
(19)
(72)
(3,496)
(77)
(46)
–
–
7
(116)
(3,612)
The amounts shown as the book value of derivative financial instruments represent accruals or deferred income arising
from these financial instruments. The fair value of long term debt has been based on current market rates offered to Reed
Elsevier for debt of the same remaining maturities. The fair values for interest rate swaps, interest rate options and forward
rate agreements represent the replacement cost calculated using market rates of interest at 31 December 2004 and 2003.
The fair values of all other items have been calculated by discounting expected future cash flows at market rates.
Hedges
The unrecognised and deferred gains and losses on financial instruments used for hedging purposes as at 31 December
2004, and before taking into account gains and losses arising in the year and included in the profit and loss account,
are as follows:
On hedges at 1 January 2004
Arising in previous years included in 2004 profit and loss account
Arising in previous years not included in 2004 profit and loss account
Arising in 2004 not included in 2004 profit and loss account
On hedges at 31 December 2004
Of which:
Expected to be included in 2005 profit and loss account
Expected to be included in 2006 profit and loss account or later
Unrecognised
Gains
£m
Losses
£m
Deferred
Gains
£m
Losses
£m
7
(4)
3
3
6
3
3
(78)
35
(43)
3
(40)
(26)
(14)
69
(44)
25
35
60
39
21
(25)
14
(11)
(6)
(17)
(12)
(5)
153556 pp043_74 report 3/3/05 5:52 pm Page 71
Reed Elsevier Annual Reports and Financial Statements 2004
71
22 Financial instruments continued
On hedges at 1 January 2004
Arising in previous years included in 2004 profit and loss account
Arising in previous years not included in 2004 profit and loss account
Arising in 2004 not included in 2004 profit and loss account
On hedges at 31 December 2004
Of which:
Expected to be included in 2005 profit and loss account
Expected to be included in 2006 profit and loss account or later
Unrecognised
Gains
€m
Losses
€m
Deferred
Gains
€m
Losses
€m
10
(6)
4
4
8
4
4
(111)
51
(60)
4
(56)
(37)
(19)
98
(65)
33
51
84
55
29
(36)
21
(15)
(9)
(24)
(17)
(7)
23 Obligations under leases
Future finance lease obligations are:
Repayable:
Within one year
Within one to two years
Within two to five years
Less: interest charges allocated to future periods
Total
Obligations falling due within one year
Obligations falling due after more than one year
Total
Annual commitments under operating leases are:
On leases expiring:
Within one year
Within two to five years
After five years
Note
2004
£m
2003
£m
2004
€m
2003
€m
9
6
2
(1)
16
8
8
16
17
4
4
(2)
23
16
7
23
13
8
3
(1)
23
11
12
23
2004
£m
2003
£m
2004
€m
20
21
7
45
53
105
9
38
59
106
10
63
75
148
24
6
6
(3)
33
23
10
33
2003
€m
13
54
84
151
Total
Of the above annual commitments, £97m/€137m relates to land and buildings (2003: £100m/€142m) and £8m/€11m
to other leases (2003: £6m/€9m).
153556 pp043_74 report 3/3/05 5:52 pm Page 72
72
Combined financial statements
Notes to the combined financial statements
For the year ended 31 December 2004
24 Provisions for liabilities and charges
At 1 January 2004
Transfers
Provided
Utilised
Exchange translation differences
At 31 December 2004
At 1 January 2004
Transfers
Provided
Utilised
Exchange translation differences
At 31 December 2004
Deferred
taxation
liabilities
£m
Property
lease
obligations
£m
93
(31)
24
(5)
(5)
76
75
–
–
(19)
(4)
52
Deferred
taxation
liabilities
€m
Property
lease
obligations
€m
132
(46)
35
(7)
(7)
107
107
–
–
(28)
(6)
73
Total
£m
168
(31)
24
(24)
(9)
128
Total
€m
239
(46)
35
(35)
(13)
180
The provision for property lease obligations relates to estimated sub-lease shortfalls and guarantees given by Harcourt
General, Inc. in favour of a former subsidiary for certain property leases for various periods up to 2016.
Deferred taxation comprises:
Deferred taxation liabilities
Excess of tax allowances over related amortisation
Pension prepayment
Short term timing differences
Deferred taxation assets
Excess of amortisation over related tax allowances
Short term timing differences
Tax losses carried forward
Net deferred tax asset
Net deferred tax asset at 1 January
Acquisitions
Transfers
Deferred tax charge in profit and loss account
Exchange translation differences
Net deferred tax asset at 31 December
Note
2004
£m
2003
£m
46
28
2
76
(9)
(29)
(59)
(97)
(21)
(3)
(24)
(62)
65
3
(21)
45
32
16
93
(9)
(69)
(18)
(96)
(3)
(69)
–
3
60
3
(3)
18
8
2004
€m
65
39
3
107
(13)
(41)
(83)
(137)
(30)
(4)
(35)
(91)
96
4
(30)
2003
€m
64
45
23
132
(13)
(98)
(25)
(136)
(4)
(105)
–
4
87
10
(4)
25 Contingent liabilities
There are contingent liabilities amounting to £57m/€80m (2003: £77m/€109m) in respect of property lease guarantees
given by Harcourt General, Inc. in favour of a former subsidiary (see note 24).
153556 pp043_74 report 3/3/05 5:52 pm Page 73
Reed Elsevier Annual Reports and Financial Statements 2004
73
26 Combined shareholders’ funds
At 1 January 2004
Profit attributable to parent companies’ shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
At 31 December 2004
At 1 January 2004
Profit attributable to parent companies’ shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
At 31 December 2004
Combined
share
capitals
£m
Combined
share
premium
accounts
£m
Combined
shares
held in
treasury
£m
Combined
reserves
£m
190
–
–
1
–
–
–
191
1,784
–
–
20
–
–
1
1,805
(37)
–
–
–
(29)
–
–
(66)
497
303
(330)
–
–
11
(144)
337
Combined
share
capitals
€m
Combined
share
premium
accounts
€m
Combined
shares
held in
treasury
€m
Combined
reserves
€m
270
–
–
1
–
–
(2)
269
2,533
–
–
30
–
–
(18)
2,545
(53)
–
–
–
(43)
–
3
(93)
706
445
(485)
–
–
16
(207)
475
Total
£m
2,434
303
(330)
21
(29)
11
(143)
2,267
Total
€m
3,456
445
(485)
31
(43)
16
(224)
3,196
Combined share capital excludes the shares of Reed Elsevier NV held by Reed Elsevier PLC.
Combined reserves include a £4m/€6m (2003: £4m/€6m) capital redemption reserve following the redemption of
non equity shares in Reed Elsevier PLC in 1999.
At 31 December 2004, shares held in treasury related to the 8,313,746 (2003: 6,383,333) Reed Elsevier PLC ordinary shares
and 3,708,599 (2003: 1,327,777) Reed Elsevier NV ordinary shares held by the Reed Elsevier Group plc Employee Benefit
Trust (“EBT”). The aggregate market value of these shares at 31 December 2004 was £66m/€93m (2003: £39m/€55m).
The EBT purchases Reed Elsevier PLC and Reed Elsevier NV shares which, at the trustees’ discretion, can be used in
respect of the exercise of share options and to meet commitments under conditional share awards.
27 Exchange rates
The following exchange rates have been applied in preparing the combined financial statements:
Euro to sterling
US dollars to sterling
Euro to US dollars
US dollars to euro
Profit and loss
Balance sheet
2004
1.47
1.83
0.80
1.24
2003
1.45
1.63
0.89
1.12
2004
1.41
1.93
0.73
1.37
2003
1.42
1.78
0.80
1.25
153556 pp043_74 report 3/3/05 5:52 pm Page 74
74
Combined financial statements
Independent auditors’ report
to the members of Reed Elsevier PLC and
shareholders of Reed Elsevier NV
We have audited the combined financial statements of Reed
Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc,
Elsevier Reed Finance BV and their respective subsidiaries,
associates and joint ventures (together “the combined
businesses’’) for the year ended 31 December 2004 which
comprise the accounting policies, the profit and loss
account, the cash flow statement, the balance sheet, the
statement of total recognised gains and losses, the
shareholders’ funds reconciliation and the related notes
1 to 27. These financial statements have been prepared
under the accounting policies set out therein.
We have also audited the information in the parts of the
Directors’ Remuneration Report presented in the Annual
Reports and Financial Statements (“the Remuneration
Report”) that are described as having been audited.
Our audit work has been undertaken so that we might
state to the members of Reed Elsevier PLC and
shareholders of Reed Elsevier NV those matters we are
required to state to them in an auditors’ report and for no
other purpose. To the fullest extent permitted by applicable
law, we do not accept or assume responsibility to anyone
other than Reed Elsevier PLC and Reed Elsevier NV and
the members of Reed Elsevier PLC and shareholders of
Reed Elsevier NV as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As described in the statement of directors’ responsibilities,
the directors of Reed Elsevier PLC and Reed Elsevier NV
are responsible for the preparation of the financial
statements in accordance with applicable United Kingdom
accounting standards. They are also responsible for the
preparation of the other information contained in the
Annual Report and Financial Statements including the
Remuneration Report. Our responsibilities, as independent
auditors of the combined financial statements and the
parts of the Remuneration Report described as having
been audited, are set out in auditing standards generally
accepted in the United Kingdom and the Netherlands and
by our respective professions’ ethical guidance.
We report to you our opinion as to whether the combined
financial statements give a true and fair view. We read the
other information contained in the Annual Reports and
Financial Statements, as described in the contents section,
and consider the implications for our report if we become
aware of any apparent misstatements or material
inconsistencies with the combined financial statements.
We are not required to consider whether the boards’
statements on internal control cover all risks and controls,
or form an opinion on the effectiveness of the combined
businesses’ corporate governance procedures or their risk
and control procedures.
Basis of audit opinion
We conducted our audit in accordance with auditing
standards generally accepted in the United Kingdom and
the Netherlands. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures
in the financial statements and the parts of the
Remuneration Report described as having been audited.
It also includes an assessment of the significant estimates
and judgements made by the directors in the preparation of
the financial statements, and of whether the accounting
policies are appropriate to the circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the combined financial
statements and the parts of the Remuneration Report
described as having been audited are free from material
misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also
evaluated the overall adequacy of the presentation of
information in the combined financial statements and the
parts of the Remuneration Report described as having
been audited.
Opinion
In our opinion:
• the combined financial statements give a true and fair
view of the state of affairs of the combined businesses
as at 31 December 2004, and of their profits for the year
then ended; and
• the parts of the Remuneration Report described as having
been audited have been properly prepared in accordance
with the United Kingdom Companies Act 1985.
Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors
London
16 February 2005
Deloitte Accountants B.V.
Amsterdam
16 February 2005
153556 pp075_92 report 3/3/05 5:52 pm Page 75
Reed Elsevier PLC
Annual report and financial statements
Financial highlights
Directors’ report
Accounting policies
Financial statements
Notes to the financial statements
Independent auditors’ report
> 76
> 77
> 80
> 81
> 85
> 92
Company number: 77536
153556 pp075_92 report 3/3/05 5:52 pm Page 76
76
Reed Elsevier PLC
Financial highlights
For the years ended 31 December
Profit and loss account
Reported profit before tax
Reported profit attributable to shareholders
Adjusted profit before tax
Adjusted profit attributable to shareholders
Per share information
Earnings per ordinary share
Adjusted earnings per ordinary share
Net dividend per ordinary share
Dividend cover (times)
Ordinary share prices – high
– low
Market capitalisation (£m)
2000
£m
102
17
365
270
1.5p
23.3p
10.0p
2.3
700p
391p
8,837
2001
£m
146
67
449
330
5.3p
26.1p
10.5p
2.5
700p
493p
7,196
2002
£m
153
96
490
361
7.6p
28.5p
11.2p
2.5
696p
488p
6,733
2003
£m
275
177
534
394
14.0p
31.2p
12.0p
2.6
552p
392p
5,909
2004
£m
297
160
543
402
12.7p
31.8p
13.0p
2.4
543p
450p
6,080
(i) All amounts presented are based on the 52.9% share of Reed Elsevier combined profits attributable to the Reed
Elsevier PLC shareholders (see note 9 to the financial statements). The statutory profit for Reed Elsevier PLC includes
the impact of sharing the UK tax credit on distributions with Reed Elsevier NV as a reduction in reported profits.
On this basis, the consolidated profit before tax, attributable profit and basic earnings per share for the year ended
31 December 2004 are £289m, £152m and 12.0p respectively.
(ii) Adjusted figures are shown before amortisation of goodwill and intangible assets, exceptional items and related tax
effects, and equalisation adjustments. The Reed Elsevier businesses focus on adjusted profit and cash flow as
additional performance measures. These are reconciled to the reported figures in note 9 to the financial statements.
(iii) Dividend cover is calculated as the number of times adjusted profit attributable to shareholders covers the
annual dividend.
(iv) Share prices quoted are the closing mid-price. Market capitalisation is the number of shares outstanding at the year
end, excluding Reed Elsevier PLC shares held in treasury, multiplied by the closing mid-price at the year end date.
153556 pp075_92 report 3/3/05 5:52 pm Page 77
Reed Elsevier Annual Reports and Financial Statements 2004
77
Directors’ report
The directors present their report, together with the
financial statements of the company, for the year ended
31 December 2004.
shareholders and it reduces the statutory attributable
earnings of the company by £8m (2003: £8m), being 47.1%
of the total amount of the tax credit.
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 74, 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
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 £363m, up from £343m in 2003. The Elsevier
division saw strong subscription renewals, growing online
sales, and a successful medical book publishing
programme. LexisNexis had a good year, with revenue
growth building as the investment programme pays back
and demand for products linked to workflow applications
and in risk management also accelerating growth. Harcourt
Education performed well against a weak US schools
market, which has seen the last year of a three year trough
in the state textbook adoption cycle. Reed Business saw
recovery in its markets for the first time in four years, with
an increasing number of sectors and geographies seeing
positive growth momentum, and online services and
exhibitions performing well. Underlying operating margins
showed continued improvement, despite the increasing
investment. 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 £215m, down £20m
from 2003, reflecting translation effects and some past
acquisitions becoming fully amortised. The company’s
share of the operating exceptional items was £29m (2003:
£38m), principally comprising its share of integration and
rationalisation costs relating to acquisitions and other
restructuring costs.
The profit for the year also includes a £2m share of the
exceptional loss (2003: gain £14m) on disposals of
businesses and fixed assets. The reported attributable
profit for Reed Elsevier PLC was £152m (2003: £169m).
The adjusted profit attributable to shareholders – before
the amortisation of goodwill and intangible assets and
exceptional items – was £402m (2003: £394m).
Adjusted earnings per share increased 2% to 31.8p (2003:
31.2p). At constant rates of exchange, the increase would
have been 8%. 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 12.0p (2003: 13.4p).
153556 pp075_92 report 3/3/05 5:52 pm Page 78
78
Reed Elsevier PLC
Balance sheet
The balance sheet of Reed Elsevier PLC reflects the
shareholders 52.9% economic interest in the net assets of
Reed Elsevier, which at 31 December 2004 amounted to
£1,199m (2003: £1,288m). The £89m decrease in net assets
principally reflects the company’s share in the attributable
profits of Reed Elsevier, less dividends paid and proposed,
and exchange translation effects.
Dividends
In 2000, consistent with Reed Elsevier’s investment led
strategy for growth, the board established a policy of
modest growth in dividends. Given the strengthening
performance of the business, the strong cash generation
and positive outlook, the board now intends to pursue a
more progressive dividend policy. Accordingly, the board is
recommending a final dividend of 9.6p per ordinary share to
be paid on 20 May 2005 to shareholders on the Register on
29 April 2005 which, when added to the interim dividend
already paid on 3 September 2004 amounting to 3.4p per
ordinary share, makes the total dividend for the year 13.0p
(2003: 12.0p), an increase of 8%.
The total dividend on the ordinary shares for the financial
year will amount to £163m (2003: £152m), leaving a
retained loss of £11m (2003: profit £17m).
International Financial Reporting Standards
Under a regulation adopted by the European Parliament,
the financial statements will be prepared in accordance
with International Financial Reporting Standards (IFRS)
with effect from the 2005 financial year. Additional
information on the adoption of IFRS, including a summary
re-presentation of the 2004 financial statements under
IFRS, is set out on pages 134 to 136.
Directors
The following served as directors during the year:
M Tabaksblat
(Chairman)
Sir Crispin Davis
(Chief Executive Officer)
M H Armour
(Chief Financial Officer)
G J A van de Aast
J F Brock
M W Elliott
E Engstrom (appointed 23 August 2004)
C J A van Lede
A Prozes
D E Reid
Lord Sharman of Redlynch OBE
R W H Stomberg
(senior independent non-executive director)
P Tierney
Biographical details of the directors at the date of this
Report are given on pages 12 and 13 of the Annual Review
and Summary Financial Statements.
Messrs Brock, Armour and Prozes and Sir Crispin Davis
will retire by rotation at the forthcoming Annual General
Meeting. Being eligible, Messrs Armour and Prozes and
Sir Crispin Davis will each offer themselves for re-election.
Erik Engstrom, having been appointed to the board during
the year, will also retire and, being eligible, offers himself
for re-election. Mr Brock will not be seeking re-election.
The notice period applicable to the service contracts of
Messrs Armour, Prozes and Engstrom and Sir Crispin
Davis is set out in the Directors’ Remuneration Report
on page 34.
Details of directors’ remuneration and their interests in the
share capital of the company are provided in the Directors’
Remuneration Report on pages 31 to 42.
Share capital
During the period 2,562,500 ordinary shares in the company
were issued in connection with the following share option
schemes:
339,087 under a UK SAYE share option scheme at prices
between 336.20p and 543.20p per share.
2,223,413 under executive share option schemes at prices
between 400.75p and 566.00p per share.
At 15 February 2005, the company had received notification
of the following substantial interests in the company’s
issued ordinary share capital:
The Capital Group Companies, Inc 127,980,366 shares 10.05%
Legal & General Group plc 55,610,716 shares 4.37%
Prudential plc 38,315,148 shares 3.01%
At the 2004 Annual General Meeting a resolution was
passed to extend the authority given to the company to
purchase up to 10% of its ordinary shares by market
purchase. At 31 December 2004, this authority remained
unutilised. A resolution to further extend the authority is
to be put to the 2005 Annual General Meeting.
Charitable and political donations
Reed Elsevier companies made donations during the year
for charitable purposes amounting to £1.4m of which £0.4m
was in the United Kingdom. In the United States, Reed
Elsevier companies contributed £44,000 to political parties.
There were no donations made in the European Union for
political purposes.
Reed Elsevier Annual Reports and Financial Statements 2004
79
Auditors
Resolutions for the reappointment of Deloitte & Touche
LLP as auditors of the company and authorising the
directors to fix their remuneration will be submitted to
the forthcoming Annual General Meeting.
By order of the Board
Stephen J Cowden
Secretary
16 February 2005
Registered Office
1-3 Strand
London
WC2N 5JR
153556 pp075_92 report 3/3/05 5:52 pm Page 79
Statement of directors’ responsibilities
The directors are required by English company law to
prepare financial statements for each financial period,
which give a true and fair view of the state of affairs of
the company and the group, and of the profit or loss for
that period. In preparing those financial statements, the
directors ensure that suitable accounting policies,
consistently applied and supported by reasonable and
prudent judgements and estimates, have been used,
and accounting standards have been followed.
The directors are responsible for keeping proper
accounting records, which disclose with reasonable
accuracy at any time the financial position of the company
and enable them to ensure that the financial statements
comply with the law.
The directors have general responsibility for taking
reasonable steps to safeguard the assets of the group and
to prevent and detect fraud and other irregularities.
Corporate governance
Save as noted on page 22, the company has complied
throughout the period under review with the provisions of
the Combined Code on Corporate Governance issued in
July 2003 (the “UK Code”).
Details of how the principles of the UK Code have been
applied and the directors’ statement on internal control are
set out in the Structure and Corporate Governance report
on pages 22 to 27.
Details of the role and responsibilities, membership and
activities of the Reed Elsevier PLC Audit Committee are set
out in the Report of the Audit Committees on pages 28 to 30.
Going concern
After making enquiries, the directors have a reasonable
expectation that the group has adequate resources to
continue in operational existence for the foreseeable future
and that, therefore, it is appropriate to adopt the going
concern basis in preparing the financial statements.
Payments to suppliers
Reed Elsevier companies agree terms and conditions for
business transactions with suppliers and payment is made
on these terms. The average time taken to pay suppliers
was between 30 and 45 days.
Foreign exchange translation
Profit and loss and cash flow items are translated at
average exchange rates. In the consolidated balance sheet,
assets and liabilities are translated at rates ruling at the
balance sheet date or contracted rates where applicable.
The gains or losses relating to the retranslation of Reed
Elsevier PLC’s 52.9% economic interest in the net assets of
the combined businesses are taken directly to reserves.
Taxation
Deferred taxation is provided in full for timing differences
using the liability method. No provision is made for tax
which might become payable on the distribution of retained
profits by foreign subsidiaries or joint ventures unless there
is an intention to distribute such retained earnings giving
rise to a charge.
Deferred tax assets are only recognised to the extent that
they are considered recoverable in the short term. Deferred
taxation balances are not discounted.
153556 pp075_92 report 3/3/05 5:52 pm Page 80
80
Reed Elsevier PLC
Accounting policies
These financial statements have been prepared under the
historical cost convention in accordance with applicable
accounting standards.
Basis of preparation
These statutory financial statements report the profit and
loss account, cash flow and financial position of Reed
Elsevier PLC, and have been prepared in accordance with
UK generally accepted accounting principles. Unless
otherwise indicated, all amounts shown in the financial
statements are in millions of pounds.
The basis of the merger of the businesses of Reed Elsevier
PLC and Reed Elsevier NV is set out on page 22.
As permitted by Section 230 of the Companies Act 1985, the
company has not presented its own profit and loss account.
Determination of profit
The Reed Elsevier PLC share of the Reed Elsevier
combined results has been calculated on the basis of the
52.9% economic interest of the Reed Elsevier PLC
shareholders in the Reed Elsevier combined businesses,
after taking account of results arising in Reed Elsevier PLC
and its subsidiary undertakings. 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. In the
financial statements, an adjustment is required to equalise
the benefit of the tax credit between the two sets of
shareholders in accordance with the equalisation
agreement. This equalisation adjustment arises on
dividends paid by Reed Elsevier PLC to its shareholders
and reduces the attributable earnings of the company by
47.1% of the total amount of the tax credit.
The accounting policies adopted in the preparation of the
combined financial statements are set out on pages 44
and 45.
Basis of valuation of assets and liabilities
Reed Elsevier PLC’s 52.9% economic interest in the net
assets of the combined businesses has been shown on the
balance sheet as interests in joint ventures, net of the
assets and liabilities reported as part of Reed Elsevier PLC
and its subsidiaries. Joint ventures are accounted for using
the gross equity method.
In the parent company accounts, investments are stated
at cost, less provision, if appropriate, for any impairment
in value.
153556 pp075_92 report 3/3/05 5:52 pm Page 81
Consolidated profit and loss account
For the year ended 31 December 2004
Reed Elsevier Annual Reports and Financial Statements 2004
81
Turnover
Including share of turnover of joint ventures
Less: share of turnover of joint ventures
Administrative expenses
Operating loss (before joint ventures)
Share of operating profit of joint ventures
Before amortisation and exceptional items
Amortisation of goodwill and intangible assets
Exceptional items
Operating profit including joint ventures
Share of non operating exceptional items of joint ventures
Net interest income/(expense)
Group
Share of net interest of joint ventures
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
UK corporation tax
Share of tax of joint ventures
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Retained (loss)/profit taken to reserves
Adjusted figures
Note
3
1
6
7
8
£
2003
£m
2,605
(2,605)
–
(1)
(1)
616
(235)
(38)
343
342
14
14
3
(92)
(89)
267
(98)
(1)
(97)
169
(152)
17
2004
£m
2,546
(2,546)
–
(2)
(2)
607
(215)
(29)
363
361
(2)
(2)
3
(73)
(70)
289
(137)
(5)
(132)
152
(163)
(11)
£
2003
£m
534
394
Adjusted profit before tax
Adjusted profit attributable to ordinary shareholders
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax
effects, are presented as additional performance measures, and are reconciled to the reported figures in note 9 to the
financial statements.
543
402
9
9
Note
2004
£m
Earnings per ordinary share (EPS)
Basic EPS
Diluted EPS
EPS based on 52.9% economic interest in the Reed Elsevier combined businesses
Adjusted EPS
The above amounts derive from continuing activities.
£
2003
pence
13.4
13.4
14.0
31.2
2004
pence
12.0
11.9
12.7
31.8
Note
10
10
10
10
153556 pp075_92 report 3/3/05 5:52 pm Page 82
82
Reed Elsevier PLC
Consolidated cash flow statement
For the year ended 31 December 2004
Net cash outflow from operating activities
Dividends received from Reed Elsevier Group plc
Returns on investments and servicing of finance – interest received
Taxation
Equity dividends paid
Cash outflow before changes in short term investments and financing
Financing
Issue of ordinary shares
Increase in net funding balances to Reed Elsevier Group plc group
Change in net cash
Note
11
11
£
2003
£m
(1)
144
3
(3)
(144)
(1)
1
12
(11)
–
2004
£m
(2)
153
3
(1)
(153)
–
–
11
(11)
–
153556 pp075_92 report 3/3/05 5:52 pm Page 83
Balance sheets
As at 31 December 2004
Fixed assets
Investment in joint ventures:
Share of gross assets
Share of gross liabilities
Share of net assets
Investments
Current assets
Debtors
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Net assets
Capital and reserves
Called up share capital
Share premium account
Shares held in treasury
Capital redemption reserve
Profit and loss reserve
Shareholders’ funds
Reed Elsevier Annual Reports and Financial Statements 2004
83
£
Consolidated
2004
£m
2003
£m
£
2003
£m
Company
2004
£m
4,128
(3,355)
773
–
773
4,370
(3,511)
859
–
859
595
595
(169)
426
1,199
–
1,199
159
974
(35)
4
97
1,199
584
584
(119)
465
1,324
(36)
1,288
159
963
(20)
4
182
1,288
–
–
–
1,411
1,411
595
595
(246)
349
1,760
–
1,760
159
974
–
4
623
1,760
–
–
–
1,411
1,411
584
584
(196)
388
1,799
(36)
1,763
159
963
–
4
637
1,763
Note
12
13
14
15
16
17
19
19
19
19
The financial statements were approved by the Board of Directors, 16 February 2005.
M Tabaksblat
Chairman
M H Armour
Chief Financial Officer
153556 pp075_92 report 3/3/05 5:52 pm Page 84
84
Reed Elsevier PLC
Consolidated statement of total recognised gains and losses
For the year ended 31 December 2004
Profit attributable to ordinary shareholders
Exchange translation differences
Total recognised gains for the year
Recognised gains include gains of £85m (2003: £53m) in respect of joint ventures.
Reconciliation of shareholders’ funds
For the year ended 31 December 2004
£
Consolidated
Company
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Equalisation adjustments
Net (decrease)/increase in shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
2004
£m
152
(163)
11
(15)
6
(76)
(4)
(89)
1,288
1,199
2003
£m
169
(152)
12
(10)
–
(123)
(5)
(109)
1,397
1,288
2004
£m
149
(163)
11
–
–
–
–
(3)
1,763
1,760
£
2003
£m
169
(123)
46
2004
£m
152
(76)
76
£
2003
£m
145
(152)
12
–
–
–
–
5
1,758
1,763
153556 pp075_92 report 3/3/05 5:52 pm Page 85
Reed Elsevier Annual Reports and Financial Statements 2004
85
Note
2004
£m
2003
£m
Notes to the financial statements
For the year ended 31 December 2004
1 Income from interests in joint ventures
Share of operating profit before amortisation and exceptional items
(based on 52.9% economic interest in the Reed Elsevier combined businesses)
Effect of tax credit equalisation on distributed earnings
Items consolidated within Reed Elsevier PLC group
Total
Segmental analysis of the Reed Elsevier combined results is shown in the Reed Elsevier combined financial statements.
2
613
(8)
2
607
623
(8)
1
616
2 Effect of tax credit equalisation on distributed earnings
The tax credit equalisation adjustment arises on dividends paid by Reed Elsevier PLC to its shareholders and reduces the
earnings of the company by 47.1% of the total amount of the tax credit, as set out in the accounting policies on page 80.
3 Operating loss (before joint ventures)
The operating loss (before joint ventures) comprises administrative expenses and includes £386,000 (2003: £330,000)
paid in the year to Reed Elsevier Group plc under a contract for the services of directors and administrative support.
The company has no employees (2003: nil).
4 Auditors’ remuneration
Audit fees payable for the group were £24,000 (2003: £23,000). Further information on the audit and non-audit fees paid by
the Reed Elsevier combined businesses to Deloitte & Touche LLP and its associates is set out in note 5 to the combined
financial statements.
5 Directors’ emoluments
Information on directors’ remuneration, share options, longer term incentive plans, pension contributions and entitlements
is set out in the Directors’ Remuneration Report on pages 31 to 42.
6 Net interest
Interest receivable and similar income
On loans to Reed Elsevier Group plc group
Net interest income
2004
£m
2003
£m
3
3
3
3
153556 pp075_92 report 3/3/05 5:52 pm Page 86
86
Reed Elsevier PLC
Notes to the financial statements
For the year ended 31 December 2004
7 Tax on profit on ordinary activities
UK corporation tax
Share of tax arising in joint ventures:
Before amortisation and exceptional items
On amortisation and exceptional items
Total
UK corporation tax has been provided at 30% (2003: 30%).
2004
£m
5
136
(4)
137
The share of tax arising in joint ventures as a proportion of the share of profit before tax is increased due to non
tax-deductible amortisation.
8 Dividends
Ordinary shares of 12.5 pence each
Interim
Final (2004 proposed)
Total
2004
pence
3.4
9.6
13.0
2003
pence
3.3
8.7
12.0
2004
£m
43
120
163
9 Adjusted figures
Adjusted profit figures are used as additional performance measures. The adjusted figures are derived as follows:
Profit before tax
Effect of tax credit equalisation on distributed earnings
Profit before tax based on 52.9% economic interest in the Reed Elsevier combined businesses
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted profit before tax
Profit attributable to ordinary shareholders
Effect of tax credit equalisation on distributed earnings
Profit attributable to ordinary shareholders based on 52.9% economic interest in the
Reed Elsevier combined businesses
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted profit attributable to ordinary shareholders
2004
£m
289
8
297
215
31
543
152
8
160
217
25
402
2003
£m
1
139
(42)
98
2003
£m
42
110
152
2003
£m
267
8
275
235
24
534
169
8
177
237
(20)
394
153556 pp075_92 report 3/3/05 5:53 pm Page 87
Reed Elsevier Annual Reports and Financial Statements 2004
87
9 Adjusted figures continued
Basic earnings per ordinary share
Effect of tax credit equalisation on distributed earnings
Earnings per share based on 52.9% economic interest in the Reed Elsevier
combined businesses
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted earnings per ordinary share
10 Earnings per ordinary share (EPS)
Note
Earnings
£m
Basic EPS
Diluted EPS
EPS based on 52.9% economic interest in the Reed Elsevier
combined businesses
Adjusted EPS
9
Basic EPS
Diluted EPS
EPS based on 52.9% economic interest in the Reed Elsevier
combined businesses
Adjusted EPS
The diluted EPS figures are calculated after taking into account the effect of share options.
9
11 Cash flow statement
Reconciliation of operating loss to net cash outflow from operating activities
Operating loss
Net movement in debtors and creditors
Net cash outflow from operating activities
152
152
160
402
Earnings
£m
169
169
177
394
2004
pence
12.0
0.7
12.7
17.2
1.9
31.8
Weighted
average
number
of shares
(millions)
1,264.6
1,273.1
1,264.6
1,264.6
Weighted
average
number
of shares
(millions)
1,263.7
1,265.4
1,263.7
1,263.7
2003
pence
13.4
0.6
14.0
18.8
(1.6)
31.2
2004
EPS
pence
12.0
11.9
12.7
31.8
2003
EPS
pence
13.4
13.4
14.0
31.2
2004
£m
(2)
–
(2)
2003
£m
(1)
–
(1)
153556 pp075_92 report 3/3/05 5:53 pm Page 88
88
Reed Elsevier PLC
Notes to the financial statements
For the year ended 31 December 2004
11 Cash flow statement continued
Reconciliation of net funding balances to Reed Elsevier Group plc group
At 1 January 2004
Cash flow
At 31 December 2004
12 Fixed asset investments – consolidated investment
in joint ventures
Share of operating profit
Share of non operating exceptional items
Share of net interest payable
Share of profit before tax
Share of taxation
Share of profit after tax
Dividends received
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Equalisation adjustments
Net movement in the year
At 1 January
At 31 December
£m
548
11
559
2003
£m
343
14
(92)
265
(97)
168
(144)
(10)
–
(123)
(5)
(114)
973
859
2004
£m
363
(2)
(73)
288
(132)
156
(153)
(15)
6
(76)
(4)
(86)
859
773
The investment in joint ventures comprises the group’s share at the following amounts of:
3,034
Fixed assets
1,336
Current assets
(2,303)
Creditors: amounts falling due within one year
(1,114)
Creditors: amounts falling due after more than one year
(89)
Provisions
(5)
Minority interests
Total
859
The above amounts exclude assets and liabilities held directly by Reed Elsevier PLC and include the counterparty balances
of amounts owed to and by other Reed Elsevier businesses. Included within share of current assets and creditors are cash
and short term investments of £119m (2003: £338m) and borrowings of £1,458m (2003: £1,592m) respectively.
2,980
1,148
(2,238)
(1,043)
(68)
(6)
773
2004
£m
2003
£m
153556 pp075_92 report 3/3/05 5:53 pm Page 89
Reed Elsevier Annual Reports and Financial Statements 2004
89
13 Fixed asset investments – company
At 1 January and 31 December 2004
14 Debtors
Subsidiary
undertakings
£m
303
Joint
ventures
£m
1,108
Total
£m
1,411
Consolidated
2004
£m
2003
£m
Company
2004
£m
2003
£m
Amounts owed by Reed Elsevier Group plc group
Amounts falling due after more than one year are £40m (2003: £40m). These amounts are denominated in sterling and
earn interest at a fixed rate of 9.8% (2003: 9.8%) for a remaining duration of three years (2003: four years). At 31 December
2004 these amounts had a fair value of £46m (2003: £47m).
595
595
584
584
15 Creditors: amounts falling due within one year
Other creditors
Amounts owed to Reed Elsevier Group plc group
Proposed dividend
Taxation
Amounts owed to group undertakings
Total
Consolidated
Company
2004
£m
1
36
120
12
–
169
2003
£m
1
–
110
8
–
119
2004
£m
1
36
120
12
77
246
2003
£m
1
–
110
8
77
196
16 Creditors: amounts falling due after more than one year
Amounts owed to Reed Elsevier Group plc group
17 Called up share capital
Consolidated
Company
2004
£m
–
2003
£m
36
2004
£m
–
2003
£m
36
Authorised
Issued and fully paid
No. of
shares
£m
2004
No. of
shares
Ordinary shares of 12.5p each
Unclassified shares of 12.5p each
Total
Details of shares issued under share option schemes are set out in note 18.
1,273,674,009
197,779,167
159 1,273,674,009
–
25
184
2003
No. of
shares
1,271,111,509
–
£m
159
–
159
£m
159
–
159
153556 pp075_92 report 3/3/05 5:53 pm Page 90
90
Reed Elsevier PLC
Notes to the financial statements
For the year ended 31 December 2004
18 Share option schemes
During the year a total of 2,562,500 ordinary shares in the company, having a nominal value of £0.3m, were allotted in
connection with the exercise of share options. The consideration received by the company was £10.9m. Options were
granted during the year under the Reed Elsevier Group plc Share Option Scheme to subscribe for 16,274,119 ordinary
shares, at prices between 473.5p and 505.5p per share, and under the Reed Elsevier Group plc Long Term Incentive
Share Option Scheme to subscribe for 5,084,722 ordinary shares at prices between 478.0p and 487.25p. Options were
also granted during the year under the Reed Elsevier Group plc SAYE Share Option Scheme to subscribe for 1,120,060
ordinary shares at a price of 377.6p per share.
Options outstanding at 31 December 2004 over the company’s ordinary share capital were:
UK and overseas executive share option schemes
Long Term Incentive Share Option Scheme
UK SAYE share option scheme
The above entitlements are expected, upon exercise, to be met principally by the issue of new ordinary shares.
Number of
ordinary shares
52,953,596
5,084,722
3,876,202
Range of
subscription prices
400.75p – 700.0p
478.0p – 487.25p
336.2p – 543.2p
Exercisable
2005 – 2014
2007 – 2014
2005 – 2010
Additionally, at 31 December 2004, there were 1,740,407 options at subscription prices ranging between 424.0p and 537.5p and
5,341,329 nil cost conditional share awards granted principally under the Reed Elsevier Group plc Long Term Incentive Share
Option Scheme, the Reed Elsevier Group plc Retention Share Plan and the Reed Elsevier Group plc Bonus Investment Plan
which, upon exercise, will be met by the Reed Elsevier Group plc Employee Benefit Trust from shares purchased in the market.
Options to subscribe for 19,374,493 ordinary shares in the company lapsed during the year.
Further information on share option schemes is included in the Directors’ Remuneration Report on pages 31 to 42.
19 Reserves
Consolidated
At 1 January 2004
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Equalisation adjustments
At 31 December 2004
Details of shares held in treasury are provided in note 26 to the combined financial statements.
Share
premium
account
£m
963
–
–
11
–
–
–
–
974
Capital
Shares
held in redemption
reserve
£m
4
–
–
–
–
–
–
–
4
treasury
£m
(20)
–
–
–
(15)
–
–
–
(35)
Profit
and loss
reserve
£m
182
152
(163)
–
–
6
(76)
(4)
97
Total
£m
1,129
152
(163)
11
(15)
6
(76)
(4)
1,040
At 1 January 2004
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Issue of ordinary shares, net of expenses
At 31 December 2004
Reed Elsevier PLC’s share of the revenue reserves of the Reed Elsevier combined businesses is £176m (2003: £261m).
Company
Share
Capital
premium redemption
reserve
£m
4
–
–
–
4
account
£m
963
–
–
11
974
Profit
and loss
reserve
£m
637
149
(163)
–
623
Total
£m
1,604
149
(163)
11
1,601
153556 pp075_92 report 3/3/05 5:53 pm Page 91
Reed Elsevier Annual Reports and Financial Statements 2004
91
20 Contingent liabilities
There are contingent liabilities in respect of borrowings of the Reed Elsevier Group plc group and Elsevier Reed Finance BV
group guaranteed by Reed Elsevier PLC as follows:
2,692
Guaranteed jointly and severally with Reed Elsevier NV
Financial instruments disclosures in respect of the borrowings covered by the above guarantees are given in note 22 to the
Reed Elsevier combined financial statements.
2,487
2004
£m
2003
£m
21 Principal joint ventures
The principal joint ventures are:
Reed Elsevier Group plc
Incorporated and operating in Great Britain
1-3 Strand
London WC2N 5JR
Holding company for operating businesses
involved in science & medical, legal, educational
and business publishing
£10,000 ordinary “R” shares
£10,000 ordinary “E” shares
£100,000 7.5% cumulative preference non voting shares
100%
–
100%
% holding
Equivalent to a 50% equity interest
Elsevier Reed Finance BV
Incorporated in the Netherlands
Radarweg 29
1043 NX Amsterdam, The Netherlands
Holding company for financing businesses
The “E” shares in Reed Elsevier Group plc and Elsevier Reed Finance BV are owned by Reed Elsevier NV.
133 ordinary “R” shares
205 ordinary “E” shares
Equivalent to a 39% equity interest
22 Principal subsidiary undertaking
The principal subsidiary undertaking is:
100%
–
% holding
Reed Holding BV
Incorporated in the Netherlands
Radarweg 29
1043 NX Amsterdam, The Netherlands
Reed Holding BV owns 4,679,249 shares of a separate class in Reed Elsevier NV, giving Reed Elsevier PLC a 5.8% indirect
equity interest in Reed Elsevier NV.
41 ordinary shares
100%
153556 pp075_92 report 3/3/05 5:53 pm Page 92
92
Reed Elsevier PLC
Independent auditors’ report
to the members of Reed Elsevier PLC
We have audited the financial statements of Reed Elsevier
PLC for the year ended 31 December 2004 which comprise
the accounting policies, the profit and loss account, the
cash flow statement, the balance sheets, the statement
of total recognised gains and losses, the reconciliation
of shareholders’ funds and the related notes 1 to 22.
These financial statements have been prepared under
the accounting policies set out therein.
We have also audited the information in the parts of the
Directors’ Remuneration Report presented in the Annual
Reports and Financial Statements (“the Remuneration
Report”) that are described as having been audited.
Authority, and we report if it does not. We are not required
to consider whether the board’s statements on internal
control cover all risks and controls, or form an opinion on
the effectiveness of the group’s corporate governance
procedures or its risk and control procedures.
We read the directors’ report and the other information
contained in the Annual Report for the above year as
described in the contents section including the unaudited
parts of the Remuneration Report and consider the
implications for our report if we become aware of any
apparent misstatements or material inconsistencies with
the financial statements.
This report is made solely to the company’s members, as a
body, in accordance with Section 235 of the Companies Act
1985. Our audit work has been undertaken so that we
might state to the company’s members those matters we
are required to state to them in an auditors’ report and for
no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other
than the company and the company’s members as a body,
for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of directors and auditors
As described in the statement of directors’ responsibilities,
the company’s directors are responsible for the preparation
of the financial statements in accordance with applicable
United Kingdom law and accounting standards. They are
also responsible for the preparation of the other
information contained in the Annual Report and Financial
Statements including, together with the directors of Reed
Elsevier NV, the Remuneration Report. Our responsibility
is to audit the financial statements and the parts of the
Remuneration Report described as having been audited
in accordance with relevant United Kingdom legal and
regulatory requirements and auditing standards.
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the
financial statements and the parts of the Remuneration
Report described as having been audited have been
properly prepared in accordance with the Companies Act
1985. We also report to you if, in our opinion, the directors’
report is not consistent with the financial statements, if the
company has not kept proper accounting records, if we
have not received all the information and explanations we
require for our audit, or if information specified by law
regarding directors’ remuneration and transactions with the
company and other members of the group is not disclosed.
We review whether the corporate governance statement
reflects the company’s compliance with the nine provisions
of the July 2003 FRC Combined Code specified for our
review by the Listing Rules of the Financial Services
Basis of audit opinion
We conducted our audit in accordance with United Kingdom
auditing standards issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial
statements and the parts of the Remuneration Report
described as having been audited. It also includes an
assessment of the significant estimates and judgements
made by the directors in the preparation of the financial
statements, and of whether the accounting policies are
appropriate to the circumstances of the company and the
group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence to
give reasonable assurance that the financial statements
and the parts of the Remuneration Report described as
having been audited are free from material misstatement,
whether caused by fraud or other irregularity or error.
In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial
statements and the parts of the Remuneration Report
described as having been audited.
Opinion
In our opinion:
• the financial statements give a true and fair view of
the state of affairs of the company and the group as
at 31 December 2004 and of the profit of the group
for the year then ended; and
• the financial statements and the parts of the
Remuneration Report described as having been audited
have been properly prepared in accordance with the
Companies Act 1985.
Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors
London
16 February 2005
153556 pp093_110 report 3/3/05 5:53 pm Page 93
Reed Elsevier NV
Annual report and financial statements
Financial highlights
The Supervisory Board’s report
The Executive Board’s report
Accounting policies
Financial statements
Notes to the financial statements
Independent auditors’ report
Other information
> 94
> 95
> 95
> 96
> 98
> 101
> 109
> 109
153556 pp093_110 report 3/3/05 5:53 pm Page 94
94
Reed Elsevier NV
Financial highlights
For the years ended 31 December
(in €m, unless otherwise indicated)
Note
2000
2001
2002
2003
2004
Profit and loss account
Reported profit before tax
Reported profit attributable to shareholders
Adjusted profit before tax
Adjusted profit attributable to shareholders
Per share information (in €)
Earnings per ordinary share
Adjusted earnings per ordinary share
Cash dividend per ordinary share
Dividend cover (times)
Ordinary share prices – high
– low
– closing
Number of shares outstanding at year end (in millions)
Market capitalisation (€m)
157
27
566
419
221
101
683
503
0.04
0.59
0.28
2.1
16.07
9.30
15.66
776
12,152
0.13
0.64
0.30
2.1
15.66
10.92
13.28
783
10,398
(i)
(i)
(i)
(iii)
(iv)
(v)
(vi)
230
144
737
542
0.18
0.69
0.30
2.3
16.01
10.86
11.65
784
9,134
376
242
733
540
0.31
0.69
0.30
2.3
12.03
8.13
9.85
784
7,722
413
223
755
559
0.28
0.71
0.33
2.2
12.19
9.61
10.03
783
7,853
The information provided above is based on Reed Elsevier NV's gross equity share of the Reed Elsevier combined businesses.
(i) Adjusted profit before tax, adjusted profit attributable and adjusted earnings per share are presented as additional
performance measures and stated before amortisation of goodwill and intangible assets, exceptional items and related
tax effects. These are reconciled to the reported figures in note 8 to the financial statements.
(ii) Per share information has been calculated using the average number of shares outstanding, taking into account that
the R-shares can be converted into ten ordinary shares.
(iii) Dividend cover is the number of times the adjusted earnings, before amortisation of goodwill and intangible assets,
exceptional items and related tax effects, cover the cash dividends paid and proposed for the year.
(iv) The closing price is the final quotation at year end on the stockmarket of Euronext Amsterdam N.V. for ordinary shares.
(v) The number of shares outstanding at year end include the R-shares, assuming that they have been converted into ten
ordinary shares, and exclude Reed Elsevier NV shares held in treasury.
(vi) Market capitalisation is the number of shares outstanding at year end multiplied by the closing price.
153556 pp093_110 report 3/3/05 5:53 pm Page 95
Reed Elsevier Annual Reports and Financial Statements 2004
95
The Supervisory Board’s report
M Tabaksblat, Chairman
G J de Boer-Kruyt
J F Brock
M W Elliott
C J A van Lede
D E Reid
Lord Sharman of Redlynch OBE
R W H Stomberg
Together with the Executive Board, we herewith submit Reed Elsevier NV’s annual report and financial statements for the financial
year ended 31 December 2004 to the shareholders’ meeting for adoption. The financial statements have been drawn up in accordance
with the accounting principles explained on pages 96 and 97 of this document. They have been examined by Deloitte Accountants B.V.
Amsterdam. Their report and opinion is set out on page 109. The combined financial statements on pages 44 to 73 are part of the
notes to and form an integral part of these statutory financial statements.
We refer to the Report of the Chairman and the Chief Executive Officer and to the other reports contained within the Reed Elsevier
Annual Review and Summary Financial Statements 2004 and the Reed Elsevier Annual Reports and Financial Statements 2004. These
reports explain the business results of 2004, the financial state of the company at the end of 2004, and contain disclosures in respect
of corporate governance, systems of internal control and risk management, corporate social responsibility, remuneration of board
members and key strategic issues.
The equalisation agreement between Reed Elsevier NV and Reed Elsevier PLC has the effect that shareholders can be regarded as
having the interests of a single economic group and provides that Reed Elsevier NV shall declare dividends such that the dividend on
one Reed Elsevier NV ordinary share, which shall be payable in euros, will equal 1.538 times the cash dividend, including the related
UK tax credit, paid on one Reed Elsevier PLC ordinary share. In that context, the combined meeting of the Supervisory and Executive
Boards (“the Combined Board”) determines the amounts of the company’s profit to be retained. The ordinary shares and the R-shares
are entitled to receive distribution in proportion to their nominal value. The Combined Board may resolve to pay less per R-share, but
not less than 1% of the nominal value. Details of dividends are contained in the Operating and Financial Review on page 21.
We have assessed Reed Elsevier NV’s compliance with the Dutch Corporate Governance Code (the “Code“) issued on 9 December
2003. Reed Elsevier’s policies, practices and disclosures, and an explanation of the way in which Reed Elsevier has complied with the
Code, are set out in pages 22 to 42 of the Reed Elsevier Annual Reports and Financial Statements 2004. The agenda for the Annual
General Meeting of the shareholders to be held on 28 April 2005 in the Hotel Okura in Amsterdam will include a discussion of Reed
Elsevier’s corporate governance policies, practices and disclosures.
At the Reed Elsevier NV Annual General Meeting Mr Brock will retire by rotation as a member of the Supervisory Board. He will not
be seeking re-election. Furthermore Sir Crispin Davis, Mr Armour and Mr Prozes will retire by rotation as members of the Executive
Board and, being eligible, will each offer themselves for re-election. A recommendation will be made to the Annual General Meeting
for the appointment of Mr Erik Engstrom as a member of the Executive Board. Details of his service contract and remuneration are
set out in the Directors’ Remuneration Report on pages 33 and 34.
The Supervisory Board
16 February 2005
Registered office
Radarweg 29
1043 NX Amsterdam
The Executive Board’s report
Sir Crispin Davis, Chairman
M H Armour, Chief Financial Officer
G J A van de Aast
A Prozes
P Tierney
We refer to the Report of the Chairman and the Chief Executive Officer and to the other reports contained within the Reed Elsevier
Annual Review and Summary Financial Statements 2004 and the Reed Elsevier Annual Reports and Financial Statements 2004.
These reports explain the business results of 2004, the financial state of the company at the end of 2004, and the key operational
and strategic issues.
As explained in the financial statements on pages 96 and 97, Reed Elsevier NV prepares its financial statements in accordance with
generally accepted accounting principles in the UK and therefore presents both group financial statements and parent company
financial statements. In the group financial statements, the profit attributable to the shareholders of Reed Elsevier NV was €223m
(2003: €242m) and net assets as at 31 December 2004, principally representing the investments in Reed Elsevier Group plc and
Elsevier Reed Finance BV under the gross equity method, were €1,598m (2003: €1,728m). In the parent company financial
statements, the profit attributable to the shareholders of Reed Elsevier NV was €219m (2003: €203m) and net assets as at 31
December 2004, principally representing the investments in Reed Elsevier Group plc and Elsevier Reed Finance BV under the
historical cost method, were €1,974m (2003: €1,985m).
The Executive Board
16 February 2005
Registered office
Radarweg 29
1043 NX Amsterdam
153556 pp093_110 report 3/3/05 5:53 pm Page 96
96
Reed Elsevier NV
Accounting policies
These statutory financial statements report the profit and
loss account, cash flow and financial position of Reed
Elsevier NV. Unless otherwise indicated, all amounts shown
in the financial statements are in millions of euros.
The financial statements have been prepared under the
historical cost convention. As permitted by Article 362.1 of
Book 2 Title 9 of the Netherlands Civil Code for companies
with international operations, the financial statements have
been prepared in accordance with UK Generally Accepted
Accounting Principles (GAAP), ensuring consistency.
The Reed Elsevier combined financial statements on
pages 44 to 73 form an integral part of the notes to Reed
Elsevier NV’s statutory financial statements.
The basis of the merger of the businesses of Reed Elsevier
NV and Reed Elsevier PLC is set out on page 22.
As a consequence of the merger of the company’s
businesses with those of Reed Elsevier PLC, described on
page 22, the shareholders of Reed Elsevier NV and Reed
Elsevier PLC can be regarded as having the interests of a
single economic group, enjoying substantially equivalent
ordinary dividend and capital rights in the earnings and net
assets of the Reed Elsevier combined businesses.
Parent company financial statements
Under UK GAAP, Reed Elsevier NV presents financial
statements for the parent company which reflect, in the
profit and loss account, its own income, including dividends
from Reed Elsevier Group plc and Elsevier Reed Finance
BV companies, and expenses, and, in the balance sheet, its
fixed asset investments in these joint ventures accounted
for using the historical cost method.
Group financial statements
Reed Elsevier NV holds a majority interest in Elsevier Reed
Finance BV (61%) and is therefore prima facie required to
prepare consolidated financial statements in accordance
with Book 2 Title 9 of the Netherlands Civil Code. However,
management believes that a better insight into the financial
position and results of Reed Elsevier NV is provided by
looking at the investment in the combined businesses in
aggregate, as presented in the Reed Elsevier combined
financial statements.
Reed Elsevier NV group financial statements are presented
incorporating Reed Elsevier NV’s investments in the Reed
Elsevier combined businesses accounted for using the
gross equity method, as adjusted for the effects of the
equalisation arrangement between Reed Elsevier NV and
Reed Elsevier PLC. The arrangement lays down the
distribution of dividends and net assets in such a way that
Reed Elsevier NV’s share in the profit and net assets of the
Reed Elsevier combined businesses equals 50%, with all
settlements accruing to shareholders from the equalisation
arrangements taken directly to reserves. These group
financial statements meet the additional information
requirements of the UK financial reporting standard FRS9:
Associates and Joint Ventures where consolidated financial
statements are not prepared.
Because the dividend paid to shareholders by Reed Elsevier
NV is equivalent to the Reed Elsevier PLC dividend plus the
UK tax credit received by certain Reed Elsevier PLC
shareholders, Reed Elsevier NV normally distributes a
higher proportion of the combined profit attributable than
Reed Elsevier PLC. Reed Elsevier PLC’s share in this
difference in dividend distributions is settled with Reed
Elsevier NV and is credited directly to group reserves under
equalisation. Reed Elsevier NV can pay a nominal dividend
on its R-shares held by Reed Elsevier PLC that is lower
than the dividend on the ordinary shares. Reed Elsevier
PLC is compensated by direct dividend payments by Reed
Elsevier Group plc. Equally, Reed Elsevier NV has the
possibility to receive dividends directly from Dutch affiliates.
The settlements flowing from these arrangements are also
taken directly to group reserves under equalisation.
Combined financial statements
The accounting policies adopted in the preparation of the
combined financial statements are set out on pages 44
and 45.
These include policies in relation to goodwill and intangible
assets. Such assets are amortised over their estimated
useful economic lives, which due to their longevity, may be
for periods in excess of five years.
Basis of valuation of assets and liabilities
Reed Elsevier NV’s 50% economic interest in the net assets
of the combined businesses has been shown on the group
balance sheet as interests in joint ventures, net of the
assets and liabilities reported as part of Reed Elsevier NV.
Joint ventures are accounted for using the gross equity
method.
In the parent company financial statements, fixed asset
investments in the combined businesses are stated at cost,
less provision, if appropriate, for any impairment in value.
Short term investments are stated at the lower of cost and
net realisable value. Other assets and liabilities are stated
at historical cost, less provision, if appropriate, for any
impairment in value.
153556 pp093_110 report 3/3/05 5:53 pm Page 97
Reed Elsevier Annual Reports and Financial Statements 2004
97
Foreign exchange translation
Profit and loss and cash flow items are translated at
average exchange rates. In the balance sheets, assets and
liabilities are translated at rates ruling at the balance sheet
date or contracted rates where applicable. The gains or
losses relating to the retranslation of Reed Elsevier NV’s
50% interest in the net assets of the combined businesses
are taken directly to group reserves.
Taxation
Deferred taxation is provided in full for timing differences
using the liability method. No provision is made for tax
which might become payable on the distribution of retained
profits by foreign subsidiaries or joint ventures unless there
is an intention to distribute such retained earnings giving
rise to a charge.
Deferred tax assets are only recognised to the extent that
they are considered recoverable in the short term. Deferred
taxation balances are not discounted.
153556 pp093_110 report 3/3/05 5:53 pm Page 98
98
Reed Elsevier NV
Profit and loss accounts
For the year ended 31 December 2004
Turnover
Including share of turnover of joint ventures
Less: share of turnover of joint ventures
Administrative expenses
Operating loss (before joint ventures)
Share of operating profit of joint ventures
Before amortisation and exceptional items
Amortisation of goodwill and intangible assets
Exceptional items
Operating profit/(loss) including joint ventures
Share of non operating exceptional items of joint ventures
Dividends received from joint ventures
Net interest income/(expense)
Company
Share of net interest of joint ventures
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Retained (loss)/profit taken to reserves
Adjusted figures
€
2003
€m
Group
2004
€m
3,537
(3,537)
–
(3)
(3)
3,571
(3,571)
–
(3)
(3)
855
(299)
(41)
515
512
(2)
(2)
–
2
(99)
(97)
413
(190)
223
(244)
(21)
858
(323)
(53)
482
479
19
19
–
7
(129)
(122)
376
(134)
242
(221)
21
Note
1
2
5
6
7
€
Parent Company
2004
€m
2003
€m
–
–
–
(3)
(3)
–
–
–
–
(3)
–
–
220
2
–
2
219
–
219
(244)
(25)
–
–
–
(3)
(3)
–
–
–
–
(3)
–
–
200
7
–
7
204
(1)
203
(221)
(18)
Adjusted group profit before tax
Adjusted group profit attributable to ordinary shareholders
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax
effects, are presented as additional performance measures, and are reconciled to the reported figures in note 8 to the
financial statements.
Earnings per ordinary share (EPS)
€
Note
8
8
2004
€m
755
559
Basic EPS
Diluted EPS
Adjusted EPS (before amortisation of goodwill and intangible
assets and exceptional items)
The above amounts derive from continuing activities.
Group
Parent Company
Note
9
9
9
2004
euro
0.28
0.28
0.71
2003
euro
0.31
0.31
0.69
2004
euro
0.28
0.28
2003
euro
0.26
0.26
Group financial statements, reflecting Reed Elsevier NV’s 50% interest in the Reed Elsevier combined businesses,
are presented using the gross equity method.
€
2003
€m
733
540
€
153556 pp093_110 report 3/3/05 5:53 pm Page 99
Cash flow statements
For the year ended 31 December 2004
Reed Elsevier Annual Reports and Financial Statements 2004
99
Net cash outflow from operating activities
Note
10
Dividends received from joint ventures
Returns on investments and servicing of finance – interest received
Taxation
Equity dividends paid
Cash outflow before changes in short term investments and financing
(Increase)/decrease in short term investments
Financing
Issue of shares, net of expenses
Net issue of debenture loans
Decrease in funding balances to joint ventures
10
€
2003
€m
(2)
200
7
(2)
(215)
(12)
8
4
3
1
–
Group
2004
€m
(3)
220
1
(5)
(229)
(16)
(18)
34
14
–
20
€
Parent Company
2004
€m
(3)
220
1
(5)
(229)
(16)
(18)
34
14
–
20
2003
€m
(2)
200
7
(2)
(215)
(12)
8
4
3
1
–
–
Change in net cash
Short term investments include deposits of under one year if the maturity or notice period exceeds 24 hours, commercial
paper investments and interest bearing securities that can be realised without significant loss at short notice.
–
–
–
Statements of total recognised gains and losses
For the year ended 31 December 2004
Profit attributable to ordinary shareholders
Exchange translation differences
Total recognised gains and losses
€
2003
€m
242
(310)
(68)
Group
2004
€m
223
(112)
111
€
Parent Company
2004
€m
219
–
219
2003
€m
203
–
203
Group financial statements, reflecting Reed Elsevier NV’s 50% interest in the Reed Elsevier combined businesses,
are presented using the gross equity method.
153556 pp093_110 report 3/3/05 5:53 pm Page 100
100
Reed Elsevier NV
Balance sheets
As at 31 December 2004
Fixed assets
Investment in joint ventures
Share of gross assets
Share of gross liabilities
Share of net assets
Investments
Current assets
Debtors
Short term investments
Creditors: amounts falling due within one year
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Net assets
€
2003
€m
Group
2004
€m
€
Parent Company
2004
€m
2003
€m
5,423
(3,638)
1,785
–
1,785
37
25
62
(184)
(122)
5,805
(3,901)
1,904
–
1,904
56
7
63
(174)
(111)
–
–
–
2,161
2,161
37
25
62
(184)
(122)
–
–
–
2,161
2,161
56
7
63
(174)
(111)
1,663
(65)
1,598
1,793
(65)
1,728
2,039
(65)
1,974
2,050
(65)
1,985
Note
11
12
13
14
15
Capital and reserves
Share capital issued
Paid in surplus
Shares held in treasury
Reserves
Shareholders’ funds
17,18
18
18
18
18
47
1,477
(47)
121
1,598
47
1,463
(27)
245
1,728
47
1,477
–
450
1,974
Reconciliations of shareholders’ funds
For the year ended 31 December 2004
€
47
1,463
–
475
1,985
€
Profit attributable to ordinary shareholders
Equity dividends paid and proposed
Issue of shares, net of expenses
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Equalisation adjustments
Net decrease in shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
Note
18
Group
Parent Company
2004
€m
223
(244)
14
(22)
8
(112)
3
(130)
1,728
1,598
2003
€m
242
(221)
3
(13)
–
(310)
8
(291)
2,019
1,728
2004
€m
219
(244)
14
–
–
–
–
(11)
1,985
1,974
2003
€m
203
(221)
3
–
–
–
–
(15)
2,000
1,985
Group financial statements, reflecting Reed Elsevier NV’s 50% interest in the Reed Elsevier combined businesses,
are presented using the gross equity method.
153556 pp093_110 report 3/3/05 5:53 pm Page 101
Reed Elsevier Annual Reports and Financial Statements 2004
101
Notes to the financial statements
For the year ended 31 December 2004
1 Operating loss (before joint ventures)
Operating loss (before joint ventures) is stated after the gross remuneration for present and former directors of Reed
Elsevier NV in respect of services rendered to Reed Elsevier NV and the combined businesses. Fees for members of the
Supervisory Board of Reed Elsevier NV of €0.2m (2003: €0.2m) are included in gross remuneration. In so far as gross
remuneration is related to services rendered to Reed Elsevier Group plc and Elsevier Reed Finance BV, it is borne by
these companies.
2 Income from interests in joint ventures
Share of operating profit before amortisation and exceptional items
Administrative expenses reported within Reed Elsevier NV group
Total
2004
€m
852
3
855
2003
€m
855
3
858
3 Auditors' remuneration
Audit fees payable for the company were €46,000 (2003: €44,000). Further information on the audit and non-audit fees paid
by the Reed Elsevier combined businesses to Deloitte Accountants, B.V. and its associates is set out in note 5 to the
combined financial statements.
4 Directors’ emoluments
Information on directors’ remuneration, share options, longer term incentive plans, pension contributions and entitlements
is set out in the Directors’ Remuneration Report on pages 31 to 42.
5 Net interest
Interest receivable and similar income
Interest on receivables from joint ventures
Other interest
Net interest income
6 Tax on profit on ordinary activities
Dutch corporation tax
Share of tax arising in joint ventures
Before amortisation and exceptional items
On amortisation and exceptional items
Total
Dutch corporation tax has been provided at 34.5%.
2004
€m
2003
€m
2
–
2
2004
€m
–
196
(6)
190
3
4
7
2003
€m
1
192
(59)
134
The share of tax arising in joint ventures as a proportion of the share of profit before tax is increased due to
non tax-deductible amortisation.
153556 pp093_110 report 3/3/05 5:53 pm Page 102
102
Reed Elsevier NV
Notes to the financial statements
For the year ended 31 December 2004
7 Dividends
Ordinary shares of €0.06 each
Interim
Final (2004 proposed)
R-shares of €0.60 each
Total
2004
euro
0.09
0.24
2003
euro
0.08
0.22
0.33
0.30
2004
€m
67
177
–
244
2003
€m
59
162
–
221
8 Adjusted figures
Adjusted group profit figures are used as additional performance measures. The adjusted figures are derived as follows:
Group profit before tax
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted group profit before tax
Group profit attributable to ordinary shareholders
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted group profit attributable to ordinary shareholders
Group earnings per ordinary share
Adjustments:
Amortisation of goodwill and intangible assets
Exceptional items
Adjusted group earnings per ordinary share
2004
€m
413
299
43
755
223
302
34
559
2004
euro
0.28
0.39
0.04
0.71
2003
€m
376
323
34
733
242
325
(27)
540
2003
euro
0.31
0.41
(0.03)
0.69
153556 pp093_110 report 3/3/05 5:53 pm Page 103
Reed Elsevier Annual Reports and Financial Statements 2004
103
9 Earnings per ordinary share (EPS)
Weighted
average number
of shares
(millions)
783.3
787.9
783.3
Note
8
2004
Earnings
€m
223
223
559
Group
Weighted
average number
of shares
(millions)
783.9
783.9
783.9
EPS
euro
0.28
0.28
0.71
2003
Earnings
€m
242
242
540
EPS
euro
0.31
0.31
0.69
Basic EPS
Diluted EPS
Adjusted EPS
Basic and diluted EPS for the parent company were both €0.28 (2003: €0.26) based on earnings of €219m (2003: €203m)
and a weighted average number of shares in issue on a basic basis of 786.3m (2003: 785.3m) and on a diluted basis of
790.9m (2003: 785.3m). The weighted average number of shares for the group is after deducting shares held in treasury.
The diluted EPS figures are calculated after taking into account the effect of share options.
10 Cash flow statement
Reconciliation of operating loss to net cash outflow from operating activities
Operating loss
Net movement in debtors and creditors
Net cash flow from operating activities
Reconciliation of net funding balances with joint ventures
At 1 January 2004
Cash flow
At 31 December 2004
2004
€m
(3)
–
(3)
2003
€m
(3)
1
(2)
€m
50
(20)
30
153556 pp093_110 report 3/3/05 5:53 pm Page 104
104
Reed Elsevier NV
Notes to the financial statements
For the year ended 31 December 2004
11 Fixed asset investments – group
Gross equity accounted investments in joint ventures
Share of operating profit
Share of non operating exceptional items
Share of net interest payable
Share of profit before tax
Share of taxation
Share of profit after tax
Dividends received
Increase in shares held in treasury
Increase in conditional share reserve
Exchange translation differences
Equalisation adjustments
Net movement in the year
At 1 January
At 31 December
The investment in joint ventures comprises the group share at the following amounts of:
2004
€m
515
(2)
(99)
414
(190)
224
(220)
(22)
8
(112)
3
(119)
1,904
1,785
2003
€m
482
19
(129)
372
(133)
239
(200)
(13)
–
(310)
8
(276)
2,180
1,904
2004
€m
2003
€m
4,073
Fixed assets
1,732
Current assets
(2,343)
Creditors: amounts falling due within one year
(1,430)
Creditors: amounts falling due after more than one year
(120)
Provisions
(8)
Minority interests
Total
1,904
The above amounts exclude assets and liabilities held directly by Reed Elsevier NV and include the counterparty balances
of amounts owed to and by other Reed Elsevier businesses. Included within share of current assets and creditors are cash
and short term investments of €134m (2003: €446m) and borrowings of €1,937m (2003: €2,130m) respectively.
3,972
1,451
(2,213)
(1,325)
(90)
(10)
1,785
12 Fixed asset investments – parent company
Investment in joint ventures
13 Debtors
Joint ventures
Other accounts receivable
Total
Amounts falling due after more than one year are €nil (2003: €nil).
2004
€m
2003
€m
2,161
2,161
2004
€m
30
7
37
2003
€m
50
6
56
153556 pp093_110 report 3/3/05 5:53 pm Page 105
Reed Elsevier Annual Reports and Financial Statements 2004
105
14 Creditors: amounts falling due within one year
Proposed dividend
Taxation
Other creditors
Total
15 Creditors: amounts falling due after more than one year
2004
€m
177
4
3
184
2003
€m
162
9
3
174
2004
€m
2003
€m
Debenture loans
Taxation
Total
Debenture loans comprise four convertible personnel debenture loans with a weighted average interest rate of 4.9%.
Depending on the conversion terms, the surrender of €227 or €200 par value debenture loans qualifies for the acquisition
of 50 Reed Elsevier NV ordinary shares.
7
58
65
7
58
65
16 Share option schemes
During the year a total of 1,329,694 ordinary shares in the company, having a nominal value of €0.08m, were allotted in
connection with the exercise of share options. The net consideration received by the company was €14m.
Share options and conditional share awards are granted under the Reed Elsevier Group plc Share Option Scheme, the
Reed Elsevier Group plc Long Term Incentive Share Option Scheme, the Reed Elsevier Group plc Retention Share Plan,
the Reed Elsevier Group plc Bonus Investment Plan and, prior to 1999, under the Reed Elsevier NV share option scheme.
Share options will be met principally by the issue of new Reed Elsevier NV shares. Conditional share awards will be met
by the Reed Elsevier Employee Benefit Trust ("EBT") from shares purchased in the market.
A summary of the movement in share options and conditional share awards is presented in the table below:
Issued in
Expiring in
Outstanding
1 January
2004
Granted
during the
year
Exercised
during the
year
Lapsed
during the
year
Outstanding
31 December
2004
Exercise
price range
(euro)
2004 – 2008
2004 – 2009
2004 – 2010
2006 – 2011
2007 – 2012
2006 – 2013
2007 – 2014
1998
1999
2000
2001
2002
2003
2004
Total
The average exercise price of share options outstanding at the end of the year was €10.37 (2003: €11.62) and the average
term of these options is six years (2003: four years).
563,832
7,227,187
10,253,355
5,798,025
5,795,561
10,780,856
–
40,418,816
392,010
5,586,101
1,536,783
4,125,692
5,111,452
9,009,874
18,081,356
43,843,268
–
–
–
–
–
–
18,322,766
18,322,766
171,822
730,082
8,676,350
1,666,903
684,109
1,426,812
212,133
13,568,211
12.50 – 15.70
10.45 – 17.07
10.73 – 15.66
11.65 – 15.43
11.78 – 16.00
Nil – 11.04
Nil – 10.77
–
911,004
40,222
5,430
–
344,170
29,277
1,330,103
153556 pp093_110 report 3/3/05 5:53 pm Page 106
106
Reed Elsevier NV
Notes to the financial statements
For the year ended 31 December 2004
17 Called up share capital
Authorised
Issued and fully paid
No. of shares
€m
No. of shares
€m
No. of shares
€m
2004
2003
Ordinary shares €0.06
R-shares €0.60
Total
The R-shares are held by a subsidiary company of Reed Elsevier PLC. The R-shares are convertible at the election of the
holder into ten ordinary shares each. They have otherwise the same rights as the ordinary shares, except that Reed
Elsevier NV may pay a lower dividend on the R-shares.
126 740,090,600
4,679,249
2,100,000,000
30,000,000
738,760,906
4,679,249
44
3
47
18
144
44
3
47
18 Shareholders' funds
Group and Parent Company
Group
Parent Company
At 1 January 2003
Profit attributable to ordinary
shareholders
Equity dividends paid and proposed
Issue of shares, net of expenses
Increase in shares held in treasury
Exchange translation differences
Equalisation adjustments
At 1 January 2004
Profit attributable to ordinary
shareholders
Equity dividends paid and proposed
Issue of shares, net of expenses
Increase in shares held in treasury
Increase in conditional share
Share capital
issued
€m
47
–
–
–
–
–
–
47
–
–
–
–
Paid-in
surplus
€m
1,460
–
–
3
–
–
–
1,463
–
–
14
–
Shares
held in
treasury
€m
(15)
–
–
–
(13)
1
–
(27)
–
–
–
(22)
reserve
–
Exchange translation differences
2
Equalisation adjustments
–
At 31 December 2004
(47)
Within paid-in surplus, an amount of €1,300m (2003: €1,286m) is free of tax.
–
–
–
1,477
–
–
–
47
Reserves
€m
527
242
(221)
–
–
(311)
8
245
223
(244)
–
–
8
(114)
3
121
Total
€m
2,019
242
(221)
3
(13)
(310)
8
1,728
223
(244)
14
(22)
8
(112)
3
1,598
Reserves
€m
Total
€m
493
2,000
203
(221)
–
–
–
–
475
219
(244)
–
–
–
–
–
450
203
(221)
3
–
–
–
1,985
219
(244)
14
–
–
–
–
1,974
Details of shares held in treasury are provided in note 26 to the combined financial statements.
153556 pp093_110 report 3/3/05 5:53 pm Page 107
Reed Elsevier Annual Reports and Financial Statements 2004
107
18 Shareholders' funds continued
A reconciliation between the parent company profit attributable to ordinary shareholders and the group profit attributable
to ordinary shareholders presented under the gross equity method is provided below:
Parent company profit attributable to ordinary shareholders
Share of profit after tax of joint ventures
Dividends received from joint ventures
Group profit attributable to ordinary shareholders using the gross equity method
2004
€m
219
224
(220)
223
2003
€m
203
239
(200)
242
A reconciliation between the parent company shareholders’ funds and group shareholders’ funds presented under the
gross equity method is provided below:
Parent company shareholders‘ funds
Cumulative profit attributable from joint ventures less cumulative dividends received
Cumulative currency translation adjustments
Cumulative equalisation adjustments and other adjustments
Shares held in treasury
Group shareholders‘ funds using the gross equity method
2004
€m
1,974
(144)
(318)
133
(47)
1,598
2003
€m
1,985
(148)
(204)
122
(27)
1,728
19 Contingent liabilities
There are contingent liabilities in respect of borrowings of Reed Elsevier Group plc group and Elsevier Reed Finance BV
group guaranteed by Reed Elsevier NV as follows:
Guaranteed jointly and severally with Reed Elsevier PLC
3,822
Financial instruments disclosures in respect of the borrowings covered by the above guarantees are given in note 22 to the
Reed Elsevier combined financial statements.
3,519
2004
€m
2003
€m
153556 pp093_110 report 3/3/05 5:53 pm Page 108
108
Reed Elsevier NV
Notes to the financial statements
For the year ended 31 December 2004
20 Principal joint ventures
The principal joint ventures are:
Reed Elsevier Group plc
Incorporated and operating in Great Britain
1-3 Strand
London WC2N 5JR
Holding company for operating businesses
involved in science & medical, legal,
educational and business publishing
Elsevier Reed Finance BV
Incorporated in the Netherlands
Radarweg 29
1043 NX Amsterdam, The Netherlands
£10,000 ordinary "R" shares
£10,000 ordinary "E" shares
£100,000 7.5% cumulative preference non voting shares
Equivalent to a 50% equity interest
133 ordinary "R" shares
205 ordinary "E" shares
% holding
–
100%
–
–
100%
Holding company for financing businesses
The "R" shares in Reed Elsevier Group plc and Elsevier Reed Finance BV are owned by Reed Elsevier PLC.
Equivalent to a 61% equity interest
In addition, Reed Elsevier NV holds €0.14m par value in shares with special dividend rights in Reed Elsevier Overseas BV
and Reed Elsevier Nederland BV, both with registered offices in Amsterdam. These shares are included in the amount
shown under investments in joint ventures. They enable Reed Elsevier NV to receive dividends from companies within the
same tax jurisdiction.
A list of companies within the Reed Elsevier combined businesses is filed with the Amsterdam Chamber of Commerce
in the Netherlands.
M Tabaksblat
Chairman
16 February 2005
M H Armour
Chief Financial Officer
153556 pp093_110 report 3/3/05 5:53 pm Page 109
Reed Elsevier Annual Reports and Financial Statements 2004
109
Independent auditors’ report
to the shareholders of Reed Elsevier NV
We have audited the 2004 financial statements of Reed Elsevier NV, Amsterdam, which comprise the accounting policies,
the profit and loss account, cash flow statement, reconciliation of shareholders’ funds, balance sheet, the statement of
total recognised gains and losses and the related notes 1 to 20. These financial statements have been prepared under
the accounting policies set out therein and include the Reed Elsevier combined financial statements for the year ended
31 December 2004 which comprise the accounting policies, the profit and loss account, the balance sheet, the cash flow
statement, the statement of total recognised gains and losses, the shareholders’ funds reconciliation and the related
notes 1 to 27, having been prepared under the accounting policies set out therein, dated 16 February 2005. These financial
statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
Basis of audit opinion
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements of Reed Elsevier NV, which include the Reed Elsevier combined financial statements,
give a true and fair view of the financial position of Reed Elsevier NV at 31 December 2004 and the result and the cash flows
for the year then ended in accordance with accounting principles generally accepted in the United Kingdom and comply with
the legal requirements for financial statements as included in Book 2 Title 9 of the Netherlands Civil Code.
Deloitte Accountants B.V.
Amsterdam
16 February 2005
Proposal for allocation of profit
Interim dividend on ordinary shares
Final dividend on ordinary shares
Dividend on R-shares
Retained loss
2004
€m
67
177
–
(25)
219
2003
€m
59
162
–
(18)
203
The combined Supervisory and Executive Board determines the part of the profit to be retained. The profit to be
distributed is paid on the ordinary shares and the R-shares in proportion to their nominal value. The Combined Board
may resolve to pay less per R-share, but not less than 1% of the nominal value.
The company is bound by the Governing Agreement with Reed Elsevier PLC, which provides that Reed Elsevier NV shall
declare dividends such that the dividend on one Reed Elsevier NV ordinary share, which shall be payable in euros, will
equal 1.538 times the dividend, including the related UK tax credit, paid on one Reed Elsevier PLC ordinary share.
153556 pp093_110 report 3/3/05 5:53 pm Page 110
153556 pp111_114 report 3/3/05 5:53 pm Page 111
Adoption of International Financial
Reporting Standards
Adoption of IFRS
Reed Elsevier combined businesses
Reed Elsevier PLC
Reed Elsevier NV
> 112
> 115
> 134
> 137
153556 pp111_114 report 3/3/05 5:53 pm Page 112
112
Adoption of International Financial Reporting Standards
Adoption of International Financial Reporting Standards
Financial highlights (IFRS)
Reed Elsevier combined businesses
Reported figures (IFRS)
Turnover
Operating profit
Profit before taxation
Net borrowings
Adjusted (benchmark) figures (IFRS)
Operating profit
Profit before taxation
Profit attributable
Operating cash flow
Operating margin
Operating cash flow conversion
Interest cover (times)
Parent companies
Earnings per ordinary share (IFRS)
Reported earnings per share
Adjusted (benchmark) earnings per share
£
Unaudited
2004
£m
4,812
766
631
2,532
1,066
934
687
1,013
22%
95%
8.1
£
Unaudited
2004
pence
18.6p
28.7p
€
Unaudited
2004
€m
7,074
1,126
928
3,570
1,567
1,373
1,010
1,490
22%
95%
8.1
€
Unaudited
2004
euro
€0.43
€0.64
On adoption of IFRS, Reed Elsevier proposes to use adjusted (benchmark) figures as additional performance measures. These
measures exclude the amortisation of acquired intangible assets, acquisition related and non-operating exceptional items and
deferred tax movements not expected to crystallise in the near term, and are explained in the commentary below. Reconciliations to
the reported IFRS figures (unaudited) have been provided within the summarised IFRS financial information.
Under a regulation adopted by the European Parliament,
the Reed Elsevier combined financial statements and the
financial statements of the two parent companies, Reed
Elsevier PLC and Reed Elsevier NV, will be prepared in
accordance with International Financial Reporting
Standards (IFRS) with effect from the 2005 financial year.
The 2004 financial statements have been restated
(unaudited) under IFRS, assuming a 1 January 2004
transition date, and are summarised on pages 115 to 139.
The restated IFRS financial information, which will form the
results and financial position for the comparative year in
the 2005 financial statements, assumes the endorsement of
certain standards by the European Commission in 2005.
• Share based payments;
• Financial instruments;
• Deferred taxation; and
• Dividends
The net effect of presenting the 2004 financial statements
under IFRS is to increase the reported Reed Elsevier
combined attributable earnings by £156m/€230m, an
increase of 51% over the amounts reported under UK
GAAP, and to reduce combined shareholders’ funds as at
31 December 2004 by £603m/€850m. These are
accounting effects only and have no bearing on the cash
flows in the business.
The adoption of IFRS for the 2005 financial year requires
changes in Reed Elsevier accounting policies in six
major areas:
Under IFRS, the primary financial statements are described
differently than under UK GAAP and there are certain
differences of presentation.
• Goodwill and intangible assets;
• Employee benefits;
153556 pp111_114 report 3/3/05 5:53 pm Page 113
Reed Elsevier Annual Reports and Financial Statements 2004
113
Goodwill and intangible assets
IFRS 3 – Business Combinations prohibits the amortisation
of acquired goodwill. Goodwill amortisation of
£206m/€304m charged under UK GAAP in 2004 is
therefore reversed under IFRS. On the balance sheet, the
net book amount of goodwill under IFRS is £262m/€370m
higher as at 31 December 2004 than under UK GAAP. This
higher amount reflects the reversal of the UK GAAP
amortisation charge for 2004, together with an increase
of £68m/€96m in the amount of goodwill arising on 2004
acquisitions under IFRS due to the recognition of additional
deferred taxation liabilities (see below), less the effects of
currency translation on adjustments.
IAS38 – Intangible Assets requires more detailed
evaluations to be made of acquired intangible assets and
their estimated useful lives than under UK GAAP. Estimated
useful lives of acquired intangible assets under IFRS are
typically shorter than under UK GAAP, although in certain
cases may be considered indefinite. The adoption of IAS38
gives rise to a net increase in the amortisation charge in
respect of acquired intangible assets of £55m/€81m.
Capitalised software costs, previously included within
tangible fixed assets, are now included within intangible
assets. The net book amount reclassified as at 31 December
2004 is £227m/€321m. There is no change to the
depreciation charges in respect of such assets, although
these will now be classified, separately, within intangible
asset amortisation.
On the balance sheet, the net book amount of intangible
assets under IFRS is £178m/€251m higher as at
31 December 2004 than under UK GAAP. This is due to the
reclassification of capitalised software costs, partly offset
by the higher amortisation of acquired intangible assets
and the effects of currency translation on adjustments.
There is no retrospective restatement of the acquired
goodwill and intangible asset values as at the 1 January
2004 transition date.
Employee benefits
The accounting for the costs of defined benefit pension
schemes and other post-retirement employee benefits
under IFRS is governed by IAS19 – Employee Benefits,
which differs from UK GAAP in that the net expense is
determined using assumptions that are based on market
conditions at the start of each financial year, principally in
relation to salary inflation, investment returns and discount
rates. Similarly, the assets and liabilities of defined benefit
pension schemes and other employee benefit schemes are
determined based on market conditions at the balance
sheet date. Previously, under UK GAAP, determinations
were made based on long run actuarial assumptions. The
adoption of IAS19 valuation methodologies increases the
expense for employee benefits by £27m/€40m compared
to the amount reported under UK GAAP. Net pension
obligations calculated using the IAS19 valuation
methodologies were £321m/€453m as at 31 December
2004, which compares with a net pension prepayment less
accrued liabilities under UK GAAP of £84m/€118m.
Reed Elsevier is adopting the approach available under
IAS19 to reflect all actuarial gains and losses in the
balance sheet in full and to report the amounts of such
gains and losses arising each year through the Statement
of Recognised Income and Expenditure. Actuarial losses of
£74m/€109m arising in the year ended 31 December 2004
are reflected in the amount of net pension obligations at
the balance sheet date.
Share based payments
For share based payments, the expense under IFRS2 – Share
Based Payment is determined based on the fair value of
such payments at the date of grant, spread over the vesting
period taking account of the number of shares that are
expected to vest. Under UK GAAP, only the intrinsic value is
expensed e.g. where options are granted over shares with an
exercise price below the market price of the shares at the
date of grant. The charge under IFRS2 in 2004 is
£48m/€71m higher than the £11m/€16m charge under UK
GAAP. There is no effect on net assets as the profit and loss
charge is offset by an equivalent amount credited to reserves.
Deferred taxation
IAS12 – Income Taxes requires deferred taxation to be
provided for nearly all differences between the balance
sheet amounts of assets and liabilities and their
corresponding tax bases. Previously, under UK GAAP,
deferred tax was provided for timing differences only and
deferred tax assets were not recognised unless realisable
in the near term. Net deferred tax liabilities as at
31 December 2004 are £643m/€907m higher under IFRS
than under UK GAAP. This relates principally to deferred
tax of £785m/€1,107m on the difference between the
balance sheet amount of acquired intangible assets and
the historic tax bases of the underlying assets, partly offset
by deferred tax assets in respect of net pension
obligations. The goodwill on acquisitions is grossed up
by the amount of deferred tax liabilities on acquired
intangible assets, other than in respect of intangible assets
acquired prior to the transition date of 1 January 2004.
(Under transition rules, the deferred tax liability as at the 1
January 2004 transition date in respect of intangible assets
acquired prior to that date is charged directly to reserves
and not added to goodwill.) The tax charge under IFRS for
2004 is £80m/€118m lower than under UK GAAP due to
the unwinding of deferred tax liabilities and the deferred
tax effects of other IFRS adjustments.
Dividends payable
Under UK GAAP, dividends are provided for in the year in
respect of which they are declared or proposed by the
directors. Under IAS10 – Post Balance Sheet Events,
153556 pp111_114 report 3/3/05 5:53 pm Page 114
114
Adoption of International Financial Reporting Standards
dividends are only provided for when declared. Current
liabilities have been reduced by £248m/€350m as at
31 December 2004 in respect of proposed dividends not
formally declared as at the balance sheet date.
Joint ventures
Under IFRS, the equity accounted share of joint ventures
results is included within operating profit on a post-tax
basis. Under UK GAAP, the equity share of the taxes in joint
ventures has been included in taxation and not deducted
within operating profit. The effect is to reduce both the
operating profit and the taxation charge under IFRS by
£7m/€10m for 2004. There is no effect on profit attributable
and net assets.
Financial instruments
IAS39 – Financial Instruments is not applicable until the
2005 financial year, and there is no restatement of prior
year comparatives required (due to the impracticality of
applying the new rules to past transactions). Accordingly
there is no restatement of the 2004 financial statements for
IAS39. Reed Elsevier uses financial instruments such as
interest rate derivatives and forward exchange contracts to
hedge interest rate and currency transaction exposures.
Not all such instruments will in future necessarily qualify
for hedge accounting treatment under the prescriptive
rules of IAS39. For financial instruments not qualifying for
hedge accounting, changes in their market value will be
reported through the income statement.
For those debt instruments designated under IFRS as
hedged by derivatives, such as cross currency swaps,
qualifying as fair value hedges, both the debt and
derivatives will be included separately in the balance sheet
at fair value, resulting in variations in the balance sheet
values of the gross debt and the offsetting derivatives as
market values fluctuate. The balance sheet value of the
net debt, including the associated derivatives, will be
unaffected. Under UK GAAP, the balance sheet amount of
debt hedged by derivatives has previously been recorded at
historical cost at hedged rates and not revalued.
In respect of currency risk, Reed Elsevier hedges cross
border transactions in foreign currencies, the most
significant of which relate to the global scientific journals
business. Hedge accounting treatment will still apply for
these transactions under IAS39. However, whereas under
UK GAAP hedge accounting applied to both revenues and
costs where the net exchange risk is hedged in the market,
under IFRS there is no grossing up of the hedge for the
foreign currency revenues and the offsetting costs and a
portion of the revenues and the costs are therefore treated
as if unhedged. There should however be no net impact on
profit and loss.
Performance measures
Reed Elsevier has for many years presented adjusted profit
and cash flow figures as additional performance measures,
which have been stated before the amortisation of goodwill
and intangible assets, exceptional items and related tax
effects. These have been important measures used in
establishing budgets across the business and in monitoring
performance, and in expressing Reed Elsevier’s financial
targets.
Whilst the adoption of IFRS has no effect on the cash flow
of the business, it will inevitably have an influence on the
way management and investors view performance.
Maintaining existing benchmarks, whilst providing
consistency and avoiding the inherent volatility under
IFRS, would require too many adjustments to reported
figures.
In future, Reed Elsevier is likely to focus on adjusted
figures that include the additional expense of share based
payments and pension expense under IFRS. Additionally,
restructuring costs will be included in the benchmark.
Acquisition integration costs will be excluded as they are
entirely dependent on acquisition activity and are budgeted
as an integral component of acquisition cost. Amortisation
of acquired intangible assets will, as before, be excluded
from the adjusted figures. Whilst the impact of mark-to-
market adjustments on any financial instruments which fail
to qualify for hedge accounting treatment is believed to be
manageable, it is intended to exclude these effects from the
benchmark figures, at least initially, whilst we gain
practical experience. The effective tax rate used in the
benchmark will exclude the effect of movements in
deferred taxation assets and liabilities that are not expected
to crystallise in the near term. This will, as before, more
closely approximate the cash tax rate. Adjusted operating
profits and taxation will be grossed up for the equity share
of taxes in joint ventures.
The new proposed additional performance measures under
an IFRS regime would for 2004 be: adjusted operating profit
of £1,066m/€1,567m, adjusted operating cash flow of
£1,013m/€1,490m, adjusted pre-tax profits of
£934m/€1,373m, and adjusted earnings per share for
Reed Elsevier PLC of 28.7p and for Reed Elsevier NV of
€0.64. The derivation of these new benchmark figures for
2004 from the results presented under IFRS is set out on
page 130.
Reported results under IFRS will inherently be more volatile
than under previous UK GAAP due to the inclusion of fair
value and market based assets and liabilities and income
and expense. Of most significance to the new additional
performance measures will be the volatility in respect of
pension expense. A relatively small market change in the
corporate bond yields that are used to determine discount
rates or in inflation rates implied by index-linked
government bonds can have a significant impact, favourable
and adverse, on the annual service cost for defined benefit
pension schemes. Targets in respect of future financial
performance will therefore be set in this context.
153556 pp115_140 report 3/3/05 6:00 pm Page 115
Reed Elsevier Annual Reports and Financial Statements 2004
115
Reed Elsevier combined businesses
Combined income statement (IFRS)
For the year ended 31 December 2004
Revenue
Cost of sales
Gross profit
Selling and distribution costs
Administration and other expenses
Before amortisation and exceptional items
Amortisation of acquired intangible assets
Exceptional items
Operating profit
Share of result of joint ventures
Operating profit including joint ventures
Net interest expense
Exceptional losses on disposals
Profit before tax
Tax
Profit on ordinary activities after taxation
Attributable to:
Parent companies’ shareholders
Minority interests
Net profit for the year
Note
1
1,2
3
£
Unaudited
2004
£m
4.812
(1,733)
3,079
(1,065)
(1,265)
(954)
(255)
(56)
749
17
766
(132)
(3)
631
(170)
461
459
2
461
€
Unaudited
2004
€m
7,074
(2,548)
4,526
(1,566)
(1,860)
(1,403)
(375)
(82)
1,100
26
1,126
(194)
(4)
928
(250)
678
675
3
678
The financial information has been prepared on the basis of the accounting policies under IFRS set out on pages 119 to 122.
A reconciliation of the combined income statement under IFRS to the combined profit and loss account under UK GAAP
is set out in note 6.
Adjusted (benchmark) profit figures under IFRS are presented in note 7 as additional performance measures.
153556 pp115_140 report 3/3/05 6:00 pm Page 116
116
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
Combined cash flow statement (IFRS)
For the year ended 31 December 2004
Cash flows from operating activities
Cash generated from operations
Interest paid
Interest received
Tax paid
Net cash from operating activities
Cash flows from investing activities
Acquisitions
Proceeds from sale of businesses
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Expenditure on internally developed intangible assets
Purchases of available-for-sale investments
Proceeds from disposal of available-for-sale investments
Dividends received from joint ventures
Net cash used in investing activities
Cash flows from financing activities
Dividends paid to shareholders of the parent companies
Decrease in borrowings
Proceeds on issue of ordinary shares
Purchase of treasury shares
Net cash used in financing activities
Decrease in cash and cash equivalents
Movement in cash and cash equivalents
At start of year
Decrease
Effect of foreign exchange rate changes
At end of year
£
Unaudited
2004
£m
1,154
(146)
16
(209)
815
(647)
2
(82)
4
(110)
(13)
10
17
(819)
(309)
(82)
21
(29)
(399)
(403)
638
(403)
(10)
225
€
Unaudited
2004
€m
1,696
(215)
24
(307)
1,198
(951)
3
(120)
7
(162)
(19)
15
25
(1,202)
(454)
(120)
31
(43)
(586)
(590)
906
(590)
1
317
The financial information has been prepared on the basis of the accounting policies under IFRS set out on pages 119 to 122.
Adjusted (benchmark) operating cash flow figures under IFRS are presented in note 7 as additional performance measures.
153556 pp115_140 report 3/3/05 6:00 pm Page 117
Reed Elsevier Annual Reports and Financial Statements 2004
117
Reed Elsevier combined businesses
Combined balance sheet (IFRS)
As at 31 December 2004
Note
4
5
Assets
Non-current assets
Goodwill
Intangible assets
Investments in joint ventures
Available-for-sale investments
Property, plant and equipment
Deferred tax assets
Current assets
Inventories and pre-publication costs
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Borrowings
Taxation
Non-current liabilities
Borrowings
Deferred tax liabilities
Employee benefit obligations
Provisions
Total liabilities
Net assets
Equity
Capital and reserves
Combined share capitals
Combined share premium accounts
Combined shares held in treasury
Translation reserve
Other combined reserves
Minority interest
Total equity
£
Unaudited
2004
£m
2,611
2,835
60
50
292
235
6,083
541
1,103
225
1,869
7,952
1,791
1,051
497
3,339
1,706
857
321
52
2,936
6,275
1,677
191
1,805
(66)
(122)
(144)
1,664
13
1,677
€
Unaudited
2004
€m
3,682
3,997
86
71
411
331
8,578
763
1,555
317
2,635
11,213
2,525
1,482
701
4,708
2,405
1,208
453
73
4,139
8,847
2,366
269
2,545
(93)
(175)
(200)
2,346
20
2,366
The financial information has been prepared on the basis of the accounting policies under IFRS set out on pages 119 to 122.
A reconciliation of the combined balance sheet under IFRS to the combined balance sheet under UK GAAP is set out
in note 6.
153556 pp115_140 report 3/3/05 6:00 pm Page 118
118
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
Combined statement of recognised income and expenditure (IFRS)
For the year ended 31 December 2004
Net profit for the year
Exchange difference on translation of foreign operations
Actuarial losses on defined benefit pension schemes
Tax on items taken directly to reserves
Net expense recognised directly in equity
Total recognised income and expense for the year
Attributable to:
Parent companies’ shareholders
Minority interests
Combined shareholders’ funds reconciliation (IFRS)
For the year ended 31 December 2004
Total recognised net income attributable to the parent
companies’ shareholders
Dividends declared in the year
Issue of ordinary shares, net of expenses
Increase in shares held in treasury
Increase in share based payment reserve
Net increase in combined shareholders’ funds
Combined shareholders’ funds at 1 January
Combined shareholders’ funds at 31 December
£
Unaudited
2004
£m
461
(121)
(74)
12
(183)
278
276
2
278
£
Unaudited
2004
£m
276
(309)
21
(29)
59
18
1,646
1,664
€
Unaudited
2004
€m
678
(196)
(109)
18
(287)
391
388
3
391
€
Unaudited
2004
€m
388
(454)
31
(43)
87
9
2,337
2,346
The financial information has been prepared on the basis of the accounting policies under IFRS set out on pages 119 to 122.
153556 pp115_140 report 3/3/05 6:00 pm Page 119
Reed Elsevier combined businesses
Reed Elsevier Annual Reports and Financial Statements 2004
119
Accounting policies (IFRS)
Basis of preparation
Under a regulation adopted by the European Parliament
in 2002, the Reed Elsevier combined financial statements
and the financial statements of the two parent companies,
Reed Elsevier PLC and Reed Elsevier NV, will be prepared
under International Financial Reporting Standards (IFRS)
with effect from the 2005 financial year.
The Reed Elsevier accounting policies under IFRS are set
out below. The financial statement information summarises
the results and financial position of the Reed Elsevier
combined businesses and the two parent companies for the
year ended 31 December 2004 in accordance with these
accounting policies.
The financial statement information presented is unaudited.
Transition date
The date of transition to IFRS is 1 January 2004, which is
the beginning of the prior year comparative period for the
2005 financial year.
Foreign exchange translation
Transactions in foreign currencies are recorded at the rate
of exchange prevailing on the date of the transaction. At
each balance sheet date, monetary assets and liabilities
that are denominated in foreign currencies are re-
translated at the rate prevailing on the balance sheet date.
Assets and liabilities of foreign operations are translated
at exchange rates prevailing on the balance sheet date.
Income and expense items of foreign operations are
translated at the average exchange rate for the period.
Exchange differences arising are classified as equity
and transferred to the translation reserve. Cumulative
translation differences are recognised within the income
statement in the period in which operations are
disposed of.
As permitted under the transition rules of IFRS1 – First
Time Adoption of International Financial Reporting
Standards, cumulative translation differences in respect of
foreign operations have been deemed to be nil at the date
of transition.
Reed Elsevier uses derivative financial instruments,
primarily forward contracts, in order to hedge its exposure
to certain foreign exchange risks. Details of Reed Elsevier's
accounting policies in respect of derivative financial
instruments are set out below.
Revenue
Revenue represents the invoiced value of sales less
anticipated returns on transactions completed by
performance, excluding customer sales taxes and
sales between the combined businesses.
Revenues are recognised for the various categories of
turnover as follows: subscriptions – on periodic despatch
of subscribed product or ratably over the period of the
subscription where performance is not measurable by
despatch; circulation – on despatch; advertising – on
publication or over the period of online display; exhibitions
– on occurrence of the exhibition; educational testing
contracts – over the term of the contract on percentage
completed against contract milestones.
Where sales consist of two or more independent
components, revenue is recognised on each component, as
it is completed by performance, based on attribution of
relative value.
Employee benefits
The expense of defined benefit pension schemes and
other post-retirement employee benefits is determined
using the projected unit credit method and charged to the
income statement as an operating expense, based on
actuarial assumptions reflecting market conditions at the
beginning of the financial year. Actuarial gains and losses
are recognised in full in the statement of recognised
income and expenditure in the period in which they occur.
Past service costs are recognised immediately to the
extent that benefits have vested, or, if not vested, on a
straight line basis over the period until the benefits vest.
Net pension obligations in respect of defined benefit
schemes are included in the balance sheet at the present
value of scheme liabilities, less the fair value of scheme
assets. Where assets exceed liabilities, any net pension
asset is limited to the extent that the asset is not
recoverable through reductions in future contributions.
The expense of defined contribution pension schemes
and other employee benefits is charged in the income
statement as incurred.
Share-based payments
The fair value of share-based remuneration is determined
at date of grant and recognised as an expense in the
income statement on a straight line basis over the vesting
period, taking account of the estimated number of
shares that will vest. The fair value is determined by use
of a binomial model. All share-based remuneration is
equity settled.
In accordance with the transitional provisions of IFRS2 –
Share-Based Payment, the expense recognised in the
income statement relates to grants made during the
153556 pp115_140 report 3/3/05 6:00 pm Page 120
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Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
financial period and all grants made before the transition
date that had not fully vested at that date.
impairment review was carried out as at the transition date
and no impairment identified.
Taxation
The tax expense represents the sum of the tax payable
on the current year taxable profits and the movements
on deferred tax.
The tax payable on current year taxable profits is calculated
using the applicable tax rates that have been enacted, or
substantively enacted, by the balance sheet date.
Deferred tax is the tax arising on differences between the
carrying amounts of assets and liabilities in the financial
statements and their corresponding tax bases used in the
computation of taxable profit, and is accounted for using
the balance sheet liability method. Deferred tax liabilities
are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be
available against which deductible temporary differences
can be utilised. Deferred tax is not recognised on
temporary differences arising in respect of goodwill that is
not deductible for tax purposes.
No provision is made for deferred tax which would become
payable on the distribution of retained profits by foreign
subsidiaries, joint ventures or associates, unless there
is an intention to distribute such retained profits.
Deferred tax is calculated using tax rates that are expected
to apply in the period when the liability is settled or the
asset is realised. Movements in deferred tax are charged or
credited in the income statement, except when they relate
to items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.
Goodwill
On the acquisition of a subsidiary, joint venture, associate
or business, the purchase consideration is allocated
between the net tangible and intangible assets on a fair
value basis, with any excess purchase consideration
representing goodwill.
Goodwill is recognised as an asset and reviewed for
impairment at least annually. Any impairment is recognised
immediately in the income statement and may not be
subsequently reversed.
On disposal of a subsidiary, joint venture, associate or
business, the attributable amount of goodwill is included
in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the 1 January 2004
date of transition to IFRS is included in the balance sheet at
the previously stated net book amount under UK GAAP. An
Intangible assets
Intangible assets acquired as part of a business
combination are stated in the balance sheet at their fair
value as at date of acquisition, less accumulated
amortisation. Internally generated intangible assets are
stated in the balance sheet at the directly attributable cost
of creation of the asset, less accumulated amortisation.
Intangible assets acquired as part of business
combinations comprise: market related assets (e.g. trade
marks, imprints, brands); customer based assets
(e.g. subscription bases, customer lists, customer
relationships); editorial content; software and systems
(e.g. application infrastructure, product delivery platforms,
in-process research and development); contract based
assets (e.g. publishing rights, exhibition rights, supply
contracts); and other intangible assets. Internally generated
intangible assets typically comprise software and systems
development where an identifiable asset is created that is
probable to generate future economic benefits. All other
development expenditure is recognised as an expense in
the period in which it is incurred.
Intangible assets, other than brands and imprints
determined to have indefinite lives, are amortised
systematically over their estimated useful lives, typically
up to a maximum of 20 years. Brands and imprints
determined to have indefinite lives are not amortised and
are subject to impairment review at least annually.
Intangible assets recognised on acquisitions made before
the 1 January 2004 date of transition to IFRS have been
included in the balance sheet at their previously stated
cost less amortisation under UK GAAP. An impairment
review was carried out as at the transition date and no
impairment identified.
Property, plant and equipment
Property, plant and equipment are stated in the balance
sheet at cost less accumulated depreciation. No
depreciation is provided on freehold land. Freehold
buildings and long leases are depreciated over their
estimated useful lives up to a maximum of 50 years.
Short leases are written off over the duration of the
lease. Depreciation is provided on other assets on a
straight line basis over their estimated useful lives:
leasehold improvements – shorter of life of lease and
10 years; plant – 3 to 20 years; office furniture, fixtures and
fittings – 5 to 10 years; computer systems, communication
networks and equipment – 3 to 7 years.
Investments, joint ventures and associates
Investments, other than investments in joint ventures and
associates, are stated in the balance sheet at fair value.
153556 pp115_140 report 3/3/05 6:00 pm Page 121
Reed Elsevier Annual Reports and Financial Statements 2004
121
Investments held as part of the Reed Elsevier Ventures
portfolio are classified as available-for-sale venture capital
investments, with changes in fair value reported through
the income statement. All other investments are classified
as available-for-sale investments with changes in fair value
recognised directly in equity, until the investment is
disposed of or is determined to be impaired, at which time
the cumulative gain or loss previously recognised in equity
is brought into the net profit or loss for the period.
Investments in joint ventures and associates are accounted
for under the equity method and stated in the balance sheet
at cost as adjusted for post-acquisition changes in share of
net assets, less any impairment in value.
Impairment
At each balance sheet date, reviews are carried out of
the carrying amounts of tangible and intangible assets
to determine whether there is any indication that those
assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is
estimated in order to determine the extent, if any, of the
impairment loss. Where the asset does not generate cash
flows that are independent from other assets, estimates are
made of the cash flows of the cash generating unit to which
the asset belongs. Intangible assets with an indefinite useful
life are tested for impairment at least annually and whenever
there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value, less costs to
sell, and value in use. In assessing value in use, estimated
future cash flows are discounted to their present value
using a discount rate appropriate to the specific asset or
cash generating unit.
If the recoverable amount of an asset or cash generating
unit is estimated to be less than its carrying amount, the
carrying amount of the asset or cash generating unit is
reduced to its recoverable amount. Impairment losses
are recognised immediately in the income statement,
unless the relevant asset is carried at a revalued amount,
in which case the impairment loss is treated as a
revaluation decrease.
Inventories and pre-publication costs
Inventories and pre-publication costs are stated at the
lower of cost, including appropriate attributable overhead,
and estimated net realisable value. Pre-publication costs,
representing costs incurred in the origination of content
prior to publication, are expensed systematically reflecting
the expected sales profile over the estimated economic
lives of the related products, generally up to five years.
Leases
Assets held under leases which confer rights and
obligations similar to those attaching to owned assets are
capitalised within property, plant and equipment and the
corresponding liability to pay rentals is shown net of
interest in the balance sheet as obligations under finance
leases. The capitalised value of the assets is depreciated
on a straight line basis over the shorter of the periods of
the leases or the useful lives of the assets concerned.
The interest element of the lease payments is allocated
so as to produce a constant periodic rate of charge.
Operating lease rentals are charged to the income
statement on a straight line basis over the period of
the leases.
Rental income from operating leases is recognised on
a straight line basis over the term of the relevant lease.
Financial instruments
Derivative financial instruments are used to hedge interest
rate and foreign exchange risks.
In accordance with the transitional provisions of IFRS1 –
First Time Adoption of International Financial Reporting
Standards, derivative financial instruments have been
accounted for and presented on the UK GAAP basis for the
year ended 31 December 2004.
Under IAS39 – Financial Instruments, derivative financial
instruments are stated in the balance sheet at fair value.
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of future cash
flows are recognised directly in equity. If a hedged firm
commitment or forecasted transaction results in the
recognition of an asset or a liability, then, at the time that
the asset or liability is recognised, the associated gains
or losses on the derivative that had previously been
recognised in equity are included in the initial
measurement of the asset or liability. For hedges that
do not result in the recognition of an asset or a liability,
amounts deferred in equity are recognised in the income
statement in the same period in which the hedged item
affects net profit or loss. Any ineffective portion of hedges is
recognised immediately in the income statement.
Where an effective hedge is in place against changes in the
fair value of fixed rate borrowings, the hedged borrowings
are adjusted for changes in fair value attributable to the
risk being hedged with a corresponding income or expense
included in the income statement. The offsetting gains or
losses from re-measuring the fair value of the related
derivatives are also recognised in the income statement.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in
the income statement as they arise.
Hedge accounting is discontinued when a hedging
instrument expires or is sold, terminated or exercised,
or no longer qualifies for hedge accounting. At that time,
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Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
any cumulative gain or loss on the hedging instrument
recognised in equity is either retained in equity until the
forecasted transaction occurs, or, where a hedged
transaction is no longer expected to occur, is immediately
credited or expensed in the income statement.
Derivatives embedded in other host contracts are
treated as separate derivatives where their risks and
characteristics are not closely related to those of the host
contracts and the host contracts are not carried at fair
value with unrealised gains or losses reported in the
income statement.
As at 1 January 2005, adjustments are to be made either to
the carrying value of hedged items or to equity, as
appropriate, to reflect the differences between the UK
GAAP carrying values of derivative financial instruments
and their carrying values required to be reported under
IAS39. Any transition gains or losses on derivative financial
instruments that qualify for hedge accounting and are
reflected in equity will remain in equity until either the
forecasted transaction occurs or is no longer expected to
occur.
153556 pp115_140 report 3/3/05 6:00 pm Page 123
Reed Elsevier Annual Reports and Financial Statements 2004
123
Notes to the combined financial statements (IFRS)
For the year ended 31 December 2004
1 Segment analysis (IFRS)
Revenue
Unaudited
2004
£m
Operating
profit
Unaudited
2004
£m
Adjusted
(benchmark)
operating
profit
Unaudited
2004
£m
Revenue
Unaudited
2004
€m
Operating
profit
Unaudited
2004
€m
Adjusted
(benchmark)
operating
profit
Unaudited
2004
€m
1,363
1,292
868
1,289
4,812
4,812
2,656
846
503
545
262
4,812
402
188
67
126
783
(29)
12
766
315
129
182
102
38
766
445
287
157
194
1,083
(29)
12
1,066
539
159
189
138
41
1,066
2,004
1,899
1,276
1,895
7,074
7,074
3,904
1,244
739
801
386
7,074
591
276
99
185
1,151
(43)
18
1,126
462
190
268
150
56
1,126
654
422
231
285
1,592
(43)
18
1,567
792
234
278
203
60
1,567
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Subtotal
Corporate costs
Unallocated net pension credit
Total
Geographical origin
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Adjusted (benchmark) operating profit figures are presented as additional performance measures and reconciled to the
reported figures in note 7. The unallocated net pension credit of £12m/€18m comprises the expected return on pension
scheme assets of £139m/€204m less interest on pension scheme liabilities of £127m/€186m. Share of post-tax results
of joint ventures of £17m/€26m included in operating profit comprises £3m/€5m relating to LexisNexis and £14m/€21m
relating to Reed Business.
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Subtotal
Corporate amounts
Total
Geographical origin
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Capital
additions
Unaudited
2004
£m
Depreciation
and
amortisation
Unaudited
2004
£m
Capital
additions
Unaudited
2004
€m
Depreciation
and
amortisation
Unaudited
2004
€m
67
300
94
47
508
5
513
407
45
40
15
6
513
67
140
85
85
377
4
381
277
47
15
36
6
381
98
441
138
70
747
7
754
598
66
59
22
9
754
98
206
125
125
554
6
560
407
69
22
53
9
560
Capital additions comprise expenditure on property, plant and equipment and intangible assets, both acquired and
internally developed, and exclude goodwill.
153556 pp115_140 report 3/3/05 6:00 pm Page 124
124
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
1 Segment analysis (IFRS) continued
Business segment
Elsevier
LexisNexis
Harcourt Education
Reed Business
Tax
Cash and borrowings
Employee benefit obligations
Other assets and liabilities
Total
Geographical origin
North America
United Kingdom
The Netherlands
Rest of Europe
Rest of world
Total
Total
assets
Unaudited
2004
£m
Total
liabilities
Unaudited
2004
£m
Net
assets
Unaudited
2004
£m
Total
assets
Unaudited
2004
€m
Total
liabilities
Unaudited
2004
€m
Net
assets
Unaudited
2004
€m
2,099
2,616
1,542
1,194
7,451
235
225
–
41
7,952
5,622
927
417
841
145
7,952
704
329
177
515
1,725
1,354
2,757
321
118
6,275
3,403
581
623
1,531
137
6,275
1,395
2,287
1,365
679
5,726
(1,119)
(2,532)
(321)
(77)
1,677
2,219
346
(206)
(690)
8
1,677
2,960
3,689
2,174
1,683
10,506
331
317
–
59
11,213
7,927
1,307
588
1,186
205
11,213
993
464
249
726
2,432
1,909
3,887
453
166
8,847
4,798
819
878
2,159
193
8,847
1,967
3,225
1,925
957
8,074
(1,578)
(3,570)
(453)
(107)
2,366
3,129
488
(290)
(973)
12
2,366
Share of net assets in joint ventures of £60m/€86m included above comprises £26m/€37m relating to LexisNexis and
£34m/€49m relating to Reed Business.
2 Operating profit (IFRS)
Operating profit is stated after charging/(crediting):
Staff costs
Wages and salaries
Social security costs
Pensions
Share based payments
Total staff costs
Operating lease rentals payable
Operating lease rentals receivable
Amortisation of acquired intangible assets
Amortisation of internally developed intangible assets
Depreciation of property, plant and equipment
Unaudited
2004
£m
Unaudited
2004
€m
1,216
130
84
59
1,489
105
(12)
255
55
71
1,788
191
123
87
2,189
154
(18)
375
81
104
The accounting for pensions under IAS19 is very similar to the requirements of UK FRS 17, disclosures in respect of which
are set out in pages 54 to 56.
153556 pp115_140 report 4/3/05 2:50 pm Page 125
Reed Elsevier Annual Reports and Financial Statements 2004
125
Notes to the combined financial statements (IFRS)
For the year ended 31 December 2004
3 Tax (IFRS)
Current tax:
United Kingdom
The Netherlands
Other
Deferred tax:
Current year
Total
Effective tax rate on reported profit before tax
4 Goodwill (IFRS)
At 1 January 2004
Acquisitions
Exchange translation differences
At 31 December 2004
Unaudited
2004
£m
Unaudited
2004
€m
73
52
60
185
(15)
170
27%
Unaudited
2004
£m
2,437
345
(171)
2,611
107
77
88
272
(22)
250
27%
Unaudited
2004
€m
3,461
507
(286)
3,682
153556 pp115_140 report 3/3/05 6:00 pm Page 126
126
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
5 Intangible assets (IFRS)
Cost
At 1 January 2004
Additions
Disposals
Exchange translation differences
At 31 December 2004
Amortisation
At 1 January 2004
Disposals/write off on acquisitions
Charge for the year
Exchange translation differences
At 31 December 2004
Net book amount
At 31 December 2003
At 31 December 2004
Acquired
intangible
assets
Unaudited
£m
Internally
developed
intangible
assets
Unaudited
£m
Total
Unaudited
£m
Acquired
intangible
assets
Unaudited
€m
Internally
developed
intangible
assets
Unaudited
€m
Total
Unaudited
€m
4,091
310
(13)
(236)
4,152
1,375
(13)
255
(73)
1,544
419
110
–
(17)
512
229
10
55
(9)
285
4,510
420
(13)
(253)
4,664
1,604
(3)
310
(82)
1,829
5,809
456
(19)
(391)
5,855
1,953
(19)
375
(131)
2,178
595
162
–
(36)
721
325
15
81
(20)
401
6,404
618
(19)
(427)
6,576
2,278
(4)
456
(151)
2,579
2,716
2,608
190
227
2,906
2,835
3,856
3,677
270
320
4,126
3,997
Acquired intangible assets as at 31 December 2004 include brands and imprints totalling £610m/€860m determined to
have indefinite lives based on an assessment of their longevity and stable market positions.
153556 pp115_140 report 3/3/05 6:00 pm Page 127
Reed Elsevier Annual Reports and Financial Statements 2004
127
Notes to the combined financial statements (IFRS)
For the year ended 31 December 2004
6 Reconciliations to UK GAAP
Reconciliation of combined profit
Revenue
Cost of sales
Gross profit
Selling and distribution costs
Administration and other expenses
Before amortisation and exceptional items
Amortisation of goodwill and acquired
intangible assets
Exceptional items
Operating profit
Share of result of joint ventures
Operating profit including joint ventures
Net interest expense
Exceptional losses on disposals
Profit before tax
Tax
Profit on ordinary activities after taxation
Attributable to:
Parent companies’ shareholders
Minority interests
Net profit for the year
Note
(i)
(ii)
(iii)
(iv)
UK GAAP Adjustments
IFRS
UK GAAP Adjustments
IFRS
2004
£m
4,812
(1,733)
3,079
(1,065)
(1,339)
(879)
(404)
(56)
675
22
697
(132)
(3)
562
(257)
305
303
2
305
Unaudited
2004
£m
Unaudited
2004
£m
–
–
–
–
74
(75)
149
–
74
(5)
69
–
–
69
87
156
156
–
156
4,812
(1,733)
3,079
(1,065)
(1,265)
(954)
(255)
(56)
749
17
766
(132)
(3)
631
(170)
461
459
2
461
2004
€m
7,074
(2,548)
4,526
(1,566)
(1,968)
(1,292)
(594)
(82)
992
32
1,024
(194)
(4)
826
(378)
448
445
3
448
Unaudited
2004
€m
Unaudited
2004
€m
–
–
–
–
108
(111)
219
–
108
(6)
102
–
–
102
128
230
230
–
230
7,074
(2,548)
4,526
(1,566)
(1,860)
(1,403)
(375)
(82)
1,100
26
1,126
(194)
(4)
928
(250)
678
675
3
678
Notes in respect of the IFRS adjustments are set out on page 129.
153556 pp115_140 report 3/3/05 6:00 pm Page 128
128
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
6 Reconciliations to UK GAAP continued
Reconciliation of combined balance sheet
ASSETS
Non-current assets
Goodwill
Intangible assets
Investments in joint ventures
Available-for-sale investments
Property, plant and equipment
Deferred tax assets
Current assets
Inventories and pre-publication costs
Trade and other receivables
Cash and cash equivalents
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Borrowings
Taxation
Non-current liabilities
Borrowings
Deferred tax liabilities
Employee benefit obligations
Provisions
Total liabilities
Net assets
EQUITY
Capital and reserves
Combined share capitals
Combined share premium accounts
Combined shares held in treasury
Translation reserves
Other combined reserves
Minority interest
Total equity
Note
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(ix)
(xii)
(xiii)
(xiv)
UK GAAP Adjustments
IFRS
UK GAAP Adjustments
IFRS
2004
£m
Unaudited
2004
£m
Unaudited
2004
£m
2004
€m
Unaudited
2004
€m
Unaudited
2004
€m
2,349
2,657
58
50
519
97
5,730
541
1,240
225
2,006
7,736
2,074
1,051
497
3,622
1,706
76
–
52
1,834
5,456
2,280
191
1,805
(66)
–
337
2,267
13
2,280
262
178
2
–
(227)
138
353
–
(137)
–
(137)
216
(283)
–
–
(283)
–
781
321
–
1,102
819
(603)
–
–
–
(122)
(481)
(603)
–
(603)
2,611
2,835
60
50
292
235
6,083
541
1,103
225
1,869
7,952
1,791
1,051
497
3,339
1,706
857
321
52
2,936
6,275
1,677
191
1,805
(66)
(122)
(144)
1,664
13
1,677
3,312
3,746
82
71
732
137
8,080
763
1,748
317
2,828
10,908
2,924
1,482
701
5,107
2,405
107
–
73
2,585
7,692
3,216
269
2,545
(93)
–
475
3,196
20
3,216
370
251
4
–
(321)
194
498
–
(193)
–
(193)
305
(399)
–
–
(399)
–
1,101
453
–
1,554
1,155
(850)
–
–
–
(175)
(675)
(850)
–
(850)
3,682
3,997
86
71
411
331
8,578
763
1,555
317
2,635
11,213
2,525
1,482
701
4,708
2,405
1,208
453
73
4,139
8,847
2,366
269
2,545
(93)
(175)
(200)
2,346
20
2,366
Notes in respect of the IFRS adjustments are set out on page 129.
153556 pp115_140 report 4/3/05 11:35 am Page 129
Reed Elsevier Annual Reports and Financial Statements 2004
129
Notes to the combined financial statements (IFRS)
For the year ended 31 December 2004
6 Reconciliations to UK GAAP continued
Notes on the IFRS adjustments
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Administration and other expenses before amortisation and exceptional items: additional pension expense
£27m/€40m; share option expense £48m/€71m.
Amortisation of goodwill and acquired intangible assets: non-amortisation of goodwill (excluding in joint ventures)
£204m/€300m; higher amortisation of acquired intangible assets £55m/€81m.
Share of result of joint ventures: non-amortisation of goodwill £2m/€4m; joint ventures tax reclassification
£7m/€10m.
Tax: reduced deferred tax charge £80m/€118m; joint ventures tax reclassification £7m/€10m.
Goodwill: non-amortisation £204m/€300m; gross up for deferred tax liabilities £68m/€96m; exchange £10m/€26m
(differences between average rates and year end balance sheet rates on profit and loss adjustments).
Intangible assets: higher amortisation £55m/€81m; reclassification of capitalised software £227m/€321m; exchange
£6m/€11m.
Investments in joint ventures: non-amortisation of goodwill £2m/€4m.
(vii)
(viii) Property, plant and equipment: reclassification of capitalised software £227m/€321m.
(ix) Deferred tax: additional deferred tax assets principally in relation to net pension obligations £138m/€194m;
additional deferred tax liabilities principally in relation to acquired intangible assets £781m/€1,101m.
Trade and other receivables: reversal of pension prepayments £137m/€193m (including £115m/€162m over
one year).
Trade and other payables: reversal of proposed dividends £248m/€350m; reversal of unfunded defined benefit
pension liability £53m/€74m; other £18m/€25m.
(xi)
(x)
(xii) Employee benefit obligations: net pension obligations £321m/€453m.
(xiii) Translation reserve: exchange differences on translation of foreign operations £143m/€224m; translation effects of
IFRS adjustments £21m/€49m (difference between average rates and year end balance sheet rates on profit and
loss adjustments).
(xiv) Other combined reserves: adjustments to net profit for the year £156m/€230m; additional net deferred tax liabilities
at 1 January 2004 date of transition £686m/€974m; additional net pension obligations at 1 January 2004 date of
transition £310m/€440m; actuarial losses arising during the year on defined benefit pension schemes net of related
deferred tax £62m/€91m; reversal of proposed dividends £248m/€350m; reclassification to translation reserve of
exchange differences on translation of foreign operations £143m/€224m; other £30m/€26m.
UK GAAP figures (before IFRS adjustments) have been recategorised so as to conform to the presentation under IFRS.
153556 pp115_140 report 3/3/05 6:00 pm Page 130
130
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
7 Adjusted (benchmark) figures (IFRS)
Adjusted (benchmark) profit figures, proposed as additional performance measures on adoption of IFRS, are derived from
the reported figures (unaudited) under IFRS for the 2004 financial year as follows:
Adjusted
operating
profit
Adjusted
Adjusted
pre-tax attributable
profit
profit
Adjusted
operating
profit
Adjusted
Adjusted
pre-tax attributable
profit
profit
For the year ended 31 December 2004
Reported figures under IFRS
Adjustments:
Amortisation of acquired intangible assets
Acquisition integration and related costs
Exceptional losses on disposals
Reclassification of tax on joint ventures
Deferred tax adjustment
Adjusted (benchmark) figures under IFRS
Unaudited Unaudited Unaudited
£m
459
£m
631
£m
766
Unaudited Unaudited Unaudited
€m
675
€m
1,126
€m
928
255
38
–
7
–
1,066
255
38
3
7
–
934
288
29
2
–
(91)
687
375
56
–
10
–
1,567
375
56
4
10
–
1,373
423
43
3
–
(134)
1,010
A reconciliation of adjusted profit figures previously used as additional performance measures under UK GAAP to the new
proposed adjusted (benchmark) figures to be used on adoption of IFRS for the 2004 financial year is set out below.
Adjusted
operating
profit
Adjusted
Adjusted
pre-tax attributable
profit
profit
Adjusted
operating
profit
Adjusted
Adjusted
pre-tax attributable
profit
profit
For the year ended 31 December 2004
Adjusted figures for UK GAAP
Reconciling items:
Additional pension expense
Share option expense
Restructuring costs
Adjusted (benchmark) figures under IFRS
Unaudited Unaudited Unaudited
£m
760
£m
1,027
£m
1,159
Unaudited Unaudited Unaudited
€m
1,117
€m
1,704
€m
1,510
(27)
(48)
(18)
1,066
(27)
(48)
(18)
934
(17)
(41)
(15)
687
(40)
(71)
(26)
1,567
(40)
(71)
(26)
1,373
(25)
(60)
(22)
1,010
Adjusted (benchmark) operating cash flow, proposed as an additional performance measure on adoption of IFRS, is derived
from the reported cash generated from operations (unaudited) under IFRS for the 2004 financial year as follows:
For the year ended 31 December 2004
Cash generated from operations
Dividends received from joint ventures
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Expenditure on internally developed intangible assets
Payments in relation to acquisition integration and related costs
Adjusted (benchmark) operating cash flow
Adjusted (benchmark) operating cash flow conversion
Unaudited
£m
1,154
17
(82)
4
(110)
30
1,013
95%
Unaudited
€m
1,696
25
(120)
7
(162)
44
1,490
95%
Adjusted (benchmark) operating cash flow conversion expresses adjusted (benchmark) operating cash flow as a
percentage of adjusted (benchmark) operating profit.
A reconciliation of adjusted operating cash flow previously used as an additional performance measure under UK GAAP to
the new proposed adjusted (benchmark) operating cash flow figure to be used on adoption of IFRS for the 2004 financial
year is set out below.
Adjusted operating cash flow under UK GAAP
Exceptional restructuring payments
Adjusted (benchmark) operating cash flow under IFRS
Unaudited
£m
1,050
(37)
1,013
Unaudited
€m
1,544
(54)
1,490
153556 pp115_140 report 3/3/05 6:00 pm Page 131
Reed Elsevier Annual Reports and Financial Statements 2004
131
Notes to the combined financial statements (IFRS)
For the year ended 31 December 2004
8 Interim results (IFRS)
The combined IFRS income statement (unaudited) for the six months ended 30 June 2004 is set out below:
Six months ended 30 June 2004
Revenue
Cost of sales
Gross profit
Selling and distribution costs
Administration and other expenses
Before amortisation and exceptional items
Amortisation of acquired intangible assets
Exceptional items
Operating profit
Share of result of joint ventures
Operating profit including joint ventures
Net interest expense
Profit before tax
Tax
Profit on ordinary activities after taxation
Attributable to:
Parent companies’ shareholders
Minority interests
Net profit for the year
Unaudited
£m
2,263
(821)
1,442
(495)
(640)
(506)
(116)
(18)
307
13
320
(64)
256
(64)
192
191
1
192
Unaudited
€m
3,349
(1,215)
2,134
(732)
(947)
(749)
(172)
(26)
455
19
474
(95)
379
(95)
284
283
1
284
153556 pp115_140 report 3/3/05 6:00 pm Page 132
132
Adoption of International Financial Reporting Standards
Reed Elsevier combined businesses
8 Interim results (IFRS) continued
The IFRS segment analysis (unaudited) of revenue, operating profit and adjusted (benchmark) operating profit for the
six months ended 30 June 2004, is as follows:
Six months ended 30 June 2004
Revenue
Elsevier
LexisNexis
Harcourt Education
Reed Business
Total
Operating profit
Elsevier
LexisNexis
Harcourt Education
Reed Business
Subtotal
Unallocated corporate costs
Unallocated net pension credit
Total
Adjusted (benchmark) operating profit
Elsevier
LexisNexis
Harcourt Education
Reed Business
Subtotal
Unallocated corporate costs
Unallocated net pension credit
Total
Unaudited
£m
Unaudited
€m
631
614
359
659
2,263
178
83
(19)
88
330
(16)
6
320
198
122
23
118
461
(16)
6
451
934
909
531
975
3,349
263
123
(27)
130
489
(24)
9
474
293
181
34
175
683
(24)
9
668
153556 pp115_140 report 3/3/05 6:00 pm Page 133
Reed Elsevier Annual Reports and Financial Statements 2004
133
Notes to the combined financial statements
For the year ended 31 December 2004
8 Interim results (IFRS) continued
Adjusted (benchmark) figures, proposed as additional performance measures on adoption of IFRS, for the six months
ended 30 June 2004 are derived from the reported figures (unaudited) as follows:
Reported figures under IFRS
Adjustments:
Amortisation of acquired intangible assets
Acquisition integration and related costs
Exceptional losses on disposals
Reclassification of tax on joint ventures
Deferred tax adjustment
Adjusted (benchmark) figures under IFRS
Adjusted
operating
profit
Unaudited
£m
Adjusted
pre-tax
profit
Unaudited
£m
Adjusted
net
profit
Unaudited
£m
Adjusted
operating
profit
Unaudited
€m
Adjusted
pre-tax
profit
Unaudited
€m
Adjusted
net
profit
Unaudited
€m
320
116
10
–
5
–
451
256
116
10
–
5
–
387
191
130
9
–
–
(42)
288
474
172
15
–
7
–
668
379
172
15
–
7
–
573
283
192
13
–
–
(62)
426
A reconciliation of adjusted figures previously used as additional performance measures under UK GAAP to the new proposed
adjusted (benchmark) figures for the six months ended 30 June 2004 to be used on adoption of IFRS is set out below.
Adjusted figures for UK GAAP
Reconciling items:
Additional pension expense
Share option expense
Restructuring costs
Adjusted (benchmark) figures under IFRS
Adjusted
operating
profit
Unaudited
£m
Adjusted
pre-tax
profit
Unaudited
£m
Adjusted
net
profit
Unaudited
£m
Adjusted
operating
profit
Unaudited
€m
Adjusted
pre-tax
profit
Unaudited
€m
Adjusted
net
profit
Unaudited
€m
497
433
319
736
641
472
(14)
(24)
(8)
451
(14)
(24)
(8)
387
(10)
(15)
(6)
288
(21)
(35)
(12)
668
(21)
(35)
(12)
573
(15)
(22)
(9)
426
Proposed adjusted (benchmark) earnings per share under IFRS for the six months ended 30 June 2004 are 12.1p for Reed
Elsevier PLC and €0.27 for Reed Elsevier NV.
153556 pp115_140 report 3/3/05 6:00 pm Page 134
134
Additional information on International Financial Reporting Standards
Reed Elsevier PLC
Consolidated income statement (IFRS)
For the year ended 31 December 2004
Administrative expenses
Effect of tax credit equalisation on distributed earnings
Share of results of joint ventures
Operating profit including joint ventures
Investment income
Profit before tax
Tax
Profit for the year attributable to ordinary shareholders
Earnings per ordinary share (EPS) (IFRS)
Basic EPS
Diluted EPS
EPS based on 52.9% economic interest in the Reed Elsevier combined businesses
Adjusted (benchmark) EPS
£
Unaudited
2004
£m
(2)
(8)
247
237
3
240
(5)
235
£
Unaudited
2004
pence
18.6p
18.5p
19.2p
28.7p
Adjusted (benchmark) earnings per ordinary share, proposed as an additional performance measure on adoption of IFRS,
is derived from the basic earnings per share (unaudited) under IFRS as follows:
Basic earnings per ordinary share
Effect of tax credit equalisation on distributed earnings
Earnings per share based on 52.9% economic interest in the Reed Elsevier combined business
Adjustments:
Amortisation of acquired intangible assets
Acquisition integration and related costs
Exceptional losses on disposals
Deferred tax adjustment
Adjusted (benchmark) earnings per ordinary share
£
Unaudited
2004
pence
18.6p
0.6p
19.2p
12.0p
1.2p
0.1p
(3.8p)
28.7p
153556 pp115_140 report 3/3/05 6:00 pm Page 135
Reed Elsevier Annual Reports and Financial Statements 2004
135
Reed Elsevier PLC
Balance sheets (IFRS)
As at 31 December 2004
Assets
Non-current assets
Investment in joint ventures
Current assets
Amounts due from joint ventures
Total assets
Liabilities
Current liabilities
Payables
Amounts owed to joint ventures
Taxation
Amounts owed to group undertakings
Total liabilities
Net assets
Equity
Capital and reserves
Called up share capital
Share premium account
Shares held in treasury
Capital redemption reserve
Translation reserve
Profit and loss reserve
Total equity
£
£
Consolidated
Company
Unaudited
2004
£m
Unaudited
2004
£m
334
595
929
1
36
12
–
49
880
159
974
(35)
4
(64)
(158)
880
1,411
595
2,006
1
36
12
77
126
1,880
159
974
–
4
–
743
1,880
Consolidated statement of recognised income and expenditure (IFRS)
For the year ended 31 December 2004
Net profit for the year
Share of exchange difference on translation of foreign operations in joint ventures
Share of actuarial losses on defined benefit pension schemes
Share of tax on items taken directly to reserves
Net expense recognised directly in equity
Total recognised income and expense for the year
£
Unaudited
2004
£m
235
(64)
(39)
6
(97)
138
153556 pp115_140 report 3/3/05 6:00 pm Page 136
136
Additional information on International Financial Reporting Standards
Reed Elsevier PLC
Reconciliations to UK GAAP
Reconciliation of profit
Net profit under UK GAAP
Adjustments to IFRS
Share of IFRS adjustments in joint ventures
Net profit for the year under IFRS
Unaudited
2004
£m
152
83
235
Reconciliation of equity
Consolidated
Company
Shareholders' funds under UK GAAP
Adjustments to IFRS
Dividends
Share of IFRS adjustments in joint ventures
Equity under IFRS
Unaudited
2004
£m
1,199
120
(439)
(319)
880
Unaudited
2004
£m
1,760
120
–
120
1,880
153556 pp115_140 report 3/3/05 6:00 pm Page 137
Reed Elsevier Annual Reports and Financial Statements 2004
137
Reed Elsevier NV
Group income statement (IFRS)
For the year ended 31 December 2004
Administrative expenses
Share of results of joint ventures
Operating profit including joint ventures
Investment income
Profit before tax
Tax
Profit for the year attributable to ordinary shareholders
Group earnings per ordinary share (EPS) (IFRS)
Basic EPS
Diluted EPS
Adjusted (benchmark) EPS
€
Unaudited
2004
€m
(3)
339
336
2
338
–
338
€
Unaudited
2004
euro
€0.43
€0.43
€0.64
Adjusted (benchmark) group earnings per ordinary share, proposed as an additional performance measure on adoption of
IFRS, is derived from the basic earnings per share (unaudited) under IFRS as follows:
€
Basic group earnings per ordinary share
Adjustments:
Amortisation of acquired intangible assets
Acquisition integration and related costs
Exceptional losses on disposals
Deferred tax adjustments
Adjusted (benchmark) group earnings per ordinary share
Unaudited
2004
euro
€0.43
€0.27
€0.03
–
€(0.09)
€0.64
153556 pp115_140 report 3/3/05 6:00 pm Page 138
138
Additional information on International Financial Reporting Standards
Reed Elsevier NV
Balance sheets (IFRS)
As at 31 December 2004
Assets
Non-current assets
Investment in joint ventures
Current assets
Amounts due from joint ventures
Receivables
Short term investments
Total assets
Liabilities
Current liabilities
Payables
Taxation
Non-current liabilities
Debenture loans
Taxation
Total liabilities
Net assets
Equity
Capital and reserves
Share capital issued
Paid in surplus
Shares held in treasury
Translation reserve
Profit and loss reserve
Total equity
€
€
Group
Parent company
Unaudited
2004
€m
Unaudited
2004
€m
1,183
30
7
25
1,245
3
4
7
7
58
65
72
1,173
47
1,477
(47)
(98)
(206)
1,173
2,161
30
7
25
2,223
3
4
7
7
58
65
72
2,151
47
1,477
–
–
627
2,151
153556 pp115_140 report 3/3/05 6:00 pm Page 139
Reed Elsevier Annual Reports and Financial Statements 2004
139
Reed Elsevier NV
Group statement of recognised income and expenditure (IFRS)
For the year ended 31 December 2004
Net profit for the year
Share of exchange difference on translation of foreign operations in joint ventures
Share of actuarial losses on defined benefit pension schemes
Share of tax on items taken directly to reserves
Net expense recognised directly in equity
Total recognised income and expense for the year
€
Unaudited
2004
€m
338
(98)
(55)
9
(144)
194
Unaudited
2004
€m
223
115
338
Group
Parent company
Unaudited
2004
€m
1,598
177
(602)
(425)
1,173
Unaudited
2004
€m
1,974
177
–
177
2,151
Reconciliations to UK GAAP
Reconciliation of group profit
Net group profit under UK GAAP
Adjustments to IFRS
Share of IFRS adjustments in joint ventures
Net group profit for the year under IFRS
Reconciliation of equity
Shareholders' funds under UK GAAP
Adjustments to IFRS
Dividends
Share of IFRS adjustments in joint ventures
Equity under IFRS
153556 pp115_140 report 3/3/05 6:00 pm Page 140
153556 pp141_150 report 3/3/05 5:54 pm Page 141
Additional information
for US investors
Reed Elsevier combined businesses
Reed Elsevier PLC
Reed Elsevier NV
> 142
> 147
> 149
153556 pp141_150 report 3/3/05 5:54 pm Page 142
142
Additional information for US Investors
Reed Elsevier combined businesses
Summary financial information in US dollars
Basis of preparation
The summary financial information is a simple translation of the Reed Elsevier combined financial statements into US
dollars at the stated rates of exchange. The financial information provided below is prepared under UK GAAP as used in
the preparation of the Reed Elsevier combined financial statements. It does not represent a restatement under US GAAP
which would be different in some significant respects.
Exchange rates for translation
Sterling
Profit and loss and cash flow
Balance sheet
Euro
Profit and loss and cash flow
Balance sheet
Profit and loss account
For the year ended 31 December 2004
Net sales
Operating profit
Profit before tax
Profit attributable
Adjusted operating profit
Adjusted profit before tax
Adjusted profit attributable to parent companies’ shareholders
2004
US$
1.83
1.93
2003
US$
1.63
1.78
1.245
1.369
1.124
1.254
2004
US$m
8,806
1,276
1,028
554
2,121
1,879
1,391
2003
US$m
8,028
1,077
846
544
1,920
1,646
1,213
Adjusted figures are used by Reed Elsevier as additional performance measures and are stated before the amortisation
of goodwill and intangible assets and exceptional items.
153556 pp141_150 report 3/3/05 5:54 pm Page 143
Reed Elsevier Annual Reports and Financial Statements 2004
143
Cash flow statement
For the year ended 31 December 2004
Net cash inflow from operating activities
Dividends received from joint ventures
Returns on investments and servicing of finance
Taxation (including US$57m (2003: US$59m) exceptional net inflow)
Capital expenditure and financial investment
Acquisitions and disposals
Equity dividends paid to shareholders of the parent companies
Cash (outflow)/inflow before changes in short term investments and financing
Decrease/(increase) in short term investments
Financing
Decrease in cash
Adjusted operating cash flow
Adjusted operating cash flow conversion
2004
US$m
2,112
31
(238)
(382)
(350)
(1,180)
(566)
(573)
736
(165)
(2)
1,922
91%
2003
US$m
1,736
23
(289)
(238)
(223)
(295)
(476)
238
(269)
(140)
(171)
1,676
87%
Reed Elsevier businesses focus on adjusted operating cash flow as a key cash flow measure. Adjusted operating cash flow
is measured after dividends from joint ventures, tangible fixed asset spend and proceeds from the sale of tangible fixed
assets but before exceptional payments and proceeds. Adjusted operating cash flow conversion expresses adjusted
operating cash flow as a percentage of adjusted operating profit.
Balance sheet
As at 31 December 2004
Goodwill and intangible assets
Tangible fixed assets and investments
Fixed assets
Inventories and pre-publication costs
Debtors – amounts falling due within one year
Debtors – amounts falling due after more than one year
Cash and short term investments
Current assets
Creditors: amounts falling due within one year
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Provisions for liabilities and charges
Minority interests
Net assets
2004
US$m
9,662
1,210
10,872
1,044
2,119
461
434
4,058
(6,479)
(2,421)
8,451
(3,804)
(247)
(25)
4,375
2003
US$m
9,172
1,038
10,210
936
1,858
443
1,136
4,373
(6,183)
(1,810)
8,400
(3,747)
(299)
(21)
4,333
153556 pp141_150 report 3/3/05 5:54 pm Page 144
144
Additional information for US Investors
Reed Elsevier combined businesses
Summary of the principal
differences to US GAAP
The combined financial statements are prepared in
accordance with UK GAAP, which differ in certain
significant respects to US GAAP. The principal differences
that affect net income and combined shareholders’ funds
are explained below and their approximate effect is shown
on page 146. The Reed Elsevier Annual Report 2004 on
Form 20-F provides further information for US investors.
Goodwill and intangible assets
Under UK GAAP, acquired goodwill and intangible assets
are capitalised and amortised systematically over their
estimated useful lives up to a maximum of 40 years,
subject to impairment review.
Under US GAAP, acquired goodwill and intangible assets
are accounted for in accordance with SFAS141: Business
Combinations and SFAS142: Goodwill and Other Intangible
Assets. In accordance with these SFAS, goodwill and
intangible assets with indefinite lives are not amortised
and are subject to at least annual impairment review.
Other intangible assets with definite lives are amortised
over periods up to 40 years, also subject to annual
impairment review under SFAS144.
Under US GAAP, as at 31 December 2004, the carrying
value of goodwill is £3,958m/€5,581m (2003:
£3,872m/€5,498m), the gross cost of intangible assets
is £4,153m/€5,856m (2003: £4,090m/€5,809m) and
accumulated amortisation of intangible assets is
£1,497m/€2,111m (2003: £1,332m/€1,891m). Net income
and combined shareholders’ funds under US GAAP have
been restated for 2003 to reflect a reclassification from
intangible assets to goodwill of amounts arising under
US GAAP in relation to deferred tax on acquired intangible
assets, with a consequential adjustment to amortisation.
Net income for 2003 and combined shareholders’ funds
as at 31 December 2003 are accordingly £52m/€75m and
£107m/€152m higher than the amounts previously
reported.
Deferred taxation
Under UK GAAP, the combined businesses provide in full
for timing differences using the liability method. Under
US GAAP, deferred taxation is provided on all temporary
differences under the liability method subject to a valuation
allowance on deferred tax assets where applicable, in
accordance with SFAS109: Accounting for Income Taxes.
The most significant adjustment to apply SFAS109 arises
on the recognition of a deferred tax liability in respect of
acquired intangible assets for which amortisation is not tax
deductible. Under the timing difference approach applied
under UK GAAP, no such liability would be recognised.
Pensions
Under UK GAAP, the combined businesses account for
pension costs under the rules set out in SSAP24:
Accounting for Pension Costs. Its objectives and principles
are broadly in line with SFAS87: Employers’ Accounting for
Pensions. However, SSAP24 is less prescriptive in the
application of the actuarial methods and assumptions to
be applied in the calculation of pension assets, liabilities
and costs.
Under UK GAAP, pension plan assets and liabilities are
based on the results of the latest actuarial valuation.
Pension assets are valued at the discounted present value
determined by expected future income. Liabilities are
assessed using the expected rate of return on plan assets.
Under US GAAP, plan assets are valued by reference to
market-related values at the date of the financial
statements. Liabilities are assessed using the rate of
return obtainable on fixed or inflation-linked bonds.
Stock based compensation
Under US GAAP, the combined businesses apply the
accounting requirements of APB25: Accounting for Stock
Issued to Employees and related interpretations in
accounting for stock based compensation. Under APB25
compensatory plans with performance criteria qualify as
variable plans, for which total compensation cost must be
recalculated each period based on the current share price.
The total compensation cost is amortised over the vesting
period. Under UK GAAP, compensation cost is determined
based on a comparison of the exercise price with the share
price on the date of grant.
Also under US GAAP, SFAS123: Accounting for Stock
Based Compensation establishes a fair value based
method of computing compensation cost. It encourages
the application of this method in the profit and loss
account but, where APB25 is applied, the proforma effect
on net income must be disclosed.
The disclosure only provisions of SFAS123, as amended by
SFAS148: Accounting for Stock Based Compensation –
Transition and Disclosure, have been adopted. If
compensation costs based on fair value at the grant date
had been recognised in the profit and loss account, net
income under US GAAP would have been reduced by
£39m/€57m in 2004 (2003: £43m/€62m).
Derivative instruments
Under US GAAP, SFAS133: Accounting for Derivative
Instruments and Hedging Activities requires all derivative
instruments to be carried at fair value on the balance
sheet. Changes in fair value are accounted for through
the profit and loss account or comprehensive income
statement, depending on the derivative’s designation and
effectiveness as a hedging instrument. Certain derivative
153556 pp141_150 report 3/3/05 5:54 pm Page 145
Reed Elsevier Annual Reports and Financial Statements 2004
145
instruments used by Reed Elsevier have not been
designated as qualifying hedge instruments under
SFAS133 and, accordingly, a charge or credit as
appropriate to net income is recorded under US GAAP
for the changes in the fair value of those derivative
instruments. Under UK GAAP, derivative instruments
intended as hedges are recorded at appropriate historical
cost amounts, with fair values shown as a disclosure
item. The adoption of SFAS133, which was effective from
1 January 2001, resulted in a cumulative transition
adjustment in other comprehensive income, of which
£4m/€6m was charged to US GAAP net income in 2004
(2003: £7m/€10m).
Equity dividends
Under UK GAAP, dividends are provided for in the year in
respect of which they are proposed by the directors. Under
US GAAP, such dividends would not be provided for until
they are formally declared by the directors.
Available for sale investments
Under UK GAAP, fixed asset investments (excluding
investments in joint ventures) are recorded at historical
cost less provision for any impairment in value. Under
US GAAP, investments in equity securities with readily
determinable fair values are classified as available for
sale and are reported at fair value, with unrealised gains
or losses reported as a separate component of
shareholders’ funds.
Exceptional items
Exceptional items are material items within the combined
businesses’ ordinary activities which, under UK GAAP, are
required to be disclosed separately due to their size or
incidence. These items do not qualify as extraordinary
under US GAAP.
Adjusted earnings
In the combined financial statements adjusted profit and
cash flow measures are presented as permitted by UK
GAAP as additional performance measures. US GAAP does
not permit the presentation of alternative earnings
measures.
Short term obligations expected to be refinanced
Under US GAAP, where it is expected to refinance short
term obligations on a long term basis and this is supported
by an ability to consummate the refinancing, such short
term obligations should be excluded from current liabilities
and shown as long term obligations. Under UK GAAP, such
obligations can only be excluded from current liabilities
where, additionally, the debt and facility are under a single
agreement or course of dealing with the same lender or
group of lenders. Short term obligations at 31 December
2004 of £1,043m/€1,471m (2003: £1,182m/€1,678m) would
be excluded from current liabilities under US GAAP and
shown as long term obligations.
153556 pp141_150 report 3/3/05 5:54 pm Page 146
146
Additional information for US Investors
Reed Elsevier combined businesses
Effects on net income of material differences to US GAAP
For the year ended 31 December 2004
Net income as reported
US GAAP adjustments:
Goodwill and intangible assets
Deferred taxation
Pensions
Stock based compensation
Derivative instruments
Net income under US GAAP
2004
£m
303
154
(3)
(30)
(7)
32
449
2003
£m
334
173
(40)
75
7
41
590
2004
€m
445
226
(4)
(44)
(10)
47
660
2003
€m
484
251
(58)
109
10
59
855
Effects on combined shareholders’ funds of material
differences to US GAAP
As at 31 December 2004
Combined shareholders’ funds as reported
US GAAP adjustments:
Goodwill and intangible assets
Deferred taxation
Pensions
Derivative instruments
Available for sale investments
Equity dividends
Other items
Combined shareholders’ funds under US GAAP
2004
£m
2003
£m
2004
€m
2003
€m
2,267
2,434
3,196
3,456
1,593
(822)
77
12
–
248
(2)
3,373
1,461
(828)
185
(69)
3
226
(2)
3,410
2,246
(1,159)
109
17
–
350
(3)
4,756
2,075
(1,176)
263
(98)
4
321
(3)
4,842
Net income and combined shareholders’ funds under US GAAP have been restated for 2003 to reflect a reclassification
from intangible assets to goodwill of amounts arising under US GAAP in relation to deferred taxation with a consequential
adjustment to amortisation. Net income for 2003 and combined shareholders’ funds as at 31 December 2003 are
accordingly £52m/€75m and £107m/€152m higher respectively than the amounts previously reported.
153556 pp141_150 report 3/3/05 5:54 pm Page 147
Reed Elsevier Annual Reports and Financial Statements 2004
147
Reed Elsevier PLC
Summary financial information in US dollars
Basis of preparation
The summary financial information is a simple translation of Reed Elsevier PLC’s consolidated financial statements into
US dollars at the stated rates of exchange. The financial information provided below is prepared under UK GAAP as used
in the preparation of the Reed Elsevier PLC consolidated financial statements. It does not represent a restatement under
US GAAP which would be different in some significant respects.
Exchange rates for translation of sterling ($:£1)
Profit and loss
Balance sheet
Consolidated profit and loss account
For the year ended 31 December 2004
Profit attributable to ordinary shareholders: statutory
Profit attributable to 52.9% interest in Reed Elsevier combined businesses
Adjusted profit attributable
Amortisation of goodwill and intangible assets
Exceptional items
Data per American Depositary Share
Earnings per American Depositary Share based on 52.9% interest in Reed Elsevier
combined businesses
Adjusted
Basic
Net dividend per American Depositary Share
Consolidated balance sheet
As at 31 December 2004
Shareholders’ funds
2004
1.83
1.93
2003
1.63
1.78
2004
US$m
278
736
(397)
(46)
293
2003
US$m
275
642
(386)
33
289
2004
US$
2003
US$
$2.33
$0.93
$0.95
$2.03
$0.91
$0.78
2004
US$m
2,314
2003
US$m
2,293
Adjusted earnings per American Depositary Share is based on Reed Elsevier PLC shareholders’ 52.9% share of the
adjusted profit attributable of the Reed Elsevier combined businesses, which excludes amortisation of goodwill and
intangible assets and exceptional items. Adjusted figures are described in note 9 to the Reed Elsevier PLC consolidated
financial statements.
Reed Elsevier PLC shares are quoted on the New York Stock Exchange and trading is in the form of American Depositary
Shares (ADSs), evidenced by American Depositary Receipts (ADRs), representing four Reed Elsevier PLC ordinary shares
of 12.5p each. (CUSIP No. 758205108; trading symbol, RUK; Bank of New York is the ADS Depositary.)
153556 pp141_150 report 3/3/05 5:54 pm Page 148
148
Additional information for US Investors
Reed Elsevier PLC
Summary of the principal differences
between UK and US GAAP
Reed Elsevier PLC accounts for its 52.9% economic interest in the Reed Elsevier combined businesses, before the effect of
tax credit equalisation, using the gross equity method in conformity with UK GAAP which is similar to the equity method in
US GAAP. Using the equity method to present its net income and shareholders’ funds under US GAAP, Reed Elsevier PLC
reflects its 52.9% share of the effects of differences between UK and US GAAP relating to the combined businesses as a
single reconciling item. The most significant differences relate to the capitalisation and amortisation of goodwill and
intangibles, pensions, deferred taxes and derivative financial instruments. A more complete explanation of the accounting
policies used by the Reed Elsevier combined businesses and the differences between UK and US GAAP is given on pages
144 and 145. The Reed Elsevier Annual Report 2004 on Form 20-F provides further information for US investors.
Effects on net income of material differences
between UK and US GAAP
For the year ended 31 December 2004
Net income under UK GAAP
Impact of US GAAP adjustments to combined financial statements
Net income under US GAAP
Earnings per ordinary share under US GAAP
Effects on shareholders’ funds of material differences
between UK and US GAAP
As at 31 December 2004
Shareholders’ funds under UK GAAP
Impact of US GAAP adjustments to combined financial statements
Equity dividends not declared in the period
Shareholders’ funds under US GAAP
2004
£m
152
77
229
18.1p
2003
£m
169
137
306
24.2p
2004
£m
1,199
464
120
1,783
2003
£m
1,288
407
110
1,805
Net income and shareholders‘ funds under US GAAP have been restated for 2003 to reflect the restated US GAAP
adjustments to the combined financial statements. Net income and shareholders’ funds under US GAAP in 2003 are higher
than previously reported by £28m and £57m respectively. Earnings per ordinary share under US GAAP in 2003 are 2.2p
higher than previously reported.
153556 pp141_150 report 3/3/05 5:54 pm Page 149
Reed Elsevier Annual Reports and Financial Statements 2004
149
Reed Elsevier NV
Summary financial information in US dollars
Basis of preparation
The summary financial information is a simple translation of the Reed Elsevier NV group financial statements into US
dollars at the stated rates of exchange. The financial information provided below is prepared under UK GAAP as used in the
preparation of the Reed Elsevier NV statutory financial statements. It does not represent a restatement under US GAAP
which would be different in some significant respects.
Exchange rates for translation of euros (€:$1)
Profit and loss
Balance sheet
Group profit and loss account
For the year ended 31 December 2004
Profit attributable to 50% interest in Reed Elsevier combined businesses
Adjusted profit attributable
Amortisation of goodwill and intangible assets
Exceptional items
Data per American Depositary Share
Earnings per American Depositary Share based on 50% interest in Reed Elsevier
combined businesses
Adjusted
Basic
Net dividend per American Depositary Share
Group balance sheet
As at 31 December 2004
Shareholders’ funds
2004
0.803
0.731
2003
0.890
0.798
2004
US$m
2003
US$m
696
(376)
(42)
278
607
(365)
30
272
2004
US$
2003
US$
$1.77
$0.70
$0.82
$1.55
$0.70
$0.67
2004
US$m
2,186
2003
US$m
2,165
Adjusted earnings per American Depositary Share is based on Reed Elsevier NV’s 50% share of the adjusted profit
attributable of the Reed Elsevier combined businesses, which excludes amortisation of goodwill and intangible assets and
exceptional items. Adjusted figures are described in note 8 to the Reed Elsevier NV statutory financial statements.
Reed Elsevier NV shares are quoted on the New York Stock Exchange and trading is in the form of American Depositary
Shares (ADSs), evidenced by American Depositary Receipts (ADRs), representing two Reed Elsevier NV ordinary shares of
€0.06 each. (CUSIP No. 758204101; trading symbol, ENL; Bank of New York is the ADS Depositary.)
153556 pp141_150 report 3/3/05 5:54 pm Page 150
150
Additional information for US Investors
Reed Elsevier NV
Summary of the principal differences
between UK and US GAAP
Reed Elsevier NV accounts for its 50% economic interest in the Reed Elsevier combined businesses, before the effect of tax
credit equalisation, using the gross equity method in its group financial statements. Using the equity method to present its
net income and shareholders’ funds under US GAAP, Reed Elsevier NV reflects its 50% share of the effects of differences
between UK and US GAAP relating to the combined businesses as a single reconciling item. The most significant
differences relate to the capitalisation and amortisation of goodwill and intangibles, pensions, deferred taxes and derivative
financial instruments. A more complete explanation of the accounting policies used by the Reed Elsevier combined
businesses and the differences between UK and US GAAP is given on pages 144 and 145. The Reed Elsevier Annual Report
2004 on Form 20-F provides further information for US investors.
Effects on group net income of material differences
between UK and US GAAP
For the year ended 31 December 2004
Group net income under UK GAAP
Impact of US GAAP adjustments to combined financial statements
Net income under US GAAP
Group earnings per share under US GAAP
2004
€m
223
119
342
€0.44
2003
€m
242
197
439
€0.56
Effects on group shareholders’ funds of material differences
between UK and US GAAP
As at 31 December 2004
Group shareholders’ funds as reported under UK GAAP
Impact of US GAAP adjustments to combined financial statements
Equity dividends not declared in the period
Group shareholders’ funds under US GAAP
2004
€m
1,598
601
177
2,376
2003
€m
1,728
531
162
2,421
Net income and shareholders’ funds under US GAAP have been restated for 2003 to reflect the restated US GAAP
adjustments to the combined financial statements. Net income and shareholders’ funds under US GAAP in 2003 are higher
than previously reported by €38m and €76m respectively. Group earnings per share under US GAAP in 2003 are €0.05
higher than previously reported.
153556 pp141_150 report 3/3/05 5:54 pm Page 151
Principal operating locations
Reed Elsevier Annual Reports and Financial Statements 2004
151
Reed Elsevier
1-3 Strand, London WC2N 5JR, UK
Tel: +44 (0)20 7930 7077
Fax: +44 (0)20 7166 5799
Radarweg 29
1043 NX Amsterdam, The Netherlands
Tel: +31 (0)20 485 2434
Fax: +31 (0)20 618 0325
125 Park Avenue, 23rd Floor
New York, NY 10017, USA
Tel: +1 212 309 5498
Fax: +1 212 309 5480
Elsevier Reed Finance BV
Radarweg 29
1043 NX Amsterdam, The Netherlands
Tel: +31 (0)20 485 2434
Fax: +31 (0)20 618 0325
Elsevier
Elsevier
Radarweg 29
1043 NX Amsterdam,
The Netherlands
www.elsevier.com
Elsevier
The Boulevard, Langford Lane
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