Interim Results

Reed Elsevier PLC 08 August 2002 Financial highlights for the six months ended 30 June 2002 REED ELSEVIER COMBINED BUSINESSES Year ended 31 December Six months ended 30 June Six months ended 30 June Change at constant 2001 2001 2002 2001 2002 2001 currencies Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m % 4,560 7,342 Turnover 2,467 2,036 3,972 3,258 +22% 990 1,594 Adjusted operating 505 438 813 701 +16% profit 848 1,365 Adjusted profit 398 410 641 656 - 3% before tax 624 1,005 Adjusted profit 293 303 472 485 - 3% attributable 1,006 1,620 Adjusted operating 160 278 258 445 - 43% cash flow 3,229 5,296 Net borrowings 3,296 530 5,076 880 21.7% 21.7% Operating margin 20.5% 21.5% 20.5% 21.5% 102% 102% Operating cash flow 32% 63% 32% 63% conversion 7 7 Interest cover (times) 5 16 5 16 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 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. The percentage change at constant currencies refers to the movements at constant exchange rates, using 2001 full year average rates. PARENT COMPANIES Reed Elsevier PLC Year Six months ended 30 June ended 31 December 2001 2002 2001 Change Â£m Â£m Â£m % 330 Adjusted profit attributable 155 160 - 3% 26.1p Adjusted earnings per share 12.3p 12.7p - 3% 10.5p Dividend per share 3.2p 3.1p +3% REED ELSEVIER NV Year Six months ended 30 June ended 31 December 2001 2002 2001 Change â‚¬m â‚¬m â‚¬m % 503 Adjusted profit attributable 236 243 - 3% â‚¬0.64 Adjusted earnings per share â‚¬0.30 â‚¬0.31 - 3% â‚¬0.30 Dividend per share â‚¬0.09 â‚¬0.09 - 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. Report of the Chairman and the Chief Executive Officer The first half of 2002 saw continued good progress across our businesses despite the challenging economic environment. Growth momentum was maintained in our Science and Legal businesses, whilst our Business division suffered, as expected, from depressed advertising markets and comparison with a more buoyant prior year first half. The Harcourt Education and STM businesses acquired last year are performing well and, with sales and profits seasonally weighted to the second half, we are confident that they will have a good outturn for the year. We remain firmly on track to deliver on our key financial targets of above market revenue growth and double digit adjusted earnings per share growth at constant exchange rates for 2002 and beyond. FINANCIAL RESULTS In the six months to 30 June 2002, revenues were up 21% to Â£2,467m/22% to â‚¬3,972m. This includes the contribution of the Harcourt Education and STM businesses acquired in July last year. Adjusted pre-tax profits were 3% lower at Â£398m/2% lower at â‚¬641m, primarily due to comparison against a strong first half in 2001 in the Business division and dilution from portfolio changes. This is in line with the statements made in our Trading Update last December and reiterated most recently at the Annual General Meetings in April. Adjusted figures are stated before amortisation of goodwill and intangible assets and exceptional items. Underlying revenues, including the Harcourt acquired businesses on a proforma basis, were 1% lower, held back by the 9% underlying decline in the Business division and the second half weighting of the Harcourt Education and Medical publishing. Underlying adjusted operating profits were 3% ahead, with margins held in the Business division and improved in the other three divisions through tight cost control and Harcourt integration benefits. Overall adjusted operating margin at 20.5% was 1 percentage point lower than in the prior first half due to the inclusion of the Harcourt businesses which have lower margins in the first half than in the second due to the seasonality of the business. The Science & Medical business continues to perform well and is on course for another good year. Revenues and adjusted operating profits were up 64% and 43% respectively at constant exchange rates, or 5% and 10% before taking into account the Harcourt STM businesses and other small acquisitions and disposals. Subscription renewals are strong and there is an increasing shift to electronic only sales; usage continues to grow significantly. The integration of the Harcourt STM businesses has gone well particularly in publishing and production, with profits from these businesses up 9% on 1% higher revenues on a proforma basis. The 2002 medical publishing programme should accelerate revenue growth in the important second half. This together with a catch up in journal phasing and growing integration benefits should ensure a strong performance for the year for the Science & Medical business. The Legal business has continued the positive performance seen last year, with revenue and adjusted operating profit growth of 5% and 4% respectively at constant exchange rates, or 4% and 6% before acquisitions and disposals. The US business is performing satisfactorily with 5% underlying revenue growth in North American Legal Markets and 4% in Corporate and Federal Markets with particularly strong sales in the risk solutions area. We estimate this to be ahead of the market. Outside the US, with the exception of weaker results in Latin America, the businesses gave a solid performance. The second half should see a stronger performance for the Legal business with continued revenue momentum and margin improvements in the US driven by increasing cost efficiency. The Education business has had a successful first half performing strongly in US state textbook adoptions and with strong sales in non-adoption states and in the backlist in Elementary Schools. This performance is not fully reflected in the first half figures since the sales, profits and cashflows of the US K-12 Schools business are significantly skewed to the second half, with most school purchasing patterns aligned to the start of the academic year. Underlying revenues for the Education division (including the Harcourt businesses on a proforma basis) were up 1% with underlying profits 7% ahead. Based on the order outlook and shipments, we are confident of a satisfactory year of growth outperforming a somewhat dull market which this year sees a trough in the state adoption cycle. The Testing business saw underlying proforma sales growth of 14% benefiting from a strong market and new contracts. The former Reed Educational & Professional Publishing businesses saw revenues 2% lower in the less important first half, due principally to lower UK primary schools sales against a prior half of more significant curriculum change. In the Business division, advertising markets remain difficult with no marked deterioration since the beginning of the year and no real signs of a recovery. Against a strong first half in 2001 when the impact of the economic downturn was limited, underlying revenues and operating profits were both down 9%. Whilst the magazine and information publishing businesses have seen underlying revenue decline of 12%, the Exhibitions business has proved much more resilient despite the economic environment with underlying revenues only marginally lower. Overall performance is significantly ahead of our markets and reflects our continued focus on improving market share, maintaining yields and protecting margins through targeted cost savings. The second half will have a much less demanding revenue comparison and will see the full benefit of the cost actions taken. Total reported revenues were down 20% and operating profits down 17% at constant exchange rates reflecting disposals in the second half of 2001, principally of the OAG and US travel publishing businesses. Disposals and acquisitions, other than Harcourt, reduced adjusted operating profits and pre-tax profits when compared with the prior first half by 6% and 7% respectively, principally due to the lost contribution from the travel publishing businesses and the electronic development losses at the Courtlink and Classroom Connect acquisitions. This dilution is predominantly a first half effect due to the timing of the portfolio changes. The contribution of the acquired Harcourt businesses, after financing costs, was neutral to first half adjusted pre-tax profits. Exchange rate movements in the first half had little impact on the average rates used for translation. If current exchange rates were to prevail throughout the second half, there would be a small adverse translation effect on the adjusted earnings reported in both sterling and euros. The reported profit before tax including exceptional items and the amortisation of goodwill and intangible assets, was Â£100m/â‚¬161m, which compares with Â£182m/ â‚¬291m in the 2001 first half. The more sizeable decrease than in the adjusted figures reflects the exceptional integration costs and goodwill and intangible asset amortisation of the acquired Harcourt businesses. The reported attributable profit of Â£97m/â‚¬156m increased against a reported attributable profit of Â£71m/â‚¬114m in the first half of 2001 and includes exceptional prior year tax credits. PROGRESS ON STRATEGY It is now two and a half years since we laid out our strategy for growth. We have continuously delivered against the milestones we set ourselves and it is a testament to the transformation of the business that we are firmly on track to meet our key financial growth targets despite the global economic slowdown. The major effort in reshaping and focusing the business is behind us. Last year's acquisition of the Harcourt Education and STM businesses gave us the scale and breadth we wanted in education and medical publishing. This and our other acquisitions and the disposals programme have positioned the portfolio well: four core businesses in attractive growth markets; leading global positions in each; strong subscriptions revenues and reduced advertising exposure; and strong cashflow dynamics. We have also significantly upgraded our organisational effectiveness. The organisation is now much more focused with clear responsibilities and accountability. We have in place across our businesses strong management teams and continue to build the depth of talent. A wide range of initiatives to strengthen organisational development further are being implemented. The integration of the Harcourt businesses has gone well; we could not have hoped for greater management cohesion and alignment. The major step up in investment in product, sales and marketing is now embedded across our business and is showing very positive results in growing our revenues ahead of our markets. The ScienceDirect web service is the global leader. Our LexisNexis online services have been dramatically upgraded and the building of a global delivery platform will deliver consistent competitive advantage. We are now leveraging our technology skills and experience in the Harcourt businesses through the development of our e-learning strategy and in electronic information solutions in Health Sciences. A more focused approach to the medical print publishing programme will also start to yield benefits this year. Investment levels in product, sales and marketing will be maintained this year and, together with the stepped up investment in the acquired Harcourt businesses, will approach Â£300m/â‚¬480m compared with Â£80m/â‚¬120m in 1999. Our focus on internet enabled product has accelerated our market success and internet revenues should meet our target of Â£1bn/â‚¬1.6bn this year. In the sales area, we have recently completed a comprehensive review of sales effectiveness across our businesses and we expect the actions arising to further improve performance. We also continue to build our marketing strength through investment in people, market research and promotion. Cost savings continue to be a major focus across the business, and particularly in the Business division where the protracted difficult economic conditions have necessitated further restructuring. We have delivered over Â£250m/â‚¬375m of annual cost savings against the original target of Â£170m/â‚¬270m we set ourselves two years ago, before taking into account the Harcourt integration benefits. Our US$70m cost synergies target for the Harcourt acquisition will be exceeded, with the greater than expected savings in the Harcourt Education operations and back office used in part to fund additional e-learning investment as we finalise our plans. We continue to build our global capabilities particularly in Science & Medical and Legal through content development and global delivery. The acquisition of Harcourt gave us both the scale we sought in Education in the US and positioning across the entire spectrum in Science & Medical. We continue to look for bolt-on acquisitions that accelerate our strategic development; our approach is disciplined and our internal criteria for quality and growth and financial return are clear and demanding. PARENT COMPANY EARNINGS AND DIVIDENDS For the parent companies, Reed Elsevier PLC and Reed Elsevier NV, the adjusted earnings per share at 12.3p and â‚¬0.30 respectively were 3% lower in both reporting currencies and at constant exchange rates. The reported earnings per share, including exceptional items and amortisation of goodwill and intangible assets, was for Reed Elsevier PLC shareholders 3.9p (2001: 2.9p) and for Reed Elsevier NV shareholders â‚¬0.10 (2001: â‚¬0.07). The Reed Elsevier PLC interim dividend is 3.2p, up 3%, and the equalised Reed Elsevier NV interim dividend is flat at â‚¬0.09. The difference in dividend growth rates reflects the impact of the appreciation of the euro against sterling since last year's interim dividend declaration. OUTLOOK In February, we stated that although the overall results for the first half of 2002 would be a little lower than last year, the second half should deliver the expected growth for the year given the less demanding comparison in the Business division and the second half weighting of sales and profit in the Harcourt businesses. We remain firmly of this view, with all four businesses positioned well for the second half despite the continuing tough economic environment. We fully expect to deliver on our key financial targets of above market revenue growth and double digit adjusted earnings per share growth at constant exchange rates. Morris Tabaksblat, Chairman Crispin Davis, Chief Executive Officer Review of operations and financial performance REVIEW OF OPERATIONS Year ended 31 December Six months ended 30 June Six months ended 30 June Change 2001 2001 2002 2001 2002 2001 at constant Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m currencies % Turnover 1,024 1,649 Science & Medical 623 380 1,003 608 +64% 1,330 2,141 Legal 670 642 1,079 1,027 +5% 579 932 Education 449 106 723 170 +325% 1,627 2,620 Business 725 908 1,167 1,453 - 20% 4,560 7,342 Total 2,467 2,036 3,972 3,258 +22% Adjusted operating profit 344 554 Science & Medical 202 142 325 227 +43% 267 430 Legal 122 117 197 187 +4% 132 212 Education 48 18 77 29 +167% 247 398 Business 133 161 214 258 - 17% 990 1,594 Total 505 438 813 701 +16% Unless otherwise indicated, all percentage movements in the commentary refer to constant currency rates, using 2001 full year average rates, and are stated before the amortisation of goodwill and intangible assets and exceptional items. Science & Medical Six months ended Six months ended Change 30 June 30 June 30 June 30 June at constant 2002 2001 2002 2001 currencies Â£m Â£m â‚¬m â‚¬m % Turnover Elsevier Science Science & Technology 375 290 604 464 +29% Health Sciences 248 90 399 144 +175% Total 623 380 1,003 608 +64% Operating profit 202 142 325 227 +43% Operating margin 32.4% 37.4% 32.4% 37.4% - 5.0pts The Science & Medical business has continued to perform well. Revenue and profit growth in the former (pre- Harcourt) Elsevier Science business was driven by strong subscription renewals and the continued success of ScienceDirect. Within the Harcourt STM businesses there is a gathering momentum as the publishing is rationalised and becomes more market focused and the integration savings are realised. Revenues and operating profits increased by 64% and 43% respectively at constant exchange rates, or 5% and 10% excluding the Harcourt STM business acquired in July 2001 and other small acquisitions and disposals. The sales growth of the pre-Harcourt Elsevier Science business was driven by strong subscription renewals and sales of new electronic product, partly offset by more favourable journal phasing in the 2001 first half. A further positive development is the increasing number of customers moving to electronic-only contracts. The former Harcourt STM businesses, which are now managed within the Science & Technology and Health Sciences businesses, saw proforma sales and operating profit growth over the prior first half of 1% and 9% respectively. The second half will see an acceleration in the revenue growth with the new publishing programme in Health Sciences and a recovery of some sales slippage as production was reorganised. Profitability improved as the business was integrated within Elsevier Science, particularly in publishing and production. Operating margins at 32.4% were 5 percentage points lower than the prior first half due to the inclusion of the lower margin Harcourt STM business. Underlying margins improved by 2 percentage points reflecting the good operational gearing in the business and the cost savings from the Harcourt STM integration. ScienceDirect continues to make major progress in its markets, with usage up 50% over a year ago and penetration now 69% of subscription value. Online products, such as subject collections and back files, are also driving new sales and usage. The content on the Harcourt IDEAL online platform has now been successfully migrated to ScienceDirect, offering customers considerably enhanced functionality whilst delivering greater operational efficiency. Within Health Sciences, the online MD Consult service has launched a number of speciality specific modules and ten new information products delivered through handheld devices. Investment in electronically delivered information and solutions in Health Sciences is being stepped up as our plans are developed. We are also making significant investment in our global systems infrastructure to support our long term growth strategies; these include data warehousing and content management, customer relationship management, order fulfilment and production scheduling. As noted in the past, the Harcourt STM business did lose some momentum during the extended regulatory review process prior to our acquisition. The organisation is now refocused around the markets served and reinvigorated under experienced leadership. The publishing plans are well developed and operational efficiency is increasing quickly. The second half will see an acceleration in sales growth for the medical book publishing programme as well as a catch up in journal phasing. Stronger revenue growth together with the increasing integration benefits should ensure another good performance for the Science & Medical business. Legal Six months ended Six months ended Change 30 June 30 June 30 June 30 June at constant 2002 2001 2002 2001 currencies Â£m Â£m â‚¬m â‚¬m % Turnover LexisNexis North America 534 507 860 811 +6% International 136 135 219 216 +3% Total 670 642 1,079 1,027 +5% Operating profit 122 117 197 187 +4% Operating margin 18.2% 18.2% 18.2% 18.2% - The Legal business has continued the positive performance that was seen last year. The US legal business is, we believe, performing ahead of the market, and although the Corporate and Federal Markets are affected by the economic slowdown, this is compensated by growing sales in the risk solutions area. Revenues and operating profits increased by 5% and 4% respectively at constant exchange rates, or 4% and 6% excluding acquisitions. LexisNexis North America saw underlying revenue growth of 5% with continued good progress in the market take up of our upgraded products and new services. Outside the US, International sales growth was 3%, held back by the difficult conditions in Latin America. Operating margins were unchanged at 18.2% in the first half, partly held back by the development losses in Courtlink, the electronic court access and filing company acquired last year. In North American Legal Markets, revenues grew by 5%. Online revenue growth was 8% with strong growth seen particularly in the small law firm market, whereas print and CD sales were broadly static as the market moves online. The Martindale-Hubbell legal directories business also had a good first half with strong growth sales of lawyers home pages in the small law firm market. In Corporate and Federal Markets, the impact of the economic downturn on the corporate market was more than compensated by strong growth in the risk solutions area, to deliver revenue growth of 4%. The migration from the proprietary online systems to the easier to use and more functional web products continues with over 80% of searches now web based. We continue to invest strongly in product enhancements through new content such as annotated state codes, additional online functionalities and customisation, and in the development of our infrastructure, most particularly in the development of our global online delivery platform, new editorial systems and in data management and customer relationship management systems. In July we announced the acquisition of Quicklaw which is the market leader in online legal information in Canada. The LexisNexis International businesses outside North America saw revenues and operating profits up 3% and 4% respectively, or 3% and 2% excluding acquisitions. Solid growth in Europe and Asia Pacific was in part held back by weaker sales in Latin America. The new publishing growth in the significant UK market is phased to the second half and there is continued strong take up of electronic product in the UK and increasingly in France. The second half should see a stronger performance for the Legal business with continued revenue momentum and margin improvements in the US driven by increasing cost efficiency. Education Six months ended Six months ended Change 30 June 30 June 30 June 30 June at constant 2002 2001 2002 2001 currencies Â£m Â£m â‚¬m â‚¬m % Turnover Harcourt Education US Schools & Testing 382 33 615 53 +1058% International 67 73 108 117 - 8% Total 449 106 723 170 +325% Operating profit 48 18 77 29 +167% Operating margin 10.7% 17.0% 10.7% 17.0% - 6.3pts The Education business has had a successful first half performing well in US state textbook adoptions, and with strong sales growth in non-adoption states and in the backlist in Elementary Schools. This positions the business well for the important second half when the majority of schools purchase learning materials. The US Testing business also performed well. A first half contribution of the Harcourt Education and Testing businesses acquired in July 2001 drove the significant increase in revenues and operating profits for the division. The inclusion of Harcourt did however significantly reduce the first half operating margin since the majority of selling expenses in the US are incurred in the first half of the year whereas the majority of sales are in the second half. On a proforma basis, underlying revenue growth for the division over the prior year first half was 1% whereas operating profits were 7% ahead. The Harcourt US K-12 Schools publishing business has had a strong start to the year although this is not readily apparent from the half year figures, because of the seasonality of the market and the timing of when individual states call for product in the peak June-September sales season. Revenues were 3% lower and operating profits up 3%. In addition to the strong Elementary sales in open territories and the backlist, Harcourt has captured the highest overall market share in 2002 state adoption revenues, coming No 1 in the Elementary market and No 2 in Secondary. Particular successes in the Elementary market were achieved in Florida reading, California maths, Georgia science and Tennessee social studies. In the Secondary market, the literature and language arts programmes maintained their leading positions and Harcourt achieved second place in secondary science. The adoptions market this year is, as expected, significantly lower than in 2001 due to the cycling of major state adoptions across years, and we expect the overall K-12 market growth for basal and supplemental product in 2002 to be modest. The Harcourt business is however firmly on track to outperform the market and this is supported by current order outlook and shipments. Underlying margins are also improving through cost synergies on integration of the business within Reed Elsevier and a systematic focus on efficiency across the supply chain and overhead structures. These savings are greater than had been anticipated, and will in part fund the step up in e-learning investment as our plans are developed. The Harcourt Testing business saw underlying proforma revenue growth of 14% driven by a strong market and new state testing contracts in Arizona, Nevada and Oklahoma. Operating margins improved against a prior first half that saw significant process inefficiencies during relocation of the business into new facilities. We were disappointed not to win the Californian state testing contract renewal. This will hold back 2003 reported revenue growth but, given the lower margin on the contract, should have limited impact on planned profit growth. Whilst individual states are facing significant overall budget pressures, progress in academic achievement remains a high priority and funding for educational text books and materials continues to grow. The increases in federal funding for education and testing have yet to have a significant impact on the market but are expected to create positive momentum over the next few years. The Harcourt Education International (formerly Reed Educational & Professional Publishing) business saw underlying revenues 2% lower, excluding acquisitions and the transfer of Butterworth-Heinemann to Elsevier Science, due principally to lower UK primary sales against a prior first half of more significant curriculum change. The business should see good growth in the much more important second half, particularly in the UK Secondary schools market where there is significant new publishing. Business Six months ended Six months ended Change 30 June 30 June 30 June 30 June at constant 2002 2001 2002 2001 currencies Â£m Â£m â‚¬m â‚¬m % Turnover Reed Business Information US 235 339 378 542 - 31% UK 114 134 184 214 - 14% Continental Europe 128 138 206 221 - 7% Reed Exhibitions 236 251 380 402 - 5% Other 12 46 19 74 Total 725 908 1,167 1,453 - 20% Operating profit 133 161 214 258 - 17% Operating margin 18.3% 17.7% 18.3% 17.7% +0.6pts The Business division continues to face difficult advertising markets with no real signs of recovery. Revenues are lower against a more buoyant 2001 first half, but the division continues to significantly outperform the market through managing yields and focus on building market share. Underlying margins have been held despite the revenue decline through continued action to reduce costs. Underlying revenues and operating profits for the division were both down 9%, before taking account of acquisitions and disposals. The sale of the travel publishing businesses and other non-core businesses in 2001 resulted in reported revenues and operating profits down 20% and 17% respectively at constant exchange rates. Underlying operating margins have been protected by the significant cost actions taken last year at the onset of the global economic slowdown and the further restructuring necessary in the first half due to the protracted conditions. The overall margin improved slightly due to the portfolio changes. In the US, Reed Business Information saw revenues, excluding disposals, 16% lower than in the much stronger first half in 2001. Advertising markets remained at depressed levels with no signs of any imminent recovery. The Electronics and Manufacturing sectors have been worst affected by the downturn whilst the Construction business has seen modest growth reflecting the expansion of its subscription based data services. The significant cost actions taken last year and in early 2002 are reflected in an improved margin, despite the lower revenues, with underlying operating profits down 5%. Spending on product quality and sales and marketing initiatives has been increased to drive continued market share improvement and yield maintenance. In the UK, Reed Business Information revenues, excluding disposals, were 13% lower with significant reductions in display and recruitment advertising, particularly in the Technology and Air Transport sectors. The Agriculture titles have recovered from the low point last year during the foot and mouth crisis and the Social Services sector continues to perform strongly. Cost actions taken could not in the first half offset the revenue loss, particularly of high margin recruitment revenues, and operating profits were 28% lower. These actions will however benefit margins in the second half. In Continental Europe, Reed Business Information saw revenues, excluding acquisitions and disposals, down 4% and operating profits 13% lower. Although advertising markets have been significantly affected by the economic conditions, subscription and circulation revenues, accounting for nearly half the revenue, have held up well. Management titles and Training serving the SME market in the Netherlands, Marketing titles in France and the pan European Electronics titles based in Belgium have suffered particularly, whereas the Hospitality, Regulatory and HR sectors in the Netherlands continue to perform well. Cost actions taken are expected to have a more significant benefit to margin in the second half. At Reed Exhibitions, underlying revenues were 2% lower than the prior first half, excluding acquisitions and disposals. Underlying operating profits were 1% lower. This robust performance, which was seen across the US, Europe and Asia Pacific regions, in such difficult economic conditions, reflects the market leading positions of our shows as well as investment in sales and marketing and tight cost control. Although no recovery in advertising markets is anticipated, the Business division will have a much less demanding revenue comparison in the second half and will see the full benefit of cost actions taken. REVIEW OF FINANCIAL PERFORMANCE Profit and Loss The reported profit before tax for the Reed Elsevier combined businesses, including exceptional items and the FRS10 amortisation of goodwill and intangible assets, was Â£100m/â‚¬161m, which compares with Â£182m/â‚¬291m in the 2001 first half. The decrease reflects the exceptional integration costs and goodwill and intangible asset amortisation of the acquired Harcourt businesses and dilution from other 2001 acquisitions and disposals. The reported attributable profit after tax of Â£97m/â‚¬156m increased against a reported attributable profit of Â£71m/â‚¬114m in the first half of 2001 and includes exceptional prior year tax credits. Turnover increased by 21% expressed in sterling to Â£2,467m, and by 22% expressed in euros to â‚¬3,972m. This included a Â£572m/â‚¬921m contribution in the first half from the Harcourt businesses acquired on 12 July 2001. Excluding Harcourt and the impact of other acquisitions and the disposals programme substantially completed in 2001, revenues were 2% lower at constant exchange rates, driven by a 9% decline in underlying revenues in the Business division. On a proforma basis, the Harcourt businesses saw revenue growth of 2% at constant exchange rates over the prior year first half. Growth in the Harcourt businesses is significantly weighted to the second half due to the timing of shipments to US schools ahead of the start of the academic year and the second half weighting of the medical publishing programme. Adjusted operating profits, excluding exceptional items and the amortisation of goodwill and intangible assets, were up 15% expressed in sterling to Â£505m, and up 16% expressed in euros at â‚¬813m. This included a Â£91m/â‚¬147m contribution in the first half from the acquired Harcourt businesses. Underlying adjusted operating profits, excluding all acquisitions and disposals, were up 1%, held back by a 9% decline in the Business division. On a proforma basis the Harcourt businesses saw underlying profit growth of 14%. Operating margin at 20.5% was 1.0 percentage points lower than in the prior half due to the inclusion of the Harcourt businesses which have a significantly lower margin in the first half than in the second half due to the much earlier timing of selling and other expenses when compared to sales. The amortisation charge for goodwill and intangible assets amounted to Â£276m/ â‚¬444m, up Â£47m/â‚¬77m on the comparative period, including Â£36m/â‚¬58m in respect of the Harcourt acquisition made in the second half of 2001. Exceptional items showed a pre-tax charge of Â£22m/â‚¬36m, comprising Â£22m/â‚¬36m of Harcourt and other acquisition integration and related costs, Â£9m/â‚¬14m in respect of restructuring actions in response to the global economic slowdown, less a Â£9m/â‚¬14m net gain on disposals including a Â£21m/â‚¬34m gain on sale of investments acquired with Harcourt. After a tax credit of Â£95m/â‚¬153m arising mostly in respect of prior year disposals, exceptional items showed a post-tax gain of Â£73m/â‚¬117m. This compares with a net post-tax charge on exceptional items of Â£3m/â‚¬4m in the first half of 2001. Net interest expense, at Â£107m/â‚¬172m, was Â£79m/â‚¬127m higher than in the corresponding first half, including an Â£89m/â‚¬143m financing cost of the Harcourt acquisition in part offset by the benefit of the 2001 free cash flow and lower interest rates. Adjusted profit before tax at Â£398m/â‚¬641m was 3% lower than in the 2001 first half expressed in sterling, 2% lower expressed in euros, or 3% lower at constant exchange rates. Dilution from portfolio changes was 7% in the first half reflecting the loss of contribution from the travel publishing and other businesses sold in 2001 and the development losses at Classroom Connect and Courtlink. The effective tax rate on adjusted earnings was little changed at 26%. The adjusted profit attributable to shareholders of Â£293m/â‚¬472m compared to Â£303m/ â‚¬485m in the first half of 2001, 3% lower at constant exchange rates. Cash flows and debt Adjusted operating cash flow, before exceptional items, was Â£160m/â‚¬258m, Â£118m/ â‚¬187m lower than the prior first half, representing 32% (2001: 63%) of adjusted operating profits. The Harcourt Education businesses have a significant cash outflow in the first half of each year as product is produced and expenses incurred ahead of the peak sales period in June through September, and after which there is substantial cash inflow in the second half. This greatly exaggerates Reed Elsevier's pre-Harcourt cash flow seasonality whereby the substantial majority of annual operating cash flows normally arises in the second half of the year due to the phasing of subscription and other advance receipts and working capital. Excluding the Harcourt cash flows, the conversion of adjusted operating profits into cash flow was 65% compared to the 63% for the first half of 2001. Free cash flow - after interest, taxation and dividends but before acquisition spend and exceptional receipts and payments - was an outflow of Â£226m/â‚¬364m (2001: Â£19m/â‚¬30m inflow), reflecting the seasonal cash outflow of the Harcourt businesses and their acquisition financing cost. Due to the phasing of operating cash flows and dividend payments, the free cash flow for the year arises in the second half. Exceptional net inflows of Â£76m/â‚¬123m include Â£113m/â‚¬182m proceeds from the sale of investments acquired on the acquisition of Harcourt General, Inc and Â£16m/ â‚¬26m of reduced tax payments, less exceptional acquisition related and restructuring payments of Â£53m/â‚¬85m. Spend on acquisitions was Â£88m/â‚¬142m, including Â£65m/â‚¬105m of payments in respect of prior year acquisitions and Harcourt General change of control and other non operating liabilities assumed on acquisition. Â£23m/â‚¬37m was capitalised as acquired goodwill and intangible assets. Net borrowings at 30 June 2002 were Â£3,296m/â‚¬5,076m, an increase in sterling of Â£67m/decrease in euros of â‚¬220m since 31 December 2001, reflecting acquisition spend and the free cash outflow, less net exceptional receipts, together with exchange translation effects. PARENT COMPANIES For the parent companies, Reed Elsevier PLC and Reed Elsevier NV, adjusted earnings per share, excluding exceptional items and the amortisation of goodwill and intangible assets, were down 3% to 12.3p (2001: 12.7p) and down 3% to â‚¬0.30 (2001: â‚¬0.31) respectively, at both reported and constant rates of exchange. The reported earnings per share for Reed Elsevier PLC shareholders was 3.9p (2001: 2.9p) and for Reed Elsevier NV shareholders â‚¬0.10 (2001: â‚¬0.07). The Reed Elsevier PLC interim dividend is 3.2p per share, an increase of 3%, and the Reed Elsevier NV interim dividend under the equalisation arrangements is unchanged at â‚¬0.09 per share. FORWARD LOOKING STATEMENTS The Interim Statement contains forward-looking statements within the meaning of Section 27A of the 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 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, customers' acceptance of its products and services, the actions of competitors, changes in law and legal interpretation affecting Reed Elsevier's intellectual property rights, and the impact of technological change. Combined financial information Combined profit and loss account For the six months ended 30 June 2002 Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m Turnover 4,627 7,449 Including share of 2,512 2,067 4,044 3,308 turnover of joint ventures (67) (107) Less: share of turnover (45) (31) (72) (50) of joint ventures 4,560 7,342 2,467 2,036 3,972 3,258 4,560 7,342 Continuing operations 2,464 2,036 3,967 3,258 before acquisitions - - Acquisitions 3 - 5 - (1,611) (2,594) Cost of sales (906) (735) (1,459) (1,176) 2,949 4,748 Gross profit 1,561 1,301 2,513 2,082 (2,570) (4,138) Operating expenses (1,378) (1,115) (2,218) (1,784) (1,974) (3,178) Before amortisation and (1,073) (874) (1,727) (1,398) exceptional items (498) (802) Amortisation of (274) (227) (441) (364) goodwill and intangible assets (98) (158) Exceptional items (31) (14) (50) (22) 379 610 Operating profit 183 186 295 298 (before joint ventures) 379 610 Continuing operations 185 186 298 298 before acquisitions - - Acquisitions (2) - (3) - 12 20 Share of operating 15 9 24 14 profit of joint ventures 391 630 Operating profit 198 195 319 312 including joint ventures Non operating exceptional items 26 41 Net profit on sale of 9 15 14 24 fixed asset investments and businesses 417 671 Profit on ordinary 207 210 333 336 activities before interest (142) (229) Net interest expense (107) (28) (172) (45) 275 442 Profit on ordinary 100 182 161 291 activities before taxation (148) (238) Tax on profit on (3) (111) (5) (177) ordinary activities (229) (368) Before exceptional items (98) (107) (158) (171) 81 130 Exceptional items 95 (4) 153 (6) 127 204 Profit on ordinary 97 71 156 114 activities after taxation (1) (2) Minority interests - - - - 126 202 Profit attributable to 97 71 156 114 parent companies' shareholders (269) (432) Equity dividends paid (82) (78) (132) (125) and proposed (143) (230) Retained profit/(loss) 15 (7) 24 (11) taken to combined reserves Adjusted figures Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 990 1,594 Adjusted operating profit 505 438 813 701 848 1,365 Adjusted profit before tax 398 410 641 656 624 1,005 Adjusted profit 293 303 472 485 attributable to parent companies' shareholders Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures. Combined cash flow statement For the six months ended 30 June 2002 Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 1,163 1,873 Net cash inflow from 245 357 395 571 operating activities before exceptional items (97) (156) Payments relating to (53) (43) (85) (69) exceptional items charged to operating profit 1,066 1,717 Net cash inflow from 192 314 310 502 operating activities 12 19 Dividends received from joint 5 6 8 10 ventures 113 181 Interest and similar income 26 45 42 72 received (227) (365) Interest and similar charges (134) (75) (216) (120) paid (114) (184) Returns on investments and (108) (30) (174) (48) servicing of finance (178) (287) Taxation before exceptional (88) (54) (142) (87) items 141 227 Exceptional items 16 1 26 2 (37) (60) Taxation (72) (53) (116) (85) (175) (282) Purchase of tangible fixed (94) (86) (151) (138) assets (59) (95) Purchase of fixed asset (2) - (3) - investments 6 10 Proceeds from sale of 4 1 6 2 tangible fixed assets - - Exceptional proceeds from 113 - 182 - sale of fixed asset investments (228) (367) Capital expenditure and 21 (85) 34 (136) financial investment (2,236) (3,599) Acquisitions (88) (60) (142) (96) 96 154 Exceptional net proceeds from - 78 - 125 sale of businesses (2,140) (3,445) Acquisitions and disposals (88) 18 (142) 29 (255) (411) Equity dividends paid to (190) (175) (306) (280) shareholders of the parent companies (1,696) (2,731) Cash outflow before changes (240) (5) (386) (8) in short term investments and financing 1,169 1,882 (Increase)/decrease in short (25) 236 (40) 378 term investments 537 865 Financing 269 (201) 432 (322) 10 16 Increase in cash 4 30 6 48 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 Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 1,006 1,620 Adjusted operating cash 160 278 258 445 flow 102% 102% Adjusted operating cash 32% 63% 32% 63% flow conversion 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. Combined statement of total recognised gains and losses For the six months ended 30 June 2002 Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 126 202 Profit attributable to 97 71 156 114 parent companies' shareholders (3) 83 Exchange translation (97) 37 (443) 213 differences 123 285 Total recognised gains - 108 (287) 327 and losses for the period Combined shareholders' funds reconciliation For the six months ended 30 June 2002 Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 126 202 Profit attributable to parent 97 71 156 114 companies' shareholders (269) (432) Equity dividends paid and (82) (78) (132) (125) proposed 22 35 Issue of ordinary shares, net 24 10 38 16 of expenses (3) 83 Exchange translation (97) 37 (443) 213 differences (124) (112) Net (decrease)/increase in (58) 40 (381) 218 combined shareholders' funds 3,041 4,896 Combined shareholders' funds 2,917 3,041 4,784 4,896 at the beginning of the period 2,917 4,784 Combined shareholders' funds 2,859 3,081 4,403 5,114 at the end of the period Combined balance sheet As at 30 June 2002 As at 31 December As at 30 June As at 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 6,723 11,026 Goodwill and intangible assets 6,210 4,059 9,563 6,738 730 1,197 Tangible fixed assets and 657 605 1,012 1,004 investments 7,453 12,223 Fixed assets 6,867 4,664 10,575 7,742 488 801 Inventories and pre-publication 558 148 859 246 costs 999 1,638 Debtors - amounts falling due 1,048 818 1,615 1,357 within one year 463 759 Debtors - amounts falling due 428 211 659 350 after more than one year 435 713 Cash and short term investments 473 1,369 728 2,273 2,385 3,911 Current assets 2,507 2,546 3,861 4,226 (4,134) (6,780) Creditors: amounts falling due (4,002) (3,021) (6,163) (5,015) within one year (1,749) (2,869) Net current liabilities (1,495) (475) (2,302) (789) 5,704 9,354 Total assets less current 5,372 4,189 8,273 6,953 liabilities (2,502) (4,103) Creditors: amounts falling due (2,300) (899) (3,542) (1,492) after more than one year (280) (459) Provisions for liabilities and (207) (202) (319) (335) charges (5) (8) Minority interests (6) (7) (9) (12) 2,917 4,784 Net assets 2,859 3,081 4,403 5,114 3,229 5,296 Net borrowings 3,296 530 5,076 880 Approved by the Boards of Reed Elsevier PLC and Reed Elsevier NV, 7 August 2002. Notes to the combined financial information 1 Basis of preparation The Reed Elsevier combined financial information (the combined financial information) represents the combined interests of the Reed Elsevier PLC and Reed Elsevier NV shareholders and encompasses the businesses of Reed Elsevier Group plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures, together with the two parent companies, Reed Elsevier PLC and Reed Elsevier NV (the combined businesses). The combined financial information, which has been prepared on the basis of the accounting policies set out in the Reed Elsevier Annual Reports & Financial Statements 2001, is unaudited but has been reviewed by the auditors and their report to the Boards of Reed Elsevier PLC and Reed Elsevier NV is set out on page 24. The financial information for the year ended 31 December 2001 has been abridged from the audited combined financial statements for that year. 2 Exchange translation rates In preparing the combined financial information the following exchange rates have been applied: Year ended 31 December 2001 Profit and loss Balance sheet Profit Balance 30 June 30 June 30 June 30 June and loss sheet 2002 2001 2002 2001 1.61 1.64 Euro to sterling 1.61 1.60 1.54 1.66 1.44 1.45 US dollars to sterling 1.44 1.44 1.53 1.41 1.12 1.13 Euro to US dollars 1.12 1.11 1.01 1.18 0.89 0.88 US dollars to euro 0.89 0.90 0.99 0.85 3 Segment analysis Turnover Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m Business segment 1,024 1,649 Science & Medical 623 380 1,003 608 1,330 2,141 Legal 670 642 1,079 1,027 579 932 Education 449 106 723 170 1,627 2,620 Business 725 908 1,167 1,453 4,560 7,342 Total 2,467 2,036 3,972 3,258 Geographical origin 2,695 4,339 North America 1,568 1,113 2,524 1,781 795 1,280 United Kingdom 369 388 594 621 416 670 The Netherlands 208 218 335 349 445 716 Rest of Europe 225 217 362 347 209 337 Rest of world 97 100 157 160 4,560 7,342 Total 2,467 2,036 3,972 3,258 Geographical market 2,765 4,452 North America 1,569 1,165 2,526 1,864 557 897 United Kingdom 266 285 428 456 224 361 The Netherlands 102 113 164 181 587 945 Rest of Europe 313 269 504 430 427 687 Rest of world 217 204 350 327 4,560 7,342 Total 2,467 2,036 3,972 3,258 Adjusted operating profit (excluding exceptional items and amortisation) Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m Business segment 344 554 Science & Medical 202 142 325 227 267 430 Legal 122 117 197 187 132 212 Education 48 18 77 29 247 398 Business 133 161 214 258 990 1,594 Total 505 438 813 701 Geographical origin 482 776 North America 251 188 404 301 207 333 United Kingdom 89 99 143 158 163 262 The Netherlands 89 81 143 130 108 174 Rest of Europe 58 59 93 94 30 49 Rest of world 18 11 30 18 990 1,594 Total 505 438 813 701 Operating profit (including exceptional items and amortisation) Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m Business segment 210 338 Science & Medical 130 86 209 138 59 95 Legal 17 27 27 43 95 153 Education 7 7 11 11 27 44 Business 44 75 72 120 391 630 Total 198 195 319 312 Geographical origin 47 76 North America 5 6 8 10 154 248 United Kingdom 65 71 105 114 129 208 The Netherlands 81 76 131 121 51 82 Rest of Europe 33 36 53 57 10 16 Rest of world 14 6 22 10 391 630 Total 198 195 319 312 4 Exceptional items Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m (35) (56) Reorganisation costs (9) - (14) - (63) (102) Acquisition related costs (22) (14) (36) (22) (98) (158) Charged to operating profit (31) (14) (50) (22) 26 41 Net profit on sale of fixed 9 15 14 24 asset investments and businesses (72) (117) Exceptional (charge)/credit (22) 1 (36) 2 before tax 81 130 Net tax credit/(charge) 95 (4) 153 (6) 9 13 Total exceptional 73 (3) 117 (4) credit/(charge) The net profit on sale of fixed asset investments and businesses comprises a Â£21m/â‚¬34m profit on sale of investments acquired on the acquisition of Harcourt General, Inc, less a Â£12m/â‚¬20m loss on other fixed asset investments. The exceptional tax credit arises principally in respect of prior year disposals. 5 Combined cash flow statement Reconciliation of operating profit to net cash inflow from operating activities Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 379 610 Operating profit (before 183 186 295 298 joint ventures) 98 158 Exceptional charges to 31 14 50 22 operating profit 477 768 Operating profit before 214 200 345 320 exceptional items 498 802 Amortisation of goodwill 274 227 441 364 and intangible assets 132 213 Depreciation 66 62 106 98 630 1,015 Total non cash items 340 289 547 462 56 90 Movement in working (309) (132) (497) (211) capital 1,163 1,873 Net cash inflow from 245 357 395 571 operating activities before exceptional items (97) (156) Payments relating to (53) (43) (85) (69) exceptional items charged to operating profit 1,066 1,717 Net cash inflow from 192 314 310 502 operating activities Reconciliation of net borrowings Year ended 31 December Short term Six months ended 30 June 2001 Cash investments Borrowings 2002 2001 Â£m Â£m Â£m Â£m Â£m Â£m (433) Net borrowings at the beginning of 96 339 (3,664) (3,229) (433) the period 10 Increase in cash 4 - - 4 30 (1,169) Increase/(decrease) in short term - 25 - 25 (236) investments (526) (Increase)/decrease in borrowings - - (245) (245) 211 (1,685) Change in net borrowings resulting 4 25 (245) (216) 5 from cash flows (1,042) Borrowings in acquired businesses - - - - - (3) Inception of finance leases - - (9) (9) (2) (66) Exchange translation differences - 9 149 158 (100) (3,229) Net borrowings at the end of the 100 373 (3,769) (3,296) (530) period Year ended 31 December Short term Six months ended 30 June 2001 Cash investments Borrowings 2002 2001 â‚¬m â‚¬m â‚¬m â‚¬m â‚¬m â‚¬m (697) Net borrowings at the beginning of 157 556 (6,009) (5,296) (697) the period 16 Increase in cash 6 - - 6 48 (1,882) Increase/(decrease) in short term - 40 - 40 (378) investments (847) (Increase)/decrease in borrowings - - (394) (394) 338 (2,713) Change in net borrowings resulting 6 40 (394) (348) 8 from cash flows (1,677) Borrowings in acquired businesses - - - - - (5) Inception of finance leases - - (14) (14) (3) (204) Exchange translation differences (9) (22) 613 582 (188) (5,296) Net borrowings at the end of the 154 574 (5,804) (5,076) (880) period 6 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: Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 391 630 Operating profit including 198 195 319 312 joint ventures Adjustments: 501 806 Amortisation of goodwill 276 229 444 367 and intangible assets 35 56 Reorganisation costs 9 - 14 - 63 102 Acquisition related costs 22 14 36 22 990 1,594 Adjusted operating profit 505 438 813 701 275 442 Profit before tax 100 182 161 291 Adjustments: 501 806 Amortisation of goodwill 276 229 444 367 and intangible assets 35 56 Reorganisation costs 9 - 14 - 63 102 Acquisition related costs 22 14 36 22 (26) (41) Net profit on sale of (9) (15) (14) (24) fixed asset investments and businesses 848 1,365 Adjusted profit before tax 398 410 641 656 126 202 Profit attributable to 97 71 156 114 parent companies' shareholders Adjustments: 507 816 Amortisation of goodwill 269 229 433 367 and intangible assets 3 5 Reorganisation costs 6 - 9 - 33 54 Acquisition related costs 16 13 26 20 (45) (72) Net profit on sale of (95) (10) (152) (16) fixed asset investments and businesses 624 1,005 Adjusted profit 293 303 472 485 attributable to parent companies' shareholders 1,066 1,717 Net cash inflow from 192 314 310 502 operating activities 12 19 Dividends received from 5 6 8 10 joint ventures (175) (282) Purchase of tangible fixed (94) (86) (151) (138) assets 6 10 Proceeds from sale of 4 1 6 2 tangible fixed assets 97 156 Payments in relation to 53 43 85 69 exceptional items charged to operating profit 1,006 1,620 Adjusted operating cash 160 278 258 445 flow 7 Proforma Harcourt figures On 12 July 2001, Reed Elsevier acquired the Scientific, Technical and Medical (STM) business and the K-12 (Kindergarten - 12th grade) Schools Education and Testing business of Harcourt General, Inc. Proforma turnover and adjusted operating profit for the businesses, prepared on the basis of Reed Elsevier's accounting policies and as if the acquisition of Harcourt had taken place on 1 January 2001 (and excluding business acquisitions and transfers since the date of acquisition and Harcourt General, Inc centre costs) are set out below: Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m Turnover 481 774 STM 219 218 353 349 769 1,238 Education and Testing 353 342 568 547 1,250 2,012 572 560 921 896 Adjusted operating profit 107 172 STM 49 45 79 72 153 246 Education and Testing 42 35 68 56 260 418 91 80 147 128 Reed Elsevier PLC Summary financial information Basis of preparation The Reed Elsevier PLC (formerly Reed International P.L.C.) 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. Reed Elsevier PLC's 52.9% economic interest in the net assets of the combined businesses has been shown in the balance sheet as interests in joint ventures, net of the assets and liabilities reported as part of Reed Elsevier PLC and its subsidiary undertakings. The interim figures for the six months ended 30 June 2002 and the comparative amounts to 30 June 2001 are unaudited but have been reviewed by the auditors and their report to the Board of Reed Elsevier PLC is set out on page 24. The financial information for the year ended 31 December 2001 has been abridged from the financial statements for that year, which have been filed with the UK Registrar of Companies and received an unqualified audit report. Consolidated profit and loss account Year ended 31 December Six months ended 30 June 2001 2002 2001 Â£m Â£m Â£m 2,412 Share of turnover of joint ventures 1,305 1,077 (1) Operating loss (before joint ventures) (1) - Share of operating profit of joint ventures 519 Before amortisation and exceptional items 266 230 (317) Amortisation and exceptional items (162) (129) 201 Operating profit including joint ventures 103 101 14 Share of non operating exceptional items of joint ventures 5 8 (75) Net interest (including share of joint ventures) (57) (15) 140 Profit on ordinary activities before taxation 51 94 (79) Tax on profit on ordinary activities (2) (58) (3) UK corporation tax - (3) Share of tax of joint ventures (119) Before exceptional items (52) (53) 43 Exceptional items 50 (2) 61 Profit attributable to ordinary shareholders 49 36 (132) Equity dividends paid and proposed (41) (38) (71) Retained profit/(loss) taken to reserves 8 (2) 4.8p Basic earnings per share 3.9p 2.9p 4.8p Diluted earnings per share 3.9p 2.8p 26.1p Adjusted earnings per share 12.3p 12.7p Adjusted earnings per share is based upon the Reed Elsevier PLC shareholders' 52.9% economic interest in the adjusted profit attributable of the Reed Elsevier combined businesses. Dividends The directors of Reed Elsevier PLC have declared an interim dividend of 3.2p per ordinary share (2001 interim: 3.1p per ordinary share). In 2001 the full year dividend was 10.5p per ordinary share. Consolidated statement of total recognised gains and losses Year ended 31 December Six months ended 30 June 2001 2002 2001 Â£m Â£m Â£m 61 Profit attributable to ordinary shareholders 49 36 (2) Exchange translation differences (51) 20 59 Total recognised gains and losses for the period (2) 56 Consolidated cash flow statement Year Six months ended 30 June ended 31 December 2001 2002 2001 Â£m Â£m Â£m (3) Net cash outflow from operating activities - (2) 127 Dividends received from Reed Elsevier Group plc 94 87 13 Returns on investments and servicing of finance - 12 (3) Taxation (2) (1) (406) Fixed asset investments - (59) (126) Equity dividends paid (94) (87) (398) Cash outflow before changes in short term investments and financing (2) (50) 431 Decrease in short term investments - 63 (33) Financing 2 (13) 10 Issue of ordinary shares 12 6 (43) Increase in net funding balances to Reed Elsevier Group plc group (10) (19) - Change in net cash - - Reconciliation of shareholders' funds Year Six months ended 30 June ended 31 December 2001 2002 2001 Â£m Â£m Â£m 61 Profit attributable to ordinary shareholders 49 36 (132) Equity dividends paid and proposed (41) (38) 10 Issue of ordinary shares, net of expenses 12 6 (2) Exchange translation differences (51) 20 (3) Equalisation adjustments - (3) (66) Net (decrease)/increase in shareholders' funds (31) 21 1,609 Shareholders' funds at the beginning of the period 1,543 1,609 1,543 Shareholders' funds at the end of the period 1,512 1,630 Consolidated balance sheet As at 31 December As at 30 June 2001 2002 2001 Â£m Â£m Â£m 1,128 Fixed asset investment in joint ventures 1,031 818 Current assets 555 Debtors 567 531 - Short term investments - 368 555 567 899 (104) Creditors: amounts falling due within one year (50) (51) 451 Net current assets 517 848 1,579 Total assets less current liabilities 1,548 1,666 (36) Creditors: amounts falling due after more than one year (36) (36) 1,543 Shareholders' funds 1,512 1,630 Approved by the Board of Directors, 7 August 2002. Reed Elsevier NV Summary financial information Basis of preparation The results for the six months ended 30 June 2002 reflect the Reed Elsevier NV (formerly Elsevier NV) shareholders' 50% economic interest in the Reed Elsevier combined businesses, accounted for on an equity basis. The interim figures for the six months ended 30 June 2002 and the comparative amounts to 30 June 2001 are unaudited but have been reviewed by the auditors and their report to the Boards of Reed Elsevier NV is set out on page 24. The financial information for the year ended 31 December 2001 has been abridged from the statutory accounts of Reed Elsevier NV for that year and the auditors have confirmed that their opinion on those accounts was unqualified. Profit and loss account Year Six months ended 30 June ended 31 December 2001 2002 2001 â‚¬m â‚¬m â‚¬m 3,671 Share of turnover of joint ventures 1,986 1,629 (3) Operating loss (before joint ventures) (1) (1) Share of operating profit of joint ventures 800 Before amortisation and exceptional items 408 352 (482) Amortisation and exceptional items (247) (195) 315 Operating profit including joint ventures 160 156 20 Share of non operating exceptional items of joint ventures 7 12 (114) Net interest (including share of joint ventures) (86) (23) 221 Profit on ordinary activities before taxation 81 145 (120) Tax on profit on ordinary activities (3) (88) (184) Before exceptional items (79) (86) 64 Exceptional items 76 (2) 101 Profit attributable to ordinary shareholders 78 57 (221) Equity dividends paid and proposed (66) (64) (120) Retained profit/(loss) taken to reserves 12 (7) â‚¬0.13 Basic earnings per share â‚¬0.10 â‚¬0.07 â‚¬0.13 Diluted earnings per share â‚¬0.10 â‚¬0.07 â‚¬0.64 Adjusted earnings per share â‚¬0.30 â‚¬0.31 Adjusted earnings per share is based upon the Reed Elsevier NV shareholders' 50% economic interest in the adjusted profit attributable of the Reed Elsevier combined businesses. Dividends The directors of Reed Elsevier NV have declared an interim dividend of â‚¬0.09 per ordinary share (2001 interim: â‚¬0.09 per ordinary share). In 2001 the full year dividend was â‚¬0.30 per ordinary share. Cash flow statement Year Six months ended 30 June ended 31 December 2001 2002 2001 â‚¬m â‚¬m â‚¬m (3) Net cash outflow from operating activities (2) (1) 100 Dividends received from joint ventures 100 50 62 Returns on investments and servicing of finance 3 25 17 Taxation - 14 (916) Fixed asset investments - - (204) Equity dividends paid (155) (140) (944) Cash outflow before changes in short term investments and financing (54) (52) 946 (Increase)/decrease in short term investments (54) (34) (2) Financing 108 86 92 Issue of shares, net of expenses 19 88 (1) Net increase in/(repayment of) debenture loans 1 1 (93) Decrease/(increase) in net funding balances to joint ventures 88 (3) - Change in net cash - - Reconciliation of shareholders' funds Year Six months ended 30 June ended 31 December 2001 2002 2001 â‚¬m â‚¬m â‚¬m 101 Profit attributable to ordinary shareholders 78 57 (221) Equity dividends paid and proposed (66) (64) 110 Issue of shares, net of expenses 19 97 42 Exchange translation differences (222) 107 (88) Equalisation adjustments 1 (88) (56) Net (decrease)/increase in shareholders' funds (190) 109 2,448 Shareholders' funds at the beginning of the period 2,392 2,448 2,392 Shareholders' funds at the end of the period 2,202 2,557 Balance sheet As at 31 December As at 30 June 2001 2002 2001 â‚¬m â‚¬m â‚¬m 2,506 Fixed asset investment in joint ventures 2,262 1,684 Current assets 94 Debtors 6 5 25 Short term investments 79 1,005 119 85 1,010 (169) Creditors: amounts falling due within one year (80) (74) (50) Net current assets 5 936 2,456 Total assets less current liabilities 2,267 2,620 (5) Creditors: amounts falling due after more than one year (6) (7) (59) Provisions (59) (56) 2,392 Shareholders' funds 2,202 2,557 Signed by the Boards of Directors, 7 August 2002. Additional information for US investors Summary combined financial information in US dollars Highlights of the Reed Elsevier combined financial information in US dollars are given below. This is a simple translation into US dollars at stated rates of exchange (see note 2 to the combined financial information) and does not represent a restatement under US GAAP. Profit and loss account Year Six months ended 30 June ended 31 December 2001 2002 2001 Change US$m US$m US$m % 6,566 Net sales 3,552 2,932 +21% 1,426 Adjusted operating profit 727 631 +15% 1,221 Adjusted profit before tax 573 590 - 3% 899 Adjusted profit attributable to parent companies' 422 436 - 3% shareholders US$ Adjusted earnings per American Depository Share (ADS) US$ US$ 1.50 Reed Elsevier PLC (Each ADS comprises four ordinary shares) 0.71 0.73 - 3% 1.14 Reed Elsevier NV (Each ADS comprises two ordinary shares) 0.54 0.56 - 4% Cash flow Year Six months ended 30 June ended 31 December 2001 2002 2001 US$m US$m US$m 1,449 Adjusted operating cash flow 230 400 Balance sheet As at 31 December As at 30 June 2001 2002 2001 US$m US$m US$m 9,748 Goodwill and intangible assets 9,501 5,723 1,059 Tangible fixed assets and investments 1,005 853 10,807 Fixed assets 10,506 6,576 708 Inventories and pre-publication costs 854 209 1,448 Debtors - amounts falling due within one year 1,603 1,153 671 Debtors - amounts falling due after more than one year 655 298 631 Cash and short term investments 724 1,930 3,458 Current assets 3,836 3,590 (5,994) Creditors: amounts falling due within one year (6,123) (4,260) (2,536) Net current liabilities (2,287) (670) 8,271 Total assets less current liabilities 8,219 5,906 (3,628) Creditors: amounts falling due after more than one year (3,519) (1,268) (406) Provisions for liabilities and charges (317) (284) (7) Minority interests (9) (10) 4,230 Net assets 4,374 4,344 Summary of the principal differences between UK and Dutch GAAP and US GAAP The combined financial information has been prepared in accordance with UK and Dutch GAAP, which differ in certain significant respects from US GAAP. The principal differences that affect net income and combined shareholders' funds relate to the capitalisation and amortisation of goodwill and other intangible assets, pensions, derivative instruments and related deferred tax effects. Under changes introduced by SFAS142: Goodwill and Other Intangible Assets, goodwill is no longer amortised under US GAAP, effective 1 January 2002. A more complete explanation of the accounting policies used by the Reed Elsevier combined businesses and the differences between UK and Dutch GAAP and US GAAP is set out in the Reed Elsevier Annual Reports & Financial Statements 2001. The effects on net income and combined shareholders' funds of material differences between UK and Dutch GAAP and US GAAP are set out below: Year ended 31 December Six months ended 30 June Six months ended 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 126 202 Net income under UK and 97 71 156 114 Dutch GAAP US GAAP adjustments: (74) (119) Amortisation of goodwill 138 (35) 222 (56) and other intangible assets (43) (69) Deferred taxation (31) 30 (50) 48 46 74 Pensions 28 22 45 35 (15) (24) Stock based compensation (9) - (14) - (56) (90) Derivative instruments 34 27 55 43 (4) (6) Other items - - - - (20) (32) Net income/(loss) under 257 115 414 184 US GAAP As at 31 December As at 30 June As at 30 June 2001 2001 2002 2001 2002 2001 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m 2,917 4,784 Combined shareholders' 2,859 3,081 4,403 5,114 funds under UK and Dutch GAAP US GAAP adjustments: 1,151 1,888 Goodwill and other 1,242 555 1,913 921 intangible assets (860) (1,410) Deferred taxation (856) (158) (1,318) (262) 132 216 Pensions 160 107 246 178 (79) (130) Derivative instruments (42) (70) (65) (116) 36 59 Unrealised gains on 14 - 22 - available for sale investments 190 312 Equity dividends not 82 78 126 129 declared in the period (20) (33) Other items (19) 2 (29) 4 3,467 5,686 Combined shareholders' 3,440 3,595 5,298 5,968 funds under US GAAP Independent review report INDEPENDENT REVIEW REPORT TO THE DIRECTORS OF REED ELSEVIER PLC AND TO THE MEMBERS OF THE SUPERVISORY AND EXECUTIVE BOARDS OF REED ELSEVIER NV Introduction On the instruction of the Boards of Reed Elsevier PLC and Reed Elsevier NV, we have reviewed the combined financial information of Reed Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures (together the combined businesses) for the six months ended 30 June 2002 which comprises the combined profit and loss account, combined cash flow statement, combined statement of total recognised gains and losses, combined shareholders' funds reconciliation, combined balance sheet and the related notes 1 to 7. We have also reviewed the financial information of Reed Elsevier PLC for the six months ended 30 June 2002 which comprises the consolidated profit and loss account, consolidated statement of total recognised gains and losses, consolidated cash flow statement, reconciliation of shareholders' funds, consolidated balance sheet and the related notes, and the financial information of Reed Elsevier NV for the six months ended 30 June 2002 which comprises the profit and loss account, cash flow statement, reconciliation of shareholders' funds, balance sheet and the related notes. We have read the other information contained in the Reed Elsevier Interim Statement and considered whether it contains any apparent misstatement or material inconsistencies with the financial information. Directors' responsibilities The Reed Elsevier Interim Statement, including the financial information contained therein, is the responsibility of, and has been approved by, the directors of Reed Elsevier PLC and Reed Elsevier NV. The directors of Reed Elsevier PLC and Reed Elsevier NV are responsible for preparing the Reed Elsevier Interim Statement in accordance with the Listing Rules of the UK Financial Services Authority and Generally Accepted Accounting Principles in the UK and the Netherlands which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the UK Auditing Practices Board. A review consists principally of making enquiries of the management of the Reed Elsevier combined businesses and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards generally accepted in the UK and the Netherlands and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2002. Deloitte & Touche Deloitte & Touche Chartered Accountants Accountants London Amsterdam 7 August 2002 7 August 2002 Investor Information FINANCIAL CALENDAR FOR 2002 8 August Announcement of Interim Results for the six months to 30 June 2002 Record date - 2002 interim dividend, Reed Elsevier NV ordinary shares 9 August Ordinary shares and ADSs in Reed Elsevier NV go ex-dividend for 2002 interim dividend 13 August Record date - 2002 interim dividend, Reed Elsevier NV ADSs 14 August Ordinary shares and ADSs in Reed Elsevier PLC go ex-dividend for 2002 interim dividend 16 August Record date - 2002 interim dividend, Reed Elsevier PLC ordinary shares and ADSs 9 September Interim dividends for 2002 paid on Reed Elsevier PLC and Reed Elsevier NV ordinary shares 16 September Interim dividends for 2002 paid on Reed Elsevier PLC and Reed Elsevier NV ADSs 5 December Trading Update issued in relation to the 2002 financial year FINANCIAL CALENDAR FOR 2003 20 February Announcement of Preliminary Results for the year ended 31 December 2002 8 April Reed Elsevier PLC Annual General Meeting, London 9 April Reed Elsevier NV Annual General Meeting, Amsterdam 7 August Announcement of Interim Results for the six months to 30 June 2003 AUDITORS STOCKBROKERS ADR DEPOSITARY Deloitte & Touche Cazenove & Co. Ltd Citibank NA Hill House, 1 Little New Street 12 Tokenhouse Yard 111 Wall Street London EC4A 3TR, United Kingdom London EC2R 7AN, United Kingdom New York, NY 10043, USA Deloitte & Touche ABN AMRO Bank NV Reed Elsevier PLC CUSIP No. 758205108 Orlyplein 50 Gustav Mahlerlaan 10 (Trading Symbol: REL) 1043 DP Amsterdam, The Netherlands 1082 PP Amsterdam, The Netherlands Reed Elsevier NV CUSIP No. 758204101 (Trading Symbol: ENL) STOCK EXCHANGE QUOTATIONS Reed Elsevier PLC's ordinary shares are quoted on the London Stock Exchange and Reed Elsevier NV's ordinary shares are quoted on the Euronext Stock Exchange in Amsterdam. In addition, Reed Elsevier PLC's and Reed Elsevier NV's shares are quoted on the New York Stock Exchange. Trading on the New York Stock Exchange is in the form of American Depositary Shares (ADSs), evidenced by American Depositary Receipts (ADRs). Each Reed Elsevier PLC ADS represents four Reed Elsevier PLC ordinary shares and each Reed Elsevier NV ADS represents two Reed Elsevier NV ordinary shares. Enquiries concerning Reed Elsevier PLC or Reed Elsevier NV ADSs should be addressed to Citibank Depositary Receipts Services, PO Box 2502, Jersey City, NJ 07303-2502 or by telephoning +1 877 248 4237 (toll free if dialled from within the United States). In addition, information can be obtained from the Citibank website: www.citibank.com/adr. This statement is being mailed to shareholders of Reed Elsevier PLC on 8 August 2002 and will be available to the shareholders of Reed Elsevier NV upon request. Copies are available to the public from the registered offices of the respective companies. Reed Elsevier PLC Reed Elsevier NV 25 Victoria Street Sara Burgerhartstraat 25 London SW1H 0EX 1055 KV Amsterdam United Kingdom The Netherlands Tel: +44 (0) 20 7222 8420 Tel: +31 (0) 20 485 2434 Fax: +44 (0) 20 7227 5799 Fax: +31 (0) 20 618 0325 A copy of this statement in Dutch will be made available on our website. For further information or contact details, please visit: www.reedelsevier.com This information is provided by RNS The company news service from the London Stock Exchange

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