2007 PRELIMINARY RESULTS

Reed Elsevier PLC 21 February 2008 Issued on behalf of Reed Elsevier PLC and Reed Elsevier NV 21 February 2008 REED ELSEVIER 2007 PRELIMINARY RESULTS HIGHLIGHTS â€¢ Strong financial performance for 2007, good momentum and significant plans to accelerate growth â€¢ Major reshaping of portfolio - Sale of Harcourt Education now completed - Planned divestment of Reed Business Information â€¢ Significant restructuring programme around a more cohesive business delivering important cost efficiencies â€¢ Agreed Â£2.1 billion/â‚¬2.8 billion acquisition of ChoicePoint, Inc separately announced today Strong financial performance â€¢ Underlying revenue growth +6%, driven by good growth in online information and workflow solutions; reported revenues of Â£4,584m/â‚¬6,693m, up 2% and 1% respectively in sterling and euros â€¢ Adjusted operating margin +80 basis points (underlying +100 basis points), from good revenue growth and ongoing cost initiatives â€¢ Adjusted earnings per share +12% at constant currencies; at reported rates up 7% to 35.9p for Reed Elsevier PLC and up 5% to â‚¬0.80 for Reed Elsevier NV â€¢ US dollar decline adversely affects growth rates on translation at reported exchange rates Major reshaping and strengthening of portfolio â€¢ Sale of Harcourt Education for Â£2.5bn/â‚¬3.6bn successfully completed with substantial gain; net proceeds distributed to shareholders in January 2008 â€¢ Reed Business Information to be divested, reducing exposure to advertising markets and cyclicality â€¢ Acquisition of ChoicePoint, Inc (2007 revenues Â£491m/â‚¬717m) significantly expands position in fast growing risk management marketplace â€¢ More cohesive and synergistic business with stronger growth prospects Major restructuring to accelerate growth â€¢ Further consolidation and streamlining of operational activities and back office support in a more integrated company â€¢ Significant savings of Â£245m/â‚¬335m over 2008-2011 with annual savings targeted of Â£100m/â‚¬135m by 2011, over and above normal expected margin improvement â€¢ Exceptional costs of approximately Â£140m/â‚¬190m; cash payback in 2.5 years Reed Elsevier's Chief Executive Officer, Sir Crispin Davis, commented: 'We have made good progress over the last year. Investment against our online growth and workflow solutions strategy is paying off with good revenue momentum. Together with our cost initiatives, this is driving underlying margin improvement and a strong earnings performance. The decline of the US dollar takes some shine off the earnings performance expressed in sterling and euros, but the strength of the underlying growth is very encouraging with 2007 representing the highest constant currency earnings growth of the last ten years. 'The sale of Harcourt Education has moved us towards a more consistent, cohesive and synergistic business and today we have announced a further major step with the planned divestment of Reed Business Information ('RBI'). RBI is a well-managed high quality business as evidenced by the success of its online growth and the control of costs. Its advertising revenue model and the inherent cyclicality fit less well however with the subscription-based information and workflow solutions focus of Reed Elsevier's strategy. 'The move to a more cohesive portfolio provides us with the opportunity to accelerate progress in consolidating and streamlining our technology, operations and back office support. In doing so, Reed Elsevier becomes a more integrated company with significant savings in cost structure. The restructuring plan announced today has an attractive payback and will make a meaningful addition to margin and earnings growth. 'The acquisition of ChoicePoint represents a major further step in the building of our risk management business and in the development of Reed Elsevier's online workflow solutions strategy. The market growth in risk information and analytics is highly attractive and ChoicePoint brings important assets and market positions that fit well with our existing business and, in combination, can be leveraged to very good effect. 'ChoicePoint's insurance business in particular has seen strong consistent growth, and through the combination of ChoicePoint's highly regarded data and analytics assets and our leading LexisNexis risk technology, we can further develop compelling offerings for customers and realise significant synergy benefits. The acquisition will accelerate Reed Elsevier's revenue and profit growth and deliver a good and growing return on capital. 'The outlook for Reed Elsevier is very positive. We are well positioned in attractive markets; the momentum in the business is showing through in the good financial performance; and the changes we are making will strengthen the business and accelerate our growth.' REED ELSEVIER COMBINED BUSINESSES Continuing operations 2007 2006 Change 2007 2006 Change Change at Â£m Â£m % â‚¬m â‚¬m % constant currencies Revenue 4,584 4,509 +2% 6,693 6,628 +1% +6% Reported operating profit 888 837 +6% 1,296 1,231 +5% +12% Adjusted operating profit 1,137 1,081 +5% 1,660 1,589 +4% +11% Adjusted operating margin 24.8% 24.0% 24.8% 24.0% Adjusted operating cash flow 1,108 1,086 +2% 1,618 1,596 +1% +6% Parent companies Reed Elsevier PLC Reed Elsevier NV Change at constant 2007 2006 Change 2007 2006 Change currencies Continuing and discontinued operations % % % Reported earnings per share 49.7p 25.6p +94% â‚¬1.10 â‚¬0.59 +86% Adjusted earnings per share 35.9p 33.6p +7% â‚¬0.80 â‚¬0.76 +5% +12% Dividend per share 18.1p 15.9p +14% â‚¬0.425 â‚¬0.406 +5% The results of the Harcourt Education division are presented as discontinued operations and are excluded from revenue, reported and adjusted operating profit, adjusted operating margin and adjusted operating cash flow. Adjusted figures are presented as additional performance measures and are stated before amortisation of acquired intangible assets and acquisition integration costs, and, in respect of earnings reflect a tax rate that excludes the effect of movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term. Profit and loss on disposals and other non-operating items are also excluded from the adjusted figures. Reconciliations between the reported and adjusted figures are provided in note 5 to the combined financial information and note 1 to the summary financial information of the respective parent companies. ENQUIRIES Sybella Stanley (Investors) Patrick Kerr (Media) +44 20 7166 5630 +44 20 7166 5646 FINANCIAL HIGHLIGHTS Adjusted Figures Continuing operations (Elsevier, LexisNexis and Reed Business) Continued revenue momentum and margin improvement â€¢ Good performances seen across all the continuing businesses. â€¢ Revenues up 2% to Â£4,584m/up 1% to â‚¬6,693m, up 6% at constant currencies. â€¢ Underlying revenue growth, excluding acquisitions and disposals, of 6% driven by strong growth in online information and workflow solutions. â€¢ Adjusted operating profits, before amortisation of acquired intangible assets and acquisition integration costs, up 5% to Â£1,137m/ up 4% to â‚¬1,660m, up 11% at constant currencies. Underlying adjusted operating profit growth of 10%. â€¢ Adjusted operating margins up 0.8% points (1.0% points underlying) at 24.8%, reflecting good revenue growth and continuing cost efficiency. â€¢ Reported revenue and operating profit growth in sterling and euros restrained by the effect on translation of the average year on year decline in the US dollar of 9% against sterling and 10% against the euro. â€¢ 11% growth in online information and workflow solutions which now account for nearly 50% of revenues reflecting the success of the investment led digital growth strategy. Strong cash flow â€¢ 97% of adjusted operating profits converted into cash reflecting focus on management of working capital. Increasing return on capital â€¢ Return on invested capital up 0.8% points to 11.8% post tax from increased profitability and low capital requirements. This is the sixth successive year of improving return on capital. Total operations (including Harcourt Education) Growth in adjusted earnings and dividends â€¢ Adjusted earnings per share, at reported exchange rates, up 7% to 35.9p for Reed Elsevier PLC and up 5% to â‚¬0.80 for Reed Elsevier NV, up 12% at constant currencies. â€¢ Final dividends proposed of 13.6p and â‚¬0.311 for Reed Elsevier PLC and Reed Elsevier NV respectively. Total dividends for 2007 of 18.1p for Reed Elsevier PLC, up 14%, and â‚¬0.425 for Reed Elsevier NV, up 5%. (Differential growth rates in the equalised dividends reflect movements in the sterling euro exchange rate.) â€¢ Cash returned to shareholders in January 2008 of Â£2.0bn/â‚¬2.7bn from net proceeds of Harcourt Education sale. Reported Figures â€¢ Reported operating profit, after amortisation of acquired intangible assets and acquisition integration costs, up 6% to Â£888m/up 5% to â‚¬1,296m. â€¢ Reported earnings per share, including disposal gains, up 94% to 49.7p/up 86% to â‚¬1.10. The growth principally reflects the improvement in underlying operating performance, the gain on the sale of Harcourt Education, and movements in deferred tax balances not expected to crystallise in the near term. STRENGTHENING THE PORTFOLIO The Reed Elsevier business is being reshaped through the sale of Harcourt Education and the planned divestment of Reed Business Information (RBI) to create a more consistent, cohesive and synergistic business and accelerate growth. As previously announced, the Harcourt Education business was sold in two separate transactions that have now completed. The aggregate proceeds were Â£2.5bn/â‚¬3.6bn, representing 21 times 2006 adjusted operating profits and a substantial gain. After taxation and other costs related to the sale, the estimated net proceeds of Â£2.0bn/â‚¬2.7bn were distributed to shareholders on 18 January 2008. The planned divestment of RBI is a further major step in our portfolio development. Although RBI has had considerable success in developing high-growth online services, its advertising revenue model and its inherent cyclicality fit less well with the subscription based information and workflow solutions focus of Reed Elsevier's strategy. Advertising accounts for approximately 60% of revenues. In the year to 31 December 2007, RBI had revenues of Â£906m/â‚¬1,323m and adjusted operating profits of Â£119m/â‚¬174m. The precise method of divestment of RBI will be the subject of review in coming months. The Reed Exhibitions business will be retained. The acquisition of ChoicePoint, and its combination with the very successful LexisNexis Risk Information and Analytics Group ('RIAG'), creates for Reed Elsevier a position as a world leading provider of risk information and analytics by adding a major presence in the insurance segment and complementary products and new capabilities in the screening, authentication and public records areas. The acquisition will accelerate Reed Elsevier's growth and, through the combination of ChoicePoint's highly regarded data and analytics assets and RIAG's market leading technology infrastructure, will provide the opportunity to develop more compelling products for the market and considerable synergy benefits. The acquisition of ChoicePoint meets all of Reed Elsevier's acquisition financial criteria: it is expected to accelerate Reed Elsevier's revenue and profit growth; be marginally accretive to earnings in the first year of ownership with significant earnings enhancement thereafter; have a post tax return on capital in excess of Reed Elsevier's WACC in the third year of ownership; and add substantial net present value. During 2007 further investment was made in new publishing and workflow solutions through both organic development and selective acquisitions that meet Reed Elsevier's strict growth and financial criteria. These acquisitions are focused in particular on accelerating our development and growth in e-health, legal workflow solutions, risk information and analytics and exhibitions and are on track to deliver a return on capital in excess of the weighted average cost of capital within three years. 2008 should see continuing organic and acquisition investment in workflow solutions to strengthen and accelerate growth in the continuing businesses. RESTRUCTURING PLAN: COST AND ANNUAL SAVINGS The reshaping of the portfolio and the good progress on the cost initiatives announced last year, have provided the opportunity to take more radical action on our cost base to capitalise on the more synergistic portfolio and accelerate margin growth. The restructuring plan represents further consolidation of operational activities and back office support both within Elsevier and LexisNexis and across the group. The principal focus is on management organisation, technology, operations, development engineering, production, procurement, customer service and support, finance and administration. Some of these savings will be used to fund additional investment in new product, sales and marketing to take advantage of the growing opportunities for workflow solutions in our markets and to build further competitive differentiation. The restructuring plan is targeted to deliver a total of Â£245m/â‚¬335m of cost savings over the next four years, with progressive net annual savings reaching Â£100m/â‚¬135m in 2011 over and above the normal expected annual margin improvement and additional investment. The annual savings targets over the 2008-11 years are Â£15m/â‚¬20m in 2008; Â£50m/â‚¬70m in 2009; Â£80m/â‚¬110m in 2010; and Â£100m/â‚¬135m in 2011. The exceptional restructuring costs are estimated to be approximately Â£140m/â‚¬190m, most of which will be incurred in 2008. These relate principally to severance, outsourcing migration costs and associated property costs. The cash payback of the restructuring plan is approximately 2.5 years. Ongoing cost efficiency to improve margins including savings from regular annual restructuring initiatives are excluded from the above figures. BALANCE SHEET Reed Elsevier looks to maintain its capital efficiency through its progressive dividend policy and annual share repurchase programme whilst having the balance sheet strength to maintain access to the most cost effective sources of borrowing and to support our strategic ambition in evolving professional publishing and information markets. Over the longer term, we would expect net debt to EBITDA to range between 2.0x and 3.0x depending on financial conditions and acquisition opportunities and timing, consistent with a solid investment grade credit rating. OPERATING AND FINANCIAL REVIEW 2007 2006 Change 2007 2006 Change Change at Â£m Â£m % â‚¬m â‚¬m % constant currencies CONTINUING OPERATIONS Revenue Elsevier 1,507 1,521 -1% 2,200 2,236 -2% +4% LexisNexis 1,594 1,570 +2% 2,328 2,308 +1% +8% Reed Business 1,483 1,418 +5% 2,165 2,084 +4% +7% Total 4,584 4,509 +2% 6,693 6,628 +1% +6% Adjusted operating profit Elsevier 477 465 +3% 696 683 +2% +9% LexisNexis 406 380 +7% 593 559 +6% +14% Reed Business 260 241 +8% 380 354 +7% +10% Unallocated items (6) (5) (9) (7) Total 1,137 1,081 +5% 1,660 1,589 +4% +11% DISCONTINUED OPERATIONS Revenue 752 889 1,098 1,307 Adjusted operating profit 121 129 177 190 Adjusted figures and constant currency growth rates are used by Reed Elsevier as additional performance measures. Adjusted operating profit is stated before the amortisation of acquired intangible assets and acquisition integration costs. Constant currency growth rates are based on 2006 full year average and hedge exchange rates. Unless otherwise indicated, all percentage movements in the following commentary refer to performance at constant exchange rates. Underlying growth rates are calculated at constant currencies, excluding acquisitions and disposals. The reported operating profit figures are set out in note 2 to the combined financial information and reconciled to the adjusted figures in note 5. FORWARD LOOKING STATEMENTS This Preliminary Statement contains forward looking statements within the meaning of Section 27A of the US Securities Act 1933, as amended, and Section 21E of the US 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 in Reed Elsevier's markets; exchange rate fluctuations; customers' acceptance of our products and services; the actions of competitors; legislative, fiscal and regulatory developments; changes in law and legal interpretations affecting Reed Elsevier's intellectual property rights and internet communications; and the impact of technological change. ELSEVIER 2007 2006 Change 2007 2006 Change Change Â£m Â£m % â‚¬m â‚¬m % at constant currencies Revenue Science & Technology 774 792 -2% 1,130 1,164 -3% +2% Health Sciences 733 729 +1% 1,070 1,072 0% +6% 1,507 1,521 -1% 2,200 2,236 -2% +4% Adjusted operating profit 477 465 +3% 696 683 +2% +9% Adjusted operating margin 31.7% 30.6% +1.1pts 31.7% 30.6% +1.1pts +1.4pts Elsevier had a very successful year with good underlying growth driven by new publishing and continued expansion of our online information and workflow solutions. Revenues and adjusted operating profits were up 6% and 10% respectively at constant currencies before acquisitions and disposals. After portfolio effects, most notably the acquisition of the Beilstein chemical compounds database and the sale of the MDL software business, revenues were up 4% and adjusted operating profits up 9% at constant currencies. The overall adjusted operating margin improved by 1.1 percentage points, driven by revenue growth and cost efficiency most particularly in production and procurement. The Science & Technology business saw underlying revenue growth of 6%, or 2% at constant currencies after acquisitions and disposals, reflecting journal subscription renewals at record levels and growing online sales with increasing market penetration. ScienceDirect saw widening distribution especially in small academic and emerging markets, and particular success from the further launch of electronic books. ScienceDirect online usage was again up over 20%. Impact Factors, one of the industry's standard measures of content quality, increased for 65% of our journals, more than for any other major science and medical publisher. Good progress was also made in our customer service programmes with positive developments across a wide range of surveyed measures. In March, we acquired the full rights to the Beilstein chemical compounds database, previously operated under licence, which is now being integrated with other resources to deliver content rich and innovative online solutions. In October we sold the MDL software services business which increasingly did not fit within Elsevier's strategy. In Health Sciences, revenue growth at constant currencies was 6%, both before and after the impact of acquisitions and disposals, driven by good growth in the nursing and allied health professional sector, and expanding online solutions. The year saw successful publishing and a growing appetite within the healthcare industry for technology enabled information solutions to improve the quality and effectiveness of diagnosis, treatment and care. Growth was partly held back by a flat performance in pharma advertising, with share gains compensating for weaker markets. Electronic products, such as the MDConsult clinical reference product, are showing good double digit growth in usage. The Evolve digital learning platform had a successful year with a 40% increase in registered users. New products were rolled out with very positive market response. These included Mosby's Nursing Skills, endorsed by the American Association of Clinical Nurses, which offers detailed interactive guidance in over 500 skills drawn from our leading reference works. At the British Medical Awards in September, we won more top awards for our publishing than any other publisher. In addition to investment in new publishing and digital solutions, we continued to expand our businesses in attractive high-growth segments through two highly complementary acquisitions in December: Clinical Practice Model Resource Centre (CPMRC), a leading provider of decision support solutions for nurses and healthcare practitioners to improve patient care and safety; and, MEDai, a provider of clinical outcome analytics and risk identification and management for both the payers and providers of healthcare. The outlook for Elsevier is positive. Revenue momentum is good with successful publishing, strong renewals and growing digital product in attractive markets. The revenue growth and continuous actions to improve cost efficiency is driving good underlying margin improvement. We look forward to another successful year in Elsevier in 2008. LEXISNEXIS 2007 2006 Change 2007 2006 Change Change Â£m Â£m % â‚¬m â‚¬m % at constant currencies Revenue United States 1,113 1,129 -1% 1,625 1,660 -2% +7% International 481 441 +9% 703 648 +8% +10% 1,594 1,570 +2% 2,328 2,308 +1% +8% Adjusted operating profit 406 380 +7% 593 559 +6% +14% Adjusted operating margin 25.5% 24.2% +1.3pts 25.5% 24.2% +1.3pts +1.3pts LexisNexis also had a good year with a successful Total Solutions strategy both in the US and internationally and good growth in risk information and analytics markets. Revenues and adjusted operating profits were up 7% and 12% respectively at constant currencies before acquisitions, and 8% and 14% including acquisitions. The overall adjusted operating margin improved by 1.3 percentage points, reflecting the strong revenue growth and the actions taken to improve cost efficiency. In US Legal markets, strong subscription renewals and additional online information and solutions sales, partly held back by fewer large sized discovery cases, drove underlying revenue growth of 5%. New Total Solutions products were introduced throughout the year in the core areas of litigation, client development, practice management, and research. Total Practice Advantage, with a series of releases in 2007, has seen particular success providing small law firms with practice management and client development tools in one integrated easy to use solution. Other Total Solutions are also growing well such as Total Litigator, combining case management tools, document and evidence repositories, discovery tools, file and serve applications, and research. The growth in the attractive Total Solutions markets is being accelerated through acquisition as well as organic investment. In July, we acquired Juris, which provides medium sized law firms with time and billing and other practice management solutions, to complement what we have achieved in small law firms with Total Practice Advantage. In electronic discovery, we acquired Image Capture Engineering in June to complement the Concordance business acquired last year. These businesses are being integrated within Total Litigator to service the majority of electronic discovery needs and are steadily migrating to a subscription model. In US Corporate and Public Markets, underlying revenue growth was 6%. Whilst the news and business information business is slower growing, we saw strong demand in risk management and in processing higher volumes for the US patent and trademark office. The Risk Information and Analytics business again saw double-digit revenue growth and further good margin expansion driven by the continued strength of the market combined with leading technology and content. The business continues to expand its product offerings and build its presence in this attractive sector. The LexisNexis International business outside the US delivered underlying revenue growth of 8% at constant rates, or 10% including acquisitions and strong margin and profit growth. Underlying revenue growth has now been at or around this level for each of the last four years, driven by the growing penetration of online information services across our markets and new publishing. Good growth was seen in the UK, France and Southern Africa in particular as well as in emerging markets such as India, Korea, China and Taiwan. To support the penetration of our Total Solutions strategy, we have been realigning and transforming the sales organisation. This has involved the integration of multiple sales forces into one in the US, global sales coordination, a substantial upgrade in capabilities and the deployment of our portfolio solution selling methodology, tools and processes. This will be extended globally as Total Solutions products are introduced internationally. Additionally, we have streamlined and strengthened our organisation by establishing global management responsibilities for solutions development and delivery, unified marketing, production and customer support. The outlook for LexisNexis is positive. The Total Solutions strategy, increased penetration of online services internationally and the strong demand for risk information and analytics is driving good revenue momentum. LexisNexis has shown meaningful good underlying margin improvement in each of the last seven years and, with good revenue growth and continued action on costs, further strong progress is expected. REED BUSINESS 2007 2006 Change 2007 2006 Change Change Â£m Â£m % â‚¬m â‚¬m % at constant currencies Revenue Reed Business Information 906 896 +1% 1,323 1,317 0% +4% Reed Exhibitions 577 522 +11% 842 767 +10% +13% 1,483 1,418 +5% 2,165 2,084 +4% +7% Adjusted operating profit 260 241 +8% 380 354 +7% +10% Adjusted operating margin 17.5% 17.0% +0.5pts 17.5% 17.0% +0.5pts +0.5pts Reed Business has performed well this year with a strong performance in the exhibitions business (partly held back by the cycling out of a number of non-annual shows) and rapid growth in online services more than compensating for print declines. Revenues and adjusted operating profits were up 6% and 8% respectively at constant currencies before acquisitions and disposals, or 7% and 10% after portfolio changes. The overall adjusted operating margin was up 0.5 percentage points, with the cycling out of contribution from biennial joint venture exhibitions reducing margin growth by 0.2 percentage points. Reed Exhibitions saw revenues 13% ahead at constant currencies, or 12% excluding acquisitions and disposals. Strong growth was seen across the show portfolio with particular success at the Mipim international property show in Cannes and the JCK jewellery show in Las Vegas. Adjusted operating profits were up 11% at constant currencies, or 8% excluding acquisitions and disposals, held back by the cycling out of the contribution from biennial joint venture shows. Excluding the cycling of shows, underlying revenue growth and adjusted operating profit growth were 10% and 11% respectively. Thirty new shows were launched in the year, in sectors ranging from personal care to aerospace and from Argentina to China. The portfolio was also added to through the acquisition of a joint venture interest in Alcantara Machado, the leading show organiser in Brazil, and of a group of six international aerospace shows. The decision was taken to exit the defence sector and a sale process is underway. The Reed Business Information magazine and information businesses saw revenues 4% ahead at constant currencies, or 3% before acquisitions and disposals. Continued strong growth in online services of 20% underlying more than compensated for a 2% decline in print as the business migrates online. Online revenues now contribute 30% of RBI's revenues. Adjusted operating profits were up 10% at constant currencies through continued actions to improve cost efficiency. In the UK, underlying revenues were up 5% reflecting strong growth in online sales, up 19% and which now represent 46% of total RBI UK revenue. Totaljobs, the leading UK recruitment site, continued its rapid growth with revenues up 35%. The number of market leading job boards increased from 10 to 12 in 2007 with the launch of UK regional sites in Scotland and the North West of England and further launches are planned. In the Netherlands and International, underlying revenue growth was 4% with good growth in online products. In the Netherlands, Elsevier magazine reached record print circulation levels and received an industry award as the number one magazine for advertisers and media agencies. In the US, RBI underlying revenue was flat, with online revenues growing rapidly, offset by the decline in print including discontinued titles. Advertising revenues grew rapidly across community sites, up 31%. This reflects surging web traffic as these sites increasingly become a starting point on the web for the communities they serve with their mix of professional content, community interaction and online tools proving attractive for both users and advertisers. The growth of online sales in RBI was accelerated by a number of acquisitions, including BuyerZone, a fast growing online service for matching vendors and buyers in procurement tendering, acquired in January 2007 and DoubleTrade, an online tendering service, acquired in April 2007. Both are performing strongly. The outlook for Reed Business is positive. The demand for exhibitions remains good and advance bookings, particularly for the important first half of 2008, are encouraging. The business magazines and information businesses, whilst seeing some general uncertainty in markets such as property and construction, are seeing no overall shift in market trends with continued strong growth in online services and slow decline in print. Continued cost actions are expected to deliver overall margin improvement together with the cycling in of joint venture exhibitions. DISCONTINUED OPERATIONS - HARCOURT EDUCATION 2007 2006 Change 2007 2006 Change Change Â£m Â£m % â‚¬m â‚¬m % at constant currencies Revenue Schools & Assessment 708 776 -9% 1,034 1,141 -9% -1% International 44 113 -61% 64 166 -61% -59% 752 889 -15% 1,098 1,307 -16% -9% Adjusted operating profit 121 129 -6% 177 190 -7% +2% Adjusted operating margin 16.1% 14.5% +1.6pts 16.1% 14.5% +1.6pts +1.8pts Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented as a discontinued operation. On 4 May, the sale of the Harcourt Education International and Harcourt Assessment businesses to Pearson plc was announced, and on 16 July the sale of the Harcourt US K-12 Education businesses to Houghton Mifflin Riverdeep Group was announced. The disposals of the UK, Australian and New Zealand businesses of Harcourt Education International completed in May 2007 with the South African business completing in August 2007. The disposal of the Harcourt US K-12 Education businesses completed in December 2007, and the disposal of Harcourt Assessment and the remaining Harcourt Education International businesses completed in January 2008. Harcourt performed well in US state book adoptions, particularly in the secondary schools market, and saw a significant turnaround in operational performance in the Assessment business. The reduced revenues and adjusted operating profits reported for Harcourt Education in the year reflect the timing of the business disposals and the seasonality of the businesses. The Harcourt Education US K-12 business saw revenues up 4% at constant currencies for the first eleven months of the year with good growth in the basal publishing businesses partly offset by a weaker supplemental market. Harcourt had significant success in the state textbook adoption market and in particular with its new elementary social studies and math programmes and secondary math. The secondary business again took by far the largest market share in new textbook adoptions. The supplemental market declined as traditional supplemental product gives way to more comprehensive intervention and assessment products and further investment was made in these. The new StoryTown elementary reading programme launched in open territories has been very well received which bodes well for the major reading adoptions in 2008. The Assessment business saw revenues 1% lower at constant currencies. This reflected the prior year loss of two major state testing contracts, with the business almost making up the gap with new publishing and contract wins and extensions. The turnaround in operational performance is also reflected in significantly improved profitability. The sale of the majority of the International business was completed in May 2007 with the remainder completed in August 2007 and January 2008. FINANCIAL REVIEW REED ELSEVIER COMBINED BUSINESSES Currency The average US dollar exchange rate in 2007 was significantly weaker than in 2006, down 9% against sterling and down 10% against the euro. The reported results are therefore significantly impacted by currency translation effects. Income statement Revenue from continuing operations (ie excluding Harcourt Education) at Â£4,584m/ â‚¬6,693m increased by 2% expressed in sterling and 1% expressed in euros. At constant exchange rates, revenue was 6% higher, both including and excluding acquisitions and disposals. Reported figures Continuing operations Reported operating profit from continuing operations, after amortisation of acquired intangible assets and acquisition integration costs, at Â£888m/â‚¬1,296m, was up 6% in sterling and 5% in euros. The increase reflects the strong underlying operating performance, partly offset by currency translation effects. The amortisation charge in respect of acquired intangible assets, including the share of amortisation in joint ventures, amounted to Â£221m/â‚¬323m, up Â£10m/â‚¬14m, principally as a result of recent acquisitions, partly offset by currency translation effects. Acquisition integration costs amounted to Â£20m/â‚¬29m (2006: Â£23m/â‚¬34m). Disposals and other non operating items within continuing operations comprise gains on disposals of businesses and investments of Â£65m/â‚¬95m and fair value decreases in the portfolio of venture capital investments of Â£2m/â‚¬3m. The reported profit before tax, including amortisation of acquired intangible assets, acquisition integration costs and non operating items, at Â£812m/â‚¬1,185m, was up 20% expressed in sterling and 19% in euros. The reported tax credit of Â£82m/â‚¬120m compares with a charge of Â£86m/â‚¬127m in the prior year. The current year credit includes the benefit of Â£223m/â‚¬326m in respect of previously unrecognised deferred tax assets and capital losses arising in continuing operations, which are realisable as a result of the disposal of Harcourt Education. The reported tax credit also reflects movements on deferred tax balances arising on unrealised exchange differences on long term inter-affiliate lending. These deferred tax movements are recognised in the income statement but are not expected to crystallise in the foreseeable future. Discontinued operations The reported operating profit of Harcourt Education of Â£112m/â‚¬164m was up Â£69m/ â‚¬101m on the prior year, principally reflecting the cessation of amortisation of acquired intangible assets following the disposal announcement. The gain on the disposal of the Harcourt US Schools business and those Harcourt International businesses completed in the year was Â£611m/â‚¬849m. Taxes on the completed disposals were Â£380m/â‚¬555m, excluding the tax credits included in continuing operations described above. Total operations The reported attributable profit of Â£1,200m/â‚¬1,709m compares with a reported attributable profit of Â£623m/â‚¬916m in 2006, reflecting the strong operating performance and the part disposal of Harcourt Education. Adjusted figures Adjusted figures are used by Reed Elsevier as additional performance measures and are stated before amortisation of acquired intangible assets and acquisition integration costs, and, in respect of earnings, reflect a tax rate that excludes the effect of movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term. Profit and loss on disposals and other non operating items are also excluded from the adjusted figures. Comparison at constant exchange rates uses 2006 average and hedge exchange rates. Continuing operations Adjusted operating profit from continuing operations, at Â£1,137m/â‚¬1,660m, was up 5% expressed in sterling and up 4% in euros. At constant exchange rates, adjusted operating profits were up 11%, or 10% excluding acquisitions and disposals. The net pension expense (including the unallocated net pension financing credit) was Â£49m/â‚¬72m, down Â£16m/â‚¬24m from 2006, principally reflecting higher returns on plan assets and curtailments. The charge for share based payments was Â£38m/ â‚¬55m (2006: Â£44m/â‚¬65m). Restructuring costs, other than in respect of acquisition integration, were Â£16m/â‚¬23m (2006: Â£18m/â‚¬26m). Overall adjusted operating margin for the continuing businesses was up 0.8 percentage points at 24.8% reflecting the good revenue growth and cost efficiency. The cycling out of biennial joint venture exhibitions, which contribute to profit but not to revenues, had a 0.1 percentage point adverse effect on overall margin growth. Currency translation mix and the effect of the science journal currency hedging programme reduced margin by 0.2 percentage points. (The net benefit of the Elsevier science journal hedging programme is lower in 2007 than in 2006 as the effect of the weaker US dollar is incorporated within the three year rolling hedging programme.) Net finance costs, at Â£139m/â‚¬203m, were Â£19m/â‚¬30m lower than in the prior year largely due to currency translation effects and the benefit of proceeds from the disposal of Harcourt Education. Adjusted profit before tax from continuing operations was Â£998m/â‚¬1,457m, up 8% compared to the prior year expressed in sterling and 7% in euros. At constant exchange rates, adjusted profit before tax was up 13%. The effective tax rate on adjusted earnings for the continuing businesses, at 23%, was similar to the rate in 2006. (The effective tax rate on adjusted earnings excludes movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term, and more closely aligns with cash tax costs. Adjusted operating profits and taxation are also grossed up for the equity share of taxes in joint ventures.) Discontinued operations Adjusted operating profit from discontinued operations, at Â£121m/â‚¬177m, was down Â£8m/â‚¬13m, largely as a result of the timing of disposals and currency translation effects. Total operations The adjusted profit attributable to shareholders, including discontinued operations, was Â£852m/â‚¬1,244m, up 7% compared to the prior year in sterling and up 6% in euros. At constant exchange rates, adjusted profit attributable to shareholders was up 13%. The effective tax rate on the profit from total operations was 23.6%, slightly lower than the 24.1% effective rate for 2006. Cash flows and debt Adjusted operating cash flow from continuing operations was Â£1,108m/â‚¬1,618m, up 2% in sterling and 1% in euros, and 6% at constant currencies. The rate of conversion of adjusted operating profits into cash flow for the continuing businesses was high at 97% (2006: 100%) reflecting the continued focus on management of working capital. Capital expenditure included within adjusted operating cash flow from continuing operations was Â£145m/â‚¬212m (2006: Â£167m/â‚¬246m), including Â£80m/â‚¬117m in respect of capitalised development costs included within intangible assets. Spend on acquisitions was Â£327m/â‚¬478m (2006: Â£163m/â‚¬240m). Including deferred consideration payable, an amount of Â£262m/â‚¬383m was capitalised as acquired intangible assets and Â£101m/â‚¬147m as goodwill. Acquisition integration spend in respect of these and other recent acquisitions amounted to Â£19m/â‚¬28m. Proceeds from disposals of businesses and other assets amounted to Â£86m/â‚¬126m. Free cash flow from continuing operations - after interest and taxation - was Â£717m/â‚¬1,047m, down Â£39m/â‚¬66m, reflecting higher tax paid than in 2006 which saw certain tax refunds. Dividends paid to shareholders in the year amounted to Â£416m/â‚¬607m (2006: Â£371m/â‚¬545m). Share repurchases by the parent companies amounted to Â£199m/â‚¬291m (2006: Â£217m/â‚¬319m). Additionally, shares of the parent companies were purchased by the employee benefit trust to meet future obligations in respect of share based remuneration for Â£74m/â‚¬108m (2006: Â£68m/ â‚¬100m). Net proceeds from share issuance under share option programmes were Â£177m/â‚¬258m (2006: Â£93m/â‚¬137m). Cash proceeds from the sale of discontinued operations in the year were Â£1,933m/ â‚¬2,704m. Net borrowings at 31 December 2007 were Â£492m/â‚¬669m (2006: Â£2,314m/â‚¬3,448m). The decrease of Â£1,822m/â‚¬2,779m since 31 December 2006 reflects the proceeds received from the part disposal of Harcourt Education, proceeds from share issuances and the benefit of free cash flow, partially offset by dividends, share buy backs and acquisition spend. Expressed in sterling, currency translation differences increased net borrowings by Â£18m, reflecting the strengthening of the euro during the year against sterling, mostly offset by the weakening of the US dollar. Expressed in euros, currency translation differences decreased net borrowings by â‚¬211m, reflecting the strengthening of the euro during the year. Gross borrowings after fair value adjustments at 31 December 2007 amounted to Â£3,129m/â‚¬4,256m, denominated mostly in US dollars. The fair value of related derivatives was Â£170m/â‚¬232m. Cash balances totalled Â£2,467m/â‚¬3,355m invested in short term deposits and marketable securities including Â£1,933m/ â‚¬2,704m proceeds received from the part disposal of Harcourt Education, which were included in the special distribution to shareholders of the parent companies in January 2008. After adjusting net debt for the Harcourt disposal proceeds and taking into account interest rate and currency derivatives, a total of 54% of Reed Elsevier's gross borrowings (equivalent to 69% of net borrowings) were at fixed rates and had a weighted average remaining life of 5.5 years and interest coupon of 5.3%. The net pension surplus, ie pension assets less pension obligations, at 31 December 2007 was Â£50m/â‚¬68m which compares with a net deficit as at 31 December 2006 of Â£236m/â‚¬351m. The improvement principally arises from increases in long term corporate bond yields used to discount scheme obligations. Capital employed and returns The capital employed in the continuing businesses at 31 December 2007 was Â£7,825m/â‚¬10,622m (2006: Â£7,266m/â‚¬10,828m), after adding back accumulated amortisation of acquired intangible assets and goodwill. Expressed in sterling, the increase of Â£559m principally reflects the impact of acquisitions and movement of the pension schemes into a net surplus, partially offset by disposals. Expressed in euros, the decrease of â‚¬206m reflects the impact of currency translation effects, most particularly the strengthening of the euro against the US dollar and sterling between 1 January and 31 December 2007, partially offset by the movements described above. The return on average capital employed for the continuing businesses in the year was 11.8% (2006: 11.0%; total operations 9.8%). This return is based on adjusted operating profits, less tax at the effective rate, and the average of the capital employed at the beginning and end of the year retranslated at average exchange rates. The improvement in the year reflects the good underlying profit growth and low capital requirements. Acquisitions typically dilute the overall return initially, but build quickly to deliver longer term returns well over Reed Elsevier's average for the business. The recent acquisitions made in the years 2005 to 2007 are delivering post tax returns in 2007 of 10%, 7% and proforma 5% respectively and continue to grow well. PARENT COMPANIES For the parent companies, Reed Elsevier PLC and Reed Elsevier NV, adjusted earnings per share for total operations were respectively up 7% at 35.9p (2006: 33.6p) and 5% at â‚¬0.80 (2006: â‚¬0.76). At constant rates of exchange, the adjusted earnings per share of both companies increased by 12% over the prior year. Shares repurchased in the year under the annual share repurchase plan announced in February 2006 totalled 15.2 million ordinary shares of Reed Elsevier PLC and 11.9 million ordinary shares of Reed Elsevier NV. Taking into account the associated financing cost, these share repurchases are estimated to have added approximately 0.2% to adjusted earnings per share in 2007. The reported earnings per share for Reed Elsevier PLC shareholders was 49.7p (2006: 25.6p) and for Reed Elsevier NV shareholders was â‚¬1.10 (2006: â‚¬0.59). The equalised final dividends proposed are 13.6p per share for Reed Elsevier PLC and â‚¬0.311 per share for Reed Elsevier NV up 15% and 2% on the prior year respectively. This gives total dividends for the year of 18.1p and â‚¬0.425, up 14% and 5% on 2006 respectively. The difference in dividend growth rates reflects the movement in the euro:sterling exchange rate between dividend announcement dates. Dividend cover, based on adjusted earnings per share and the total of the interim and proposed final dividend for the year, was 2.0 times for Reed Elsevier PLC and 1.9 times for Reed Elsevier NV. SUBSEQUENT EVENTS On 18 January 2008, a special distribution was paid to shareholders in the equalisation ratio from the estimated net proceeds of the sale of the Harcourt Education division. The distribution was 82.0p per share for Reed Elsevier PLC and â‚¬1.767 per share for Reed Elsevier NV and amounted to Â£2,013m/â‚¬2,690m in aggregate. The special distribution was accompanied by a consolidation of the ordinary share capital of Reed Elsevier PLC and Reed Elsevier NV on the basis of 58 new ordinary shares for every 67 existing ordinary shares. This represents a 13.4% consolidation of ordinary share capital, being the aggregate special distribution expressed as a percentage of the combined market capitalisation of Reed Elsevier PLC and Reed Elsevier NV (excluding the 5.8% indirect equity interest in Reed Elsevier NV held by Reed Elsevier PLC), as at the date of the announcement of the special distribution. Following the share consolidation, effective 7 January 2008, there were 1,130,473,244 Reed Elsevier PLC ordinary shares of 14 51/116 pence in issue, of which 46,880,490 were held in treasury including 15,849,192 held by the employee benefit trust; and 658,127,218 Reed Elsevier NV ordinary shares of â‚¬0.07 in issue, of which 30,584,845 were held in treasury including 8,682,054 held by the employee benefit trust. Additionally, post share consolidation there were 4,050,720 Reed Elsevier NV R-shares of â‚¬0.70 in issue, of which 135,179 were held in treasury, representing Reed Elsevier PLC's 5.8% indirect equity interest in Reed Elsevier NV. For the purposes of calculating earnings per share, the effective date of the share consolidation is deemed to be 18 January 2008, being the date on which the special distribution was paid. On a proforma basis, net debt as at 31 December 2007 adjusted for the special distribution paid to shareholders on 18 January 2008 would have been Â£2,505m/ â‚¬3,359m. On 30 January 2008, the sale of Harcourt Assessment and the remaining Harcourt International businesses, first announced in May 2007, completed following receipt of regulatory clearance in the United States. Proceeds received on disposal were Â£330m/â‚¬449m. COMBINED FINANCIAL INFORMATION Combined Income Statement For the year ended 31 December 2007 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Revenue - continuing operations 4,584 4,509 6,693 6,628 Cost of sales (1,624) (1,602) (2,371) (2,355) Gross profit 2,960 2,907 4,322 4,273 Selling and distribution costs (938) (925) (1,370) (1,360) Administration and other expenses (1,150) (1,163) (1,679) (1,709) Operating profit before joint ventures 872 819 1,273 1,204 Share of results of joint ventures 16 18 23 27 Operating profit - continuing operations 888 837 1,296 1,231 Finance income 43 21 63 31 Finance costs (182) (179) (266) (264) Net finance costs (139) (158) (203) (233) Disposals and other non operating items 63 (1) 92 (1) Profit before tax - continuing operations 812 678 1,185 997 Taxation 82 (86) 120 (127) Net profit from continuing operations 894 592 1,305 870 Net profit from discontinued operations 309 33 408 49 Net profit for the year 1,203 625 1,713 919 Attributable to: Parent companies' shareholders 1,200 623 1,709 916 Minority interests 3 2 4 3 Net profit for the year 1,203 625 1,713 919 Net profit from discontinued operations is analysed in note 3. Adjusted profit figures are presented in note 5 as additional performance measures. Combined Cash Flow Statement For the year ended 31 December 2007 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Cash flows from operating activities - continuing operations Cash generated from operations 1,218 1,213 1,778 1,782 Interest paid (174) (172) (254) (253) Interest received 26 12 38 18 Tax paid (239) (165) (349) (241) Net cash from operating activities 831 888 1,213 1,306 Cash flows from investing activities - continuing operations Acquisitions (327) (163) (478) (240) Purchases of property, plant and equipment (65) (68) (95) (100) Expenditure on internally developed intangible assets (80) (99) (117) (146) Purchase of investments (4) (9) (6) (13) Proceeds from disposals of property, plant and equipment 4 2 6 3 Proceeds from other disposals 82 48 120 70 Dividends received from joint ventures 12 16 18 24 Net cash used in investing activities (378) (273) (552) (402) Cash flows from financing activities - continuing operations Dividends paid to shareholders of the parent companies (416) (371) (607) (545) Increase in bank loans, overdrafts and commercial paper 111 72 163 105 Issuance of other loans 276 407 403 598 Repayment of other loans (311) (337) (454) (495) Repayment of finance leases (12) (12) (18) (18) Proceeds on issue of ordinary shares 177 93 258 137 Purchase of treasury shares (273) (285) (399) (419) Net cash used in financing activities (448) (433) (654) (637) Net cash from discontinued operations 1,912 57 2,674 84 Increase in cash and cash equivalents 1,917 239 2,681 351 Movement in cash and cash equivalents At start of year 519 296 774 432 Increase in cash and cash equivalents 1,917 239 2,681 351 Exchange translation differences 31 (16) (100) (9) At end of year 2,467 519 3,355 774 Net cash from discontinued operations is analysed in note 3. Adjusted operating cash flow figures are presented in note 5 as additional performance measures. Combined Balance Sheet As at 31 December 2007 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Non-current assets Goodwill 2,462 2,802 3,348 4,175 Intangible assets 2,089 2,524 2,841 3,761 Investments in joint ventures 116 73 158 108 Other investments 111 50 151 75 Property, plant and equipment 239 298 325 444 Net pension assets 183 20 249 30 Deferred tax assets 141 170 192 253 5,341 5,937 7,264 8,846 Current assets Inventories and pre-publication costs 271 633 368 943 Trade and other receivables 1,148 1,224 1,561 1,824 Derivative financial instruments 210 219 286 326 Cash and cash equivalents 2,467 519 3,355 774 4,096 2,595 5,570 3,867 Assets held for sale 341 - 464 - Total assets 9,778 8,532 13,298 12,713 Current liabilities Trade and other payables 1,966 1,925 2,674 2,868 Derivative financial instruments 22 9 30 14 Borrowings 1,127 921 1,533 1,372 Taxation 752 479 1,023 714 3,867 3,334 5,260 4,968 Non-current liabilities Borrowings 2,002 2,085 2,723 3,107 Deferred tax liabilities 695 850 945 1,266 Net pension obligations 133 256 181 381 Provisions 21 28 28 42 2,851 3,219 3,877 4,796 Liabilities associated with assets held for sale 84 - 114 - Total liabilities 6,802 6,553 9,251 9,764 Net assets 2,976 1,979 4,047 2,949 Capital and reserves Combined share capitals 197 191 268 285 Combined share premiums 2,143 1,879 2,914 2,800 Combined shares held in treasury (619) (377) (842) (562) Translation reserve (145) (136) (170) (201) Other combined reserves 1,389 409 1,862 607 Combined shareholders' equity 2,965 1,966 4,032 2,929 Minority interests 11 13 15 20 Total equity 2,976 1,979 4,047 2,949 Approved by the boards of Reed Elsevier PLC and Reed Elsevier NV, 20 February 2008. Combined statement of recognised income and expense For the year ended 31 December 2007 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Net profit for the year 1,203 625 1,713 919 Exchange differences on translation of foreign operations (33) (244) (350) (300) Actuarial gains on defined benefit pension schemes 224 139 327 204 Fair value movements on available for sale investments - 3 - 4 Fair value movements on cash flow hedges 3 54 4 79 Tax recognised directly in equity (50) (60) (73) (88) Net income/(expense) recognised directly in equity 144 (108) (92) (101) Cumulative exchange differences on disposal of foreign 148 - 206 - operations Cumulative fair value movements on disposal of available (7) - (10) - for sale investments Transfer to net profit from hedge reserve (net of tax) (20) (5) (29) (7) Total recognised income and expense for the year 1,468 512 1,788 811 Attributable to: Parent companies' shareholders 1,465 510 1,784 808 Minority interests 3 2 4 3 Total recognised income and expense for the year 1,468 512 1,788 811 Combined reconciliation of shareholders' equity For the year ended 31 December 2007 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Total recognised net income attributable to the parent 1,465 510 1,784 808 companies' shareholders Dividends declared (416) (371) (607) (545) Issue of ordinary shares, net of expenses 177 93 258 137 Increase in shares held in treasury (273) (285) (399) (419) Increase in share based remuneration reserve 46 49 67 72 Net increase/(decrease) in combined shareholders' equity 999 (4) 1,103 53 Combined shareholders' equity at start of year 1,966 1,970 2,929 2,876 Combined shareholders' equity at end of year 2,965 1,966 4,032 2,929 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 has been abridged from the audited combined financial statements for the year ended 31 December 2007, which have been prepared in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union and as issued by the International Accounting Standards Board ('IASB'). Financial information is presented in both sterling and euros. The Reed Elsevier accounting policies under IFRS are set out in the Reed Elsevier Annual Reports and Financial Statements 2006 on pages 58 to 61. The combined financial information has been prepared in accordance with those accounting policies. 2 Segment analysis Harcourt Education, which has previously been presented as a separate business segment, has been classified as a discontinued operation and its results for the period are presented in note 3. Revenue 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Business segment Elsevier 1,507 1,521 2,200 2,236 LexisNexis 1,594 1,570 2,328 2,308 Reed Business 1,483 1,418 2,165 2,084 Total 4,584 4,509 6,693 6,628 Geographical origin North America 2,147 2,219 3,135 3,262 United Kingdom 896 828 1,308 1,217 The Netherlands 505 497 737 731 Rest of Europe 708 675 1,034 992 Rest of world 328 290 479 426 Total 4,584 4,509 6,693 6,628 Geographical market North America 2,233 2,322 3,260 3,413 United Kingdom 603 531 880 781 The Netherlands 206 196 301 288 Rest of Europe 897 866 1,310 1,273 Rest of world 645 594 942 873 Total 4,584 4,509 6,693 6,628 Adjusted operating profit 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Business segment Elsevier 477 465 696 683 LexisNexis 406 380 593 559 Reed Business 260 241 380 354 Sub-total 1,143 1,086 1,669 1,596 Corporate costs (45) (39) (66) (57) Unallocated net pension credit 39 34 57 50 Total 1,137 1,081 1,660 1,589 Geographical origin North America 505 486 737 715 United Kingdom 211 196 308 288 The Netherlands 181 175 264 257 Rest of Europe 174 169 254 248 Rest of world 66 55 97 81 Total 1,137 1,081 1,660 1,589 Adjusted operating profit figures are presented as additional performance measures. They are stated before the amortisation of acquired intangible assets and acquisition integration costs, and are grossed up to exclude the equity share of taxes in joint ventures. Adjusted figures are reconciled to the reported figures in note 5. The unallocated net pension credit of Â£39m/â‚¬57m (2006: Â£34m/â‚¬50m) comprises the expected return on pension scheme assets of Â£196m/â‚¬286m (2006: Â£178m/â‚¬262m) less interest on pension scheme liabilities of Â£157m/â‚¬229m (2006: Â£144m/â‚¬212m). Operating profit 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Business segment Elsevier 410 395 598 581 LexisNexis 287 264 419 388 Reed Business 197 183 288 269 Sub-total 894 842 1,305 1,238 Corporate costs (45) (39) (66) (57) Unallocated net pension credit 39 34 57 50 Total 888 837 1,296 1,231 Geographical origin North America 353 329 515 485 United Kingdom 180 167 263 245 The Netherlands 179 172 261 253 Rest of Europe 118 117 172 172 Rest of world 58 52 85 76 Total 888 837 1,296 1,231 Share of post-tax results of joint ventures of Â£16m/â‚¬23m (2006: Â£18m/â‚¬27m) included in operating profit comprises Â£3m/â‚¬4m (2006: Â£3m/â‚¬5m) relating to LexisNexis and Â£13m/â‚¬19m (2006: Â£15m/â‚¬22m) relating to Reed Business. 3 Discontinued operations Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented as a discontinued operation. On 4 May 2007 the sale of the Harcourt Assessment and Harcourt Education International businesses for $950m was announced, and on 16 July 2007 the sale of the Harcourt US Schools Education businesses for $4.0bn was announced. All disposals had completed by 31 December 2007, with the exception of Harcourt Assessment and certain Harcourt International businesses, the disposal of which completed on 30 January 2008. Those businesses are presented in the balance sheet as assets held for sale. Net profit from discontinued operations 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Revenue 752 889 1,098 1,307 Operating costs (640) (846) (934) (1,244) Operating profit and profit before tax 112 43 164 63 Taxation (34) (10) (50) (14) Profit after taxation 78 33 114 49 Gain on disposals 611 - 849 - Tax on disposals (380) - (555) - Net profit from discontinued operations 309 33 408 49 Operating profit is stated after amortisation of acquired intangible assets of Â£9m/â‚¬13m (2006: Â£86m/â‚¬127m). The adjusted operating profit, before amortisation of acquired intangible assets, of the discontinued operations was Â£121m/â‚¬177m (2006: Â£129m/â‚¬190m). The gain on disposals of discontinued operations relates to the completed sale of the Harcourt US Schools Education business and certain of the Harcourt Education International businesses. Net assets disposed comprise Â£318m/â‚¬445m of goodwill, Â£383m/â‚¬537m of intangible assets, Â£39m/â‚¬55m of property, plant and equipment, Â£377m/â‚¬527m of inventory and Â£40m/â‚¬56m of other net assets. Tax on disposals is stated before taking account of tax credits of Â£223m/â‚¬326m in respect of previously unrecognised deferred tax assets and capital losses. These have been realised as a result of the disposal of discontinued operations, but are reported within continuing operations whence they first arose. Cash flows from discontinued operations 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Net cash flow from operating activities 33 86 48 126 Net cash flow from investing activities 1,879 (29) 2,626 (42) Net cash flow from financing activities - - - - Net movement in cash and cash equivalents 1,912 57 2,674 84 Net cash flow from investing activities includes cash proceeds on the completed disposals of Â£1,933m/â‚¬2,704m (2006: nil). Cash and cash equivalents disposed was Â£7m/â‚¬10m (2006: nil). 4 Combined cash flow statement Reconciliation of operating profit before joint ventures to cash generated from operations - continuing operations 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Operating profit before joint ventures 872 819 1,273 1,204 Amortisation of acquired intangible assets 219 211 320 309 Amortisation of internally developed intangible assets 72 66 105 97 Depreciation of property, plant and equipment 76 81 111 119 Share based remuneration 38 44 55 65 Total non cash items 405 402 591 590 Movement in working capital (59) (8) (86) (12) Cash generated from operations 1,218 1,213 1,778 1,782 Reconciliation of net borrowings Cash Related & derivative cash financial equivalents Borrowings instruments 2007 2006 Â£m Â£m Â£m Â£m Â£m At start of year 519 (3,006) 173 (2,314) (2,694) Increase in cash and cash equivalents 1,917 - - 1,917 239 Increase in borrowings - (64) - (64) (130) Changes resulting from cash flows 1,917 (64) - 1,853 109 Inception of finance leases - (11) - (11) (9) Fair value adjustments - (2) - (2) 3 Exchange translation differences 31 (46) (3) (18) 277 At end of year 2,467 (3,129) 170 (492) (2,314) Related Cash & derivative cash financial equivalents Borrowings instruments 2007 2006 â‚¬m â‚¬m â‚¬m â‚¬m â‚¬m At start of year 774 (4,479) 257 (3,448) (3,933) Increase in cash and cash equivalents 2,681 - - 2,681 351 Increase in borrowings - (94) - (94) (190) Changes resulting from cash flows 2,681 (94) - 2,587 161 Inception of finance leases - (16) - (16) (14) Fair value adjustments - (3) - (3) 5 Exchange translation differences (100) 336 (25) 211 333 At end of year 3,355 (4,256) 232 (669) (3,448) Net borrowings comprise cash and cash equivalents, loan capital, finance leases, promissory notes, bank and other loans, and those derivative financial instruments used to hedge the fair value of fixed rate borrowings. 5 Adjusted figures Reed Elsevier uses adjusted figures as additional performance measures. Adjusted figures are stated before amortisation of acquired intangible assets, acquisition integration costs, disposals and other non operating items, related tax effects and movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term. Adjusted operating profit is also grossed up to exclude the equity share of taxes in joint ventures. Adjusted operating cash flow is measured after net capital expenditure and dividends from joint ventures but before payments in relation to acquisition integration costs. Adjusted figures are derived as follows: Continuing operations 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Operating profit - continuing operations 888 837 1,296 1,231 Adjustments: Amortisation of acquired intangible assets 221 211 323 309 Acquisition integration costs 20 23 29 34 Reclassification of tax in joint ventures 8 10 12 15 Adjusted operating profit from continuing operations 1,137 1,081 1,660 1,589 Profit before tax - continuing operations 812 678 1,185 997 Adjustments: Amortisation of acquired intangible assets 221 211 323 309 Acquisition integration costs 20 23 29 34 Reclassification of tax in joint ventures 8 10 12 15 Disposals and other non operating items (63) 1 (92) 1 Adjusted profit before tax from continuing operations 998 923 1,457 1,356 Profit attributable to parent companies' shareholders 1,200 623 1,709 916 Net profit from discontinued operations (309) (33) (408) (49) Profit attributable to parent companies' shareholders - 891 590 1,301 867 continuing operations Adjustments (post tax): Amortisation of acquired intangible assets 247 236 361 347 Acquisition integration costs 13 16 19 24 Disposals and other non operating items (290) (64) (423) (95) Deferred tax not expected to crystallise in the near term: Unrealised exchange differences on long term inter (21) (22) (31) (32) affiliate lending Acquired intangible assets (60) (56) (88) (82) Other (15) 6 (22) 9 Adjusted profit attributable to parent companies' 765 706 1,117 1,038 shareholders from continuing operations Cash generated from operations 1,218 1,213 1,778 1,782 Dividends received from joint ventures 12 16 18 24 Purchases of property, plant and equipment (65) (68) (95) (100) Proceeds from disposals of property, plant and equipment 4 2 6 3 Expenditure on internally developed intangible assets (80) (99) (117) (146) Payments in relation to acquisition integration costs 19 22 28 33 Adjusted operating cash flow from continuing operations 1,108 1,086 1,618 1,596 2007 2006 2007 2006 Â£m Â£m â‚¬m â‚¬m Operating profit - continuing operations 888 837 1,296 1,231 Operating profit - discontinued operations 112 43 164 63 Operating profit - total operations 1,000 880 1,460 1,294 Adjustments: Amortisation of acquired intangible assets 230 297 336 436 Acquisition integration costs 20 23 29 34 Reclassification of tax in joint ventures 8 10 12 15 Adjusted operating profit from total operations 1,258 1,210 1,837 1,779 Profit before tax - continuing operations 812 678 1,185 997 Profit before tax - discontinued operations 112 43 164 63 Profit before tax - total operations 924 721 1,349 1,060 Adjustments: Amortisation of acquired intangible assets 230 297 336 436 Acquisition integration costs 20 23 29 34 Reclassification of tax in joint ventures 8 10 12 15 Disposals and other non operating items (63) 1 (92) 1 Adjusted profit before tax from total operations 1,119 1,052 1,634 1,546 Profit attributable to parent companies' shareholders - 1,200 623 1,709 916 total operations Adjustments (post tax): Amortisation of acquired intangible assets 259 324 378 476 Acquisition integration costs 13 16 19 24 Disposals and other non operating items (521) (64) (717) (95) Deferred tax not expected to crystallise in the near term: Unrealised exchange differences on long term inter (21) (22) (31) (32) affiliate lending Acquired intangible assets (63) (87) (92) (128) Other (15) 6 (22) 9 Adjusted profit attributable to parent companies' 852 796 1,244 1,170 shareholders from total operations 6 Exchange translation rates In preparing the combined financial information the following exchange rates have been applied: Income statement Balance sheet 2007 2006 2007 2006 Euro to sterling 1.46 1.47 1.36 1.49 US dollars to sterling 2.00 1.84 2.00 1.96 US dollars to euro 1.37 1.25 1.47 1.32 7 Post balance sheet events On 18 January 2008, Reed Elsevier PLC paid a special distribution of 82.0p per ordinary share and Reed Elsevier NV paid a special distribution of â‚¬1.767 per ordinary share, from the net proceeds of the disposal of Harcourt Education. The aggregate special distribution, announced on 12 December 2007, of Â£2,013m/ â‚¬2,690m was recognised when paid in January 2008. The special distributions were accompanied by a consolidation of the ordinary share capital of Reed Elsevier PLC and Reed Elsevier NV on the basis of 58 new ordinary shares for every 67 existing ordinary shares, being the ratio of the aggregate special distribution to the combined market capitalisation of Reed Elsevier PLC and Reed Elsevier NV (excluding the 5.8% indirect equity interest in Reed Elsevier NV held by Reed Elsevier PLC) as at the date of the announcement of the special distributions. On 30 January 2008 the sale of Harcourt Assessment and the remaining Harcourt International businesses, first announced in May 2007, completed following receipt of regulatory clearance in the United States. Proceeds received on disposal were Â£330m/â‚¬449m. On 20 February 2008, Reed Elsevier approved a plan to divest Reed Business Information. In the year to 31 December 2007, Reed Business Information reported revenues of Â£906m/â‚¬1,323m and adjusted operating profits of Â£119m/ â‚¬174m. On 20 February 2008, Reed Elsevier entered into a definitive merger agreement with ChoicePoint, Inc to acquire the company for cash. Taking into account $0.6bn of ChoicePoint's estimated net debt, the total value of the transaction is $4.1bn. The ChoicePoint board will convene a meeting of ChoicePoint shareholders to approve the merger and is unanimous in its recommendation of the merger. The merger is subject to customary regulatory approvals and is expected to be completed later in the year. The transaction will be financed initially through committed new bank facilities, to be later refinanced through the issuance of term debt. ChoicePoint provides unique information and analytics to support underwriting decisions within the property and casualty insurance sector; screening and authentication services for employment, real estate leasing and customer enrolment; and public information solutions primarily to banking, professional services and government customers. Combination of ChoicePoint with the LexisNexis' Risk Information and Analytics Group will create a risk management business with $1.5bn in revenues and a leading position in the fast growing risk management markets. REED ELSEVIER PLC SUMMARY FINANCIAL INFORMATION Basis of preparation 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 the results arising in Reed Elsevier PLC and its subsidiary undertakings. The summary financial information has been prepared on the basis of the group accounting policies of Reed Elsevier PLC as set out on page 112 of the Reed Elsevier Annual Reports and Financial Statements 2006, which are in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union and as issued by the International Accounting Standards Board (' IASB'). Reed Elsevier PLC's 52.9% economic interest in the net assets of the combined businesses is shown in the balance sheet as investments in joint ventures, net of the assets and liabilities reported as part of Reed Elsevier PLC and its subsidiary undertakings. The financial information set out below has been abridged from Reed Elsevier PLC's consolidated financial statements for the year ended 31 December 2007, which have been audited and will be filed with the UK Registrar of Companies following the Annual General Meeting. The audit report was unqualified and did not contain statements under Sections 237(2) or (3) of the Companies Act 1985. Consolidated income statement For the year ended 31 December 2007 2007 2006 Â£m Â£m Administrative expenses (1) (2) Effect of tax credit equalisation on distributed earnings (11) (10) Share of results of joint ventures 658 343 Operating profit 646 331 Finance charges (3) (3) Profit before tax 643 328 Taxation (19) (8) Profit attributable to ordinary shareholders 624 320 Earnings per ordinary share For the year ended 31 December 2007 2007 2006 pence pence Basic earnings per share From continuing operations of the combined businesses 36.6p 24.1p From discontinued operations of the combined businesses 13.1p 1.5p From total operations of the combined businesses 49.7p 25.6p Diluted earnings per share From continuing operations of the combined businesses 36.2p 23.8p From discontinued operations of the combined businesses 12.9p 1.5p From total operations of the combined businesses 49.1p 25.3p Adjusted profit and earnings per share figures are presented in note 1 as additional performance measures. Consolidated cash flow statement For the year ended 31 December 2007 2007 2006 Â£m Â£m Cash flows from operating activities Cash used by operations (2) (2) Interest paid (3) (3) Tax paid (16) (6) Net cash used in operating activities (21) (11) Cash flows from investing activities Dividends received from joint ventures 850 596 Cash flows from financing activities Equity dividends paid (206) (186) Proceeds on issue of ordinary shares 92 47 Purchase of treasury shares (92) (112) Repayment of loan from joint ventures (36) - Increase in net funding balances due from joint ventures (587) (334) Net cash used in financing activities (829) (585) Movement in cash and cash equivalents - - Consolidated balance sheet As at 31 December 2007 2007 2006 Â£m Â£m Non-current assets Investments in joint ventures 1,584 1,090 Total assets 1,584 1,090 Current liabilities Amounts owed to joint ventures - 36 Payables - 1 Taxation 16 13 Total liabilities 16 50 Net assets 1,568 1,040 Capital and reserves Called up share capital 163 161 Share premium account 1,123 1,033 Shares held in treasury (including in joint ventures) (302) (200) Capital redemption reserve 4 4 Translation reserve (37) (98) Other reserves 617 140 Total equity 1,568 1,040 Approved by the board of directors, 20 February 2008. Consolidated statement of recognised income and expense For the year ended 31 December 2007 2007 2006 Â£m Â£m Profit attributable to ordinary shareholders 624 320 Share of joint ventures' net income/(expense) recognised directly in equity 77 (57) Share of joint ventures' cumulative exchange differences on disposal of foreign operations 78 - Share of joint ventures' cumulative fair value movements on disposal of available for sale (4) - investments Share of joint ventures' transfer to net profit from hedge reserve (11) (3) Total recognised net income and expense for the year 764 260 Consolidated reconciliation of shareholders' equity For the year ended 31 December 2007 2007 2006 Â£m Â£m Total recognised net income 764 260 Equity dividends declared (206) (186) Issue of ordinary shares, net of expenses 92 47 Increase in shares held in treasury (including in joint ventures) (130) (151) Increase in share based remuneration reserve 24 26 Equalisation adjustments (16) 2 Net increase/(decrease) in shareholders' equity 528 (2) Shareholders' equity at start of year 1,040 1,042 Shareholders' equity at end of year 1,568 1,040 Notes to the summary financial information 1 Adjusted figures Adjusted profit and earnings per share figures are used as additional performance measures. 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, which is reconciled to the reported figures in note 5 to the combined financial information. The adjusted figures are derived as follows: Earnings per share from total operations of the combined businesses Profit attributable to Basic earnings ordinary shareholders per share 2007 2006 2007 2006 Â£m Â£m pence pence Reported figures 624 320 49.7p 25.6p Effect of tax credit equalisation on distributed earnings 11 10 0.8p 0.8p Profit attributable to ordinary shareholders based on 52.9% 635 330 50.5p 26.4p economic interest in the Reed Elsevier combined businesses Share of adjustments in joint ventures (184) 91 (14.6)p 7.2p Adjusted figures 451 421 35.9p 33.6p Earnings per share from the continuing operations of the combined businesses Profit attributable to Basic earnings ordinary shareholders per share 2007 2006 2007 2006 Â£m Â£m pence pence Reported figures 624 320 49.7p 25.6p Share of joint ventures' net profit from discontinued operations (164) (18) (13.1)p (1.5)p Profit attributable to ordinary shareholders based on the 460 302 36.6p 24.1p continuing operations of the combined businesses 2 Equity dividends Dividends declared in the year 2007 2006 2007 2006 pence pence Â£m Â£m Ordinary shares Final for prior financial year 11.8p 10.7p 149 135 Interim for financial year 4.5p 4.1p 57 51 Total 16.3p 14.8p 206 186 The Directors of Reed Elsevier PLC have proposed a final dividend of 13.6p (2006: 11.8p). The cost of the final dividend, if approved by shareholders, is expected to be Â£147m. No liability has been recognised at the balance sheet date. The Reed Elsevier PLC final dividend as approved will be paid on 16 May 2008, with ex-dividend and record dates of 30 April 2008 and 2 May 2008 respectively. 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. The equalisation adjustment equalises the benefit of the tax credit between the two sets of shareholders in accordance with the equalisation agreement. Dividends paid and proposed relating to the financial year 2007 2006 pence pence Ordinary shares Interim (paid) 4.5p 4.1p Final (proposed) 13.6p 11.8p Total 18.1p 15.9p 3 Share capital and treasury shares 2007 2006 Shares in Shares in issue net of issue net Shares in Treasury treasury of treasury issue shares shares shares millions millions millions millions Number of ordinary shares At start of year 1,287.4 (37.8) 1,249.6 1,266.2 Issue of ordinary shares 18.5 - 18.5 10.4 Share repurchases - (15.2) (15.2) (20.6) Net purchase of shares by employee benefit trust - (1.6) (1.6) (6.4) At end of year 1,305.9 (54.6) 1,251.3 1,249.6 Average number of ordinary shares during the year 1,256.5 1,251.9 4 Contingent liabilities There are contingent liabilities in respect of borrowings of joint ventures guaranteed jointly and severally by Reed Elsevier PLC and Reed Elsevier NV amounting to Â£2,759m at 31 December 2007 (2006: Â£2,589m). 5 Post balance sheet events On 18 January 2008, the company paid a special distribution of 82.0p per ordinary share from the net proceeds of the disposal of Harcourt Education. The distribution, announced on 12 December 2007, of Â£1,041m was recognised when paid in January 2008. The special distribution was accompanied by a consolidation of ordinary share capital on the basis of 58 new ordinary shares of 14 51/116p for every 67 existing ordinary shares of 12.5p, being the ratio of the aggregate special distribution (including that paid by Reed Elsevier NV) to the combined market capitalisation of Reed Elsevier PLC and Reed Elsevier NV (excluding the 5.8% indirect equity interest in Reed Elsevier NV held by Reed Elsevier PLC) as at the date of the announcement of the special distribution. Following the share consolidation, effective 7 January 2008, there were 1,130,473,244 Reed Elsevier PLC ordinary shares of 14 51/116p in issue, of which 46,880,490 were held in treasury including 15,849,192 held by the Reed Elsevier Group plc employee benefit trust. For the purposes of calculating earnings per share, the effective date of the share consolidation is deemed to be 18 January 2008, being the date on which the special distribution was paid. On 30 January 2008 the sale of Harcourt Assessment and the remaining Harcourt International businesses, first announced in May 2007, completed following receipt of regulatory clearance in the United States. Proceeds received on disposal by the Reed Elsevier combined businesses were Â£330m. On 20 February 2008, Reed Elsevier approved a plan to divest Reed Business Information. In the year to 31 December 2007, Reed Business Information reported revenues of Â£906m and adjusted operating profits of Â£119m. On 20 February 2008, Reed Elsevier entered into a definitive merger agreement with ChoicePoint, Inc to acquire the company for cash. Taking into account $0.6bn of ChoicePoint's estimated net debt, the total value of the transaction is $4.1bn. The ChoicePoint board will convene a meeting of ChoicePoint shareholders to approve the merger and is unanimous in its recommendation of the merger. The merger is subject to customary regulatory approvals and is expected to be completed later in the year. REED ELSEVIER NV SUMMARY FINANCIAL INFORMATION Basis of preparation The Reed Elsevier NV share of the Reed Elsevier combined results has been calculated on the basis of the 50% economic interest of the Reed Elsevier NV shareholders in the Reed Elsevier combined businesses, after taking account of the results arising in Reed Elsevier NV and its subsidiary undertakings. The summary financial information has been prepared on the basis of the group accounting policies of Reed Elsevier NV as set out on page 130 of the Reed Elsevier Annual Reports and Financial Statements 2006, which are in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union and as issued by the International Accounting Standards Board ('IASB'). Reed Elsevier NV's 50% economic interest in the net assets of the combined businesses is shown in the balance sheet as investments in joint ventures, net of the assets and liabilities reported as part of Reed Elsevier NV and its subsidiary undertakings. The financial information in respect of the year ended 31 December 2007 has been abridged from the consolidated financial statements of Reed Elsevier NV which have been audited and will be filed with the Chamber of Commerce following the Annual General Meeting. The audit report was unqualified. Consolidated income statement For the year ended 31 December 2007 2007 2006 â‚¬m â‚¬m Administrative expenses (3) (3) Share of results of joint ventures 803 455 Operating profit 800 452 Finance income 73 7 Profit before tax 873 459 Taxation (18) (1) Profit attributable to ordinary shareholders 855 458 Earnings per ordinary share For the year ended 31 December 2007 2007 2006 â‚¬ â‚¬ Basic earnings per share From continuing operations of the combined businesses â‚¬0.84 â‚¬0.56 From discontinued operations of the combined businesses â‚¬0.26 â‚¬0.03 From total operations of the combined businesses â‚¬1.10 â‚¬0.59 Diluted earnings per share From continuing operations of the combined businesses â‚¬0.83 â‚¬0.56 From discontinued operations of the combined businesses â‚¬0.26 â‚¬0.03 From total operations of the combined businesses â‚¬1.09 â‚¬0.59 Adjusted profit and earnings per share figures are presented in note 1 as additional performance measures. Consolidated cash flow statement For the year ended 31 December 2007 2007 2006 â‚¬m â‚¬m Cash flows from operating activities Cash used by operations (2) (3) Interest received 71 12 Tax paid (18) (1) Net cash from operating activities 51 8 Cash flows from investing activities Dividends received from joint ventures 1,410 1,111 Cash flows from financing activities Equity dividends paid (310) (272) Proceeds on issue of ordinary shares 124 68 Purchase of treasury shares (176) (156) Increase in net funding balances due from joint ventures (1,238) (612) Net cash used in financing activities (1,600) (972) Movement in cash and cash equivalents (139) 147 Consolidated balance sheet As at 31 December 2007 2007 2006 â‚¬m â‚¬m Non-current assets Investments in joint ventures 2,075 1,386 Current assets Amounts due from joint ventures - other 5 3 Cash and cash equivalents 9 148 14 151 Total assets 2,089 1,537 Current liabilities Payables 9 8 Taxation 64 64 Total liabilities 73 72 Net assets 2,016 1,465 Capital and reserves Share capital issued 49 48 Paid-in surplus 1,685 1,562 Shares held in treasury (including in joint ventures) (459) (282) Translation reserve (129) (70) Other reserves 870 207 Total equity 2,016 1,465 Approved by the combined board of directors, 20 February 2008. Consolidated statement of recognised income and expense For the year ended 31 December 2007 2007 2006 â‚¬m â‚¬m Profit attributable to ordinary shareholders 855 458 Share of joint ventures' net expense recognised directly in equity (45) (50) Share of joint ventures' cumulative exchange differences on disposal of foreign operations 103 - Share of joint ventures' cumulative fair value movements on disposal of available for sale (5) - investments Share of joint ventures' transfer to net profit from hedge reserve (15) (4) Total recognised net income and expense for the year 893 404 Consolidated reconciliation of shareholders' equity For the year ended 31 December 2007 2007 2006 â‚¬m â‚¬m Total recognised net income for the year 893 404 Equity dividends declared (310) (272) Issue of ordinary shares, net of expenses 124 68 Increase in shares held in treasury (including in joint ventures) (200) (210) Increase in share based remuneration reserve 34 36 Equalisation adjustments 10 1 Net increase in shareholders' equity 551 27 Shareholders' equity at start of year 1,465 1,438 Shareholders' equity at end of year 2,016 1,465 Notes to the summary financial information 1 Adjusted figures Adjusted profit and earnings per share figures are used as additional performance measures. 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, which is reconciled to the reported figures in note 5 to the combined financial information. The adjusted figures are derived as follows: Earnings per share from total operations of the combined businesses Profit attributable to Basic earnings ordinary shareholders per share 2007 2006 2007 2006 â‚¬m â‚¬m â‚¬ â‚¬ Reported figures 855 458 â‚¬1.10 â‚¬0.59 Share of adjustments in joint ventures (233) 127 â‚¬(0.30) â‚¬0.17 Adjusted figures 622 585 â‚¬0.80 â‚¬0.76 Earnings per share from the continuing operations of the combined businesses Profit attributable to Basic earnings ordinary shareholders per share 2007 2006 2007 2006 â‚¬m â‚¬m â‚¬ â‚¬ Reported figures 855 458 â‚¬1.10 â‚¬0.59 Share of joint ventures' net profit from discontinued operations (204) (24) â‚¬(0.26) â‚¬(0.03) Profit attributable to ordinary shareholders based on the 651 434 â‚¬0.84 â‚¬0.56 continuing operations of the combined businesses 2 Equity dividends Dividends declared in the year 2007 2006 2007 2006 â‚¬ â‚¬ â‚¬m â‚¬m Ordinary shares Final for prior financial year â‚¬0.304 â‚¬0.267 225 197 Interim for financial year â‚¬0.114 â‚¬0.102 85 75 R-shares - - - - Total â‚¬0.418 â‚¬0.369 310 272 The Directors of Reed Elsevier NV have proposed a final dividend of â‚¬0.311 (2006: â‚¬0.304). The cost of the final dividend, if approved by shareholders, is expected to be â‚¬195m. No liability has been recognised at the balance sheet date. The Reed Elsevier NV final dividend as approved will be paid on 16 May 2008, with ex-dividend and record dates of 28 April 2008 and 30 April 2008 respectively. 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. Dividends paid and proposed relating to the financial year 2007 2006 â‚¬ â‚¬ Ordinary shares Interim (paid) â‚¬0.114 â‚¬0.102 Final (proposed) â‚¬0.311 â‚¬0.304 R-shares - - Total â‚¬0.425 â‚¬0.406 3 Share capital and treasury shares 2007 2006 Shares in Shares in issue net of issue net Shares in Treasury treasury of treasury issue shares shares shares millions millions millions millions Number of ordinary shares At start of year 748.6 (22.6) 726.0 736.3 Issue of ordinary shares 11.7 - 11.7 6.8 Share repurchases - (11.9) (11.9) (13.4) Net purchase of shares by employee benefit trust - (0.9) (0.9) (3.7) At end of year 760.3 (35.4) 724.9 726.0 Average number of equivalent ordinary shares during the year 774.9 772.1 4 Contingent liabilities There are contingent liabilities in respect of borrowings of joint ventures guaranteed jointly and severally by Reed Elsevier NV and Reed Elsevier PLC amounting to â‚¬3,745m at 31 December 2007 (2006: â‚¬3,858m). 5 Post balance sheet events On 18 January 2008, the company paid a special distribution of â‚¬1.767 per ordinary share from the net proceeds of the disposal of Harcourt Education. The distribution, announced on 12 December 2007, of â‚¬1,299m was recognised when paid in January 2008. The special distribution was accompanied by a consolidation of ordinary share capital on the basis of 58 new ordinary shares of â‚¬0.07 for every 67 existing ordinary shares of â‚¬0.06, being the ratio of the aggregate special distribution (including that paid by Reed Elsevier PLC) to the combined market capitalisation of Reed Elsevier NV and Reed Elsevier PLC (excluding the 5.8% indirect equity interest in Reed Elsevier NV held by Reed Elsevier PLC) as at the date of the announcement of the special distribution. The existing R-shares of â‚¬0.60 were consolidated on a similar basis into new R-shares of â‚¬0.70. Following the share consolidation, effective 7 January 2008, there were 658,127,218 Reed Elsevier NV ordinary shares of â‚¬0.07 in issue, of which 30,584,845 were held in treasury including 8,682,054 held by the Reed Elsevier Group plc employee benefit trust. Additionally, post share consolidation there were 4,050,720 Reed Elsevier NV R-shares of â‚¬0.70 in issue, of which 135,179 were held in treasury. For the purposes of calculating earnings per share, the effective date of the share consolidation is deemed to be 18 January 2008, being the date on which the special distribution was paid. On 30 January 2008 the sale of Harcourt Assessment and the remaining Harcourt International businesses, first announced in May 2007, completed following receipt of regulatory clearance in the United States. Proceeds received on disposal by the Reed Elsevier combined businesses were â‚¬449m. On 20 February 2008, Reed Elsevier approved a plan to divest Reed Business Information. In the year to 31 December 2007, Reed Business Information reported revenues of â‚¬1,323m and adjusted operating profits of â‚¬174m. On 20 February 2008, Reed Elsevier entered into a definitive merger agreement with ChoicePoint, Inc to acquire the company for cash. Taking into account $0.6bn of ChoicePoint's estimated net debt, the total value of the transaction is $4.1bn. The ChoicePoint board will convene a meeting of ChoicePoint shareholders to approve the merger and is unanimous in its recommendation of the merger. The merger is subject to customary regulatory approvals and is expected to be completed later in the year. ADDITIONAL INFORMATION FOR US INVESTORS Summary financial information in US dollars This summary financial information in US dollars is a simple translation of the Reed Elsevier combined financial information into US dollars at the rates of exchange set out in note 6 to the combined financial information. The financial information provided below is prepared in accordance with accounting principles as used in the preparation of the Reed Elsevier combined financial information. It does not represent a restatement under US Generally Accepted Accounting Principles ('US GAAP'), which would be different in some significant respects. Combined income statement 2007 2006 US$m US$m Revenue - continuing operations 9,168 8,297 Operating profit - continuing operations 1,776 1,540 Profit before tax - continuing operations 1,624 1,248 Net profit from discontinued operations 618 61 Net profit attributable to parent companies' shareholders - total operations 2,400 1,146 Adjusted operating profit - continuing operations 2,274 1,989 Adjusted profit attributable to parent companies' shareholders - total operations 1,704 1,465 Basic earnings per American Depositary Share (ADS) - total operations US$ US$ Reed Elsevier PLC (Each ADS comprises four ordinary shares) $3.98 $1.88 Reed Elsevier NV (Each ADS comprises two ordinary shares) $3.01 $1.48 Adjusted earnings per American Depositary Share (ADS) - total operations Reed Elsevier PLC (Each ADS comprises four ordinary shares) $2.87 $2.47 Reed Elsevier NV (Each ADS comprises two ordinary shares) $2.19 $1.90 Adjusted earnings per American Depository Share is based on Reed Elsevier PLC shareholders' 52.9% and Reed Elsevier NV's 50% respective share of the adjusted profit attributable of the Reed Elsevier combined businesses. Adjusted figures are presented as additional performance measures and are reconciled to the reported figures at their sterling and euro amounts in note 6 to the combined financial information and in note 1 to the summary financial information of each of the two parent companies. Combined cash flow statement 2007 2006 US$m US$m Net cash from operating activities - continuing operations 1,662 1,634 Net cash used in investing activities - continuing operations (756) (503) Net cash used in financing activities - continuing operations (896) (796) Net cash from discontinued operations 3,824 105 Increase in cash and cash equivalents 3,834 440 Adjusted operating cash flow - continuing operations 2,216 1,998 Combined balance sheet 2007 2006 US$m US$m Non-current assets 10,682 11,637 Current assets 8,192 5,086 Assets held for sale 682 - Total assets 19,556 16,723 Current liabilities 7,734 6,535 Non-current liabilities 5,702 6,309 Liabilities associated with assets held for sale 168 - Total liabilities 13,604 12,844 Net assets 5,952 3,879 Both Reed Elsevier PLC ('RUK', CUSIP No. 758205207) and Reed Elsevier NV ('ENL', CUSIP No. 758204200) have American Depositary Shares (ADSs) listed on the New York Stock Exchange (Depositary: Bank of New York NA). An ADS in Reed Elsevier NV represents two ordinary shares in Reed Elsevier NV, while a Reed Elsevier PLC ADS represents four ordinary shares in Reed Elsevier PLC. Final dividends on Reed Elsevier PLC and Reed Elsevier NV ADSs will be paid on 23 May 2008. INVESTOR INFORMATION Notes for Editors Reed Elsevier is a world leading publisher and information provider and its principal operations are in North America and Europe. Its two parent companies - Reed Elsevier PLC and Reed Elsevier NV - are listed on the London and Amsterdam Stock Exchanges respectively, and also on the New York Stock Exchange. The returns to their respective shareholders are equalised in terms of dividend and capital rights. 'Reed Elsevier' and 'the combined businesses' comprise Reed Elsevier PLC and Reed Elsevier NV plus their two jointly owned companies, Reed Elsevier Group plc and Elsevier Reed Finance BV, and their respective subsidiaries and joint ventures. The Reed Elsevier PLC 2007 Annual Report and Financial Statements are being posted to Reed Elsevier PLC shareholders on 14 March 2008. Copies of the Reed Elsevier PLC and Reed Elsevier NV 2007 Annual Report and Financial Statements will be available to shareholders in Reed Elsevier NV on request. Copies of the Preliminary Statement are available to the public from the respective companies: Reed Elsevier PLC Reed Elsevier NV 1-3 Strand Radarweg 29 London WC2N 5JR 1043 NX Amsterdam United Kingdom The Netherlands Copies of all recent announcements, including this Preliminary Announcement, and additional information on Reed Elsevier can be found on the Reed Elsevier Home Page on the World Wide Web: http://www.reedelsevier.com This information is provided by RNS The company news service from the London Stock Exchange

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