Final Results

Reed Elsevier PLC 15 February 2007 Issued on behalf of Reed Elsevier PLC and Reed Elsevier NV 15 February 2007 REED ELSEVIER 2006 PRELIMINARY RESULTS GOOD FINANCIAL PROGRESS AND SHARPENED STRATEGIC FOCUS Good financial progress Adjusted Figures - Revenues up 4% to Â£5,398m/up 5% to â‚¬7,935m, up 6% at constant currencies. - Adjusted operating profits, before amortisation of acquired intangible assets and acquisition integration costs, up 6% to Â£1,210m/up 7% to â‚¬1,779m, up 9% at constant currencies. - Adjusted earnings per share, at reported exchange rates, up 7% to 33.6p for Reed Elsevier PLC and up 9% to â‚¬0.76 for Reed Elsevier NV, up 11% at constant currencies. - 10% growth in online information and digital services which now account for 37% of total revenues. - Adjusted operating margins at 22.4%, up 0.7%pts underlying. - 95% of adjusted operating profits converted into cash with free cash flow after interest and taxation up 7% to Â£817m/up 8% to â‚¬1,201m. - Â£588m/â‚¬864m of cash returned to shareholders in 2006 through dividends and share buybacks, representing 72% of free cash flow. - Return on invested capital increased to 9.8% post tax. - Increase in equalised final dividends for Reed Elsevier PLC and Reed Elsevier NV of 10% and 14% respectively giving total dividends for 2006 up 10% to 15.9p and up 13% to â‚¬0.406 respectively. Reported Figures - Reported operating profit, after amortisation of acquired intangible assets and acquisition integration costs, up 5% to Â£880m/up 6% to â‚¬1,294m. - Reported earnings per share up 38% to 25.6p/up 37% to â‚¬0.59. Sharpened strategic focus - Following a detailed review, Reed Elsevier is to sharpen its strategic focus to best capitalise on growing digital opportunities in its key markets of Science and Medical, Legal and Business. - Sale of the Education division is planned; its business dynamics and strategy have increasingly differed from the other three divisions as Elsevier, LexisNexis and Reed Business accelerate their online information and workflow solution strategies. - It is the intention to return the net proceeds to shareholders by way of a special distribution in the equalisation ratio. The sale of Education and return of capital is expected to be modestly dilutive to proforma adjusted earnings per share. - Reed Elsevier's strategic focus across all its businesses will be: â€¢ to deliver authoritative content through leading brands â€¢ to drive online solutions â€¢ to improve cost efficiency â€¢ selective portfolio development. - This strategy, coupled with the disposal of the Education business, will produce a more cohesive and predictable business with an expectation of a minimum 10% annual growth in adjusted earnings per share at constant currencies. Reed Elsevier's Chief Executive Officer, Sir Crispin Davis, commented: '2006 saw important progress in the development of Reed Elsevier's business. There is momentum behind our digital revenues driven by a widening range of innovative online information products, increasingly embedded in customer workflows. The planned sale of our Harcourt Education division announced today sharpens our strategic focus and concentrates our resources on the digital opportunities across an increasingly synergistic portfolio. The 2006 financial results were encouraging, with revenue growth in line with our expectations and improved underlying margins. Strong cash generation and higher returns on invested capital have also been delivered. Recent acquisitions in e-health, legal solutions, risk management and business to business online are accelerating our digital progress and delivering increasing returns. Going into 2007, market conditions are generally favourable. Our strategy is clear, the business well focused, and we are leveraging our resources to good effect. The digital horizon is expanding and Reed Elsevier is well placed.' __________________________________________________________________________________________________________________ 2006 2005 Change 2006 2005 Change Change at Â£m Â£m % â‚¬m â‚¬m constant REED ELSEVIER COMBINED BUSINESSES % currencies % __________________________________________________________________________________________________________________ Revenue 5,398 5,166 +4% 7,935 7,542 +5% +6% __________________________________________________________________________________________________________________ Reported operating profit 880 839 +5% 1,294 1,225 +6% +9% Reported profit before tax 721 701 +3% 1,060 1,023 +4% +8% Adjusted operating profit 1,210 1,142 +6% 1,779 1,667 +7% +9% Adjusted profit before tax 1,052 1,002 +5% 1,546 1,463 +6% +9% __________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________ PARENT COMPANIES Reed Elsevier PLC Reed Elsevier NV Change at constant 2006 2005 Change 2006 2005 Change currencies % % % __________________________________________________________________________________________________________________ Reported earnings per share 25.6p 18.6p 38% â‚¬0.59 â‚¬0.43 37% +44% Adjusted earnings per share 33.6p 31.5p +7% â‚¬0.76 â‚¬0.70 +9% +11% Dividend per share 15.9p 14.4p +10% â‚¬0.406 â‚¬0.359 +13% __________________________________________________________________________________________________________________ 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 expect 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 2005 average and hedge exchange rates. ENQUIRIES Sybella Stanley (Investors) Patrick Kerr (Media) +44 20 7166 5630 +44 20 7166 5646 FINANCIAL HIGHLIGHTS (Growth rates at constant currencies unless otherwise indicated) Revenue growth and underlying margin improvement Revenues were up 6% and adjusted operating profits were up 9% at constant currencies. Organic revenue growth was 5% despite the weak education markets. Organic adjusted operating profit was 8% reflecting underlying margin improvement across the rest of the business. Revenue growth was driven by a 10% increase in digital revenues representing the payback on the continuing investment in new electronic product, innovative marketing and expanded sales coverage. The 0.7% point improvement in underlying margin reflects the impact of higher revenue growth combined with continuing cost actions to improve operational efficiency as the business migrates online. Overall operating margin was up 0.3% points at reported exchange rates, impacted by the US dollar decline as it works its way through the Elsevier subscriptions rolling currency hedging programme. Strong cash flow and increasing returns on capital The quality of the earnings is underpinned by the strong cash flow, with 95% of operating profits converting into cash. Increasing profitability and capital discipline drove the return on capital employed in the business 0.4% points higher to 9.8% post tax. The recent acquisitions to accelerate strategy in e-health, legal solutions, risk management and business to business online are contributing well to the development of the business and are on track to deliver a return on capital of 10% within three years, with good growth in returns thereafter. Growth in adjusted earnings and dividends Growth in adjusted earnings per share at constant currencies was 11%. The impact of the weaker US dollar, including the impact on the currency hedging programme, gives, at reported exchange rates, adjusted earnings growth of 7% for Reed Elsevier PLC to 33.6p and 9% for Reed Elsevier NV to â‚¬0.76. The Boards are recommending an increase in the equalised final dividends for Reed Elsevier PLC and Reed Elsevier NV of 10% and 14% respectively, to give total dividends for the year up 10% and 13% (the differential growth rates reflect movements in the sterling/euro exchange rate). Dividends paid in the year, together with share buybacks under the share repurchase programme, have distributed Â£588m/â‚¬864m to shareholders, representing 72% of free cash flow. Reported earnings per share Reported earnings per share (taking into account the amortisation of acquired intangible assets, disposal gains and losses, and movements in deferred tax balances not expected to crystallise in the near term) were up 38% expressed in sterling and 37% in euros at 25.6p and â‚¬0.59 for Reed Elsevier PLC and Reed Elsevier NV respectively. This growth reflects the improvement in underlying operating performance together with a lower reported tax charge including the favourable settlement of tax on prior year disposals and movements in deferred tax balances not expected to crystallise in the near term. SHARPENED STRATEGIC FOCUS Following a detailed review Reed Elsevier is sharpening its strategic focus to best capitalise on the growing digital opportunities in its markets. Reed Elsevier will derive the best returns on its brand franchises and digital investments by focusing on the Science, Medical, Legal and Business markets. Accordingly Reed Elsevier has announced the planned sale of the Harcourt Education division. The strategy is focused on four priorities, closely linked to financial strategy. Deliver authoritative content through leading brands Reed Elsevier delivers authoritative, and to a great extent proprietary, content of the highest quality through market leading brands. In its publications and services Reed Elsevier's professional customers find the essential data, analysis and comment to support their decisions. Editorial investment and selective acquisitions are generating new sources of content to widen the product offering to customers, and to expand into new segments and geographic regions. As online information sources increase, Reed Elsevier's trusted leadership brands play a vital role. Drive online solutions Over the last five years digital revenues have built to Â£2.0bn/â‚¬2.9bn, or 37% of total revenues. Authoritative information, technology enabled and increasingly integrated into customer workflows, is making Reed Elsevier's customers more effective professionally and making Reed Elsevier a more valued partner. As Reed Elsevier's customers and core markets rapidly migrate online, there are opportunities to leverage its leadership brands and authoritative proprietary content. Digital technology enables Reed Elsevier to move up the value chain with its customers by providing a range of innovative solution orientated products that become embedded in their workflow. This will play a major part in Reed Elsevier's strategy going forward. Improve cost efficiency Digital growth and an increasingly synergistic portfolio provide opportunities to further leverage scale and commonalities across the business, sharing skill sets, resources and collective experience. Substantial cost savings have been made over the last five years, and there are further opportunities across the supply chain and in technology and infrastructure to continue this progress. Improving cost efficiency remains a fundamental feature of Reed Elsevier. Selective portfolio development In addition to significant internal investment, Reed Elsevier will continue to allocate capital and resources to pursue selective acquisition opportunities that accelerate its strategy and overall business progress. Reed Elsevier has spent Â£1.6bn/â‚¬2.1bn on acquisitions over the last five years, focused on strong brands and proprietary content, customer workflow solutions, leading technologies and expansion into attractive adjacent markets, most notably in legal solutions, risk management, health and e-business. Financial strategy Reed Elsevier expects progress in the development of its digital business to deliver good revenue growth and, with improvements in cost efficiency, this will flow through at a higher rate to operating profitability. Additional financial benefits are delivered through leverage and fiscal efficiency. With an increasing and substantial portion of the revenues being delivered by subscription based products and the trend to longer term contracts, Reed Elsevier will be a more predictable business. Reed Elsevier aims to distribute 70-80% of free cash flow through dividends and share buybacks. The balance (Â£229m/â‚¬337m in 2006) will be invested in the business, mainly through acquisitions, so maintaining capital efficiency aligned to its strategy. Reed Elsevier aims to maintain its credit rating in order to take advantage of opportunities within its markets and access the cheapest sources of borrowing, particularly the commercial paper markets. This business and financial strategy is directed at delivering good revenue growth, continuous margin improvement, strong cash generation and growing returns on capital. These are targeted to deliver consistent adjusted earnings per share growth of a minimum 10% annually at constant currencies. This strategy is supported by long term incentive programmes which are based on growth in adjusted earnings per share and total shareholder return relative to a peer group of media companies. OUTLOOK Going into 2007, market conditions are generally favourable. Elsevier, LexisNexis and Reed Business are expected to make further good progress in the development of Reed Elsevier's digital business as well as show good revenue momentum and margin improvement. The financial goal is for a minimum of 10% annual adjusted earnings per share growth at constant currencies. Adjusted earnings per share for 2007 will however be influenced by the timing of the sale of the highly seasonal education business. DIVISIONAL PERFORMANCE SUMMARY (Growth rates at constant currencies unless otherwise indicated) Elsevier delivered revenues and adjusted operating profits ahead 8% and 10% respectively at constant currencies, or 5% and 8% before acquisitions and disposals. Growth was driven by strong subscription renewals and widening distribution of its scientific and medical journals and databases, as well as new online product sales and a successful book publishing programme. In Health, our market strategies in electronic health information services are accelerating through the launch of electronic reference materials, medical education resources, and specialist information services and workflow tools to enhance the efficacy of clinical diagnosis and treatment. LexisNexis saw revenues and adjusted operating profits up 8% and 13% respectively at constant currencies, or 7% and 13% before acquisitions. Subscription renewals were strong, good growth was seen in new sales of its online information solutions, both in the US and internationally, and in the Risk Information and Analytics business. The Total Solutions strategy launched in the year has gained good traction in the market, focused on the distinctive needs of lawyers across major areas of their workflow. In Risk Information and Analytics, the Seisint business saw strong revenue growth and delivered a 10% post tax return in only its second full year of ownership. Harcourt Education held revenues flat at constant currencies despite a weaker market. Adjusted underlying operating profits were 20% lower, largely reflecting investment ahead of the much stronger 2007 state textbook adoption market and the significant impact of underperformance and contract cost overruns in assessment. Harcourt's US basal and supplemental businesses performed well to grow revenues 1% against a textbook market estimated to be down 6%. Harcourt won the leading share, at 38%, in the new state textbook adoptions in which it participated and the supplemental business saw a good market response to its new publishing. Reed Business revenues and adjusted operating profits were up 5% and 14% respectively at constant currencies, both in total and underlying. The online information services grew at over 20%, more than compensating for print migration, and the Exhibition business performed strongly. Reed Business has grown its digital revenues to $400m over the last five years almost entirely through organic investment and new product launches, leveraging its brands, content and market positions. With 24% of the revenues of the magazines and information businesses now from online services, the overall growth trajectory is encouraging. 2006 2005 2006 2005 Change at Â£m Â£m â‚¬m â‚¬m constant currencies __________________________________________________________________________________________________________________ Revenue Elsevier 1,521 1,436 2,236 2,097 +8% LexisNexis 1,570 1,466 2,308 2,140 +8% Harcourt Education 889 901 1,307 1,315 0% Reed Business 1,418 1,363 2,084 1,990 +5% __________________________________________________________________________________________________________________ Total 5,398 5,166 7,935 7,542 +6% __________________________________________________________________________________________________________________ Adjusted operating profit Elsevier 465 449 683 655 +10% LexisNexis 380 338 559 493 +13% Harcourt Education 129 161 190 235 -19% Reed Business 241 214 354 313 +14% Unallocated items (5) (20) (7) (29) __________________________________________________________________________________________________________________ Total 1,210 1,142 1,779 1,667 +9% __________________________________________________________________________________________________________________ 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. The reported operating profit figures are set out in Note 2 to the combined financial information and reconciled to the adjusted figures in Note 4. OPERATING AND FINANCIAL REVIEW ELSEVIER 2006 2005 2006 2005 Change Â£m Â£m â‚¬m â‚¬m at constant currencies __________________________________________________________________________________________________________________ Revenue Science & Technology 792 785 1,164 1,146 +4% Health Sciences 729 651 1,072 951 +13% __________________________________________________________________________________________________________________ 1,521 1,436 2,236 2,097 +8% __________________________________________________________________________________________________________________ Adjusted operating profit 465 449 683 655 +10% Adjusted operating margin 30.6% 31.3% 30.6% 31.3% +0.7pts __________________________________________________________________________________________________________________ Elsevier had a successful year, with strong subscription renewals, widening distribution of its scientific and medical journals and databases, growing new online product sales and a successful book publishing programme. Revenues and adjusted operating profits were ahead 8% and 10% respectively at constant currencies, or 5% and 8% before acquisitions and disposals. Underlying operating margins were 0.9 percentage points ahead before acquisition and currency effects, driven by revenue growth, stabilising investment levels and further supply chain efficiency. The Science & Technology business saw organic revenue growth of 5% at constant currencies reflecting strong journal subscription renewals, at 97%, widening distribution through an expanded sales force, and good growth in online databases. ScienceDirect usage continues to grow at over 20% and e-only contracts now account for 45% of journal subscription revenues. The Scopus abstract and indexing database has been well received in the market and is seeing good conversion of trials into firm contracts. Early in the year, the Science & Technology business was reorganised into a more market-focused organisation, to better serve large academic and government institutions as well as to focus more directly on smaller and mid sized institutions, the corporate sector, and societies and individuals. Customer satisfaction scores have significantly improved during the year as a result of the sustained programme to improve service levels, and new products and marketing strategies are being developed for under penetrated segments. In Health Sciences, revenue growth was 13% at constant currencies, or 6% underlying. Strong growth was seen in the nursing and allied health professional sectors and in new society journal publishing. Online revenues are growing rapidly, up 37% in total, as the medical community increasingly adopts online information services to drive productivity and enhance outcomes. The year saw increasing penetration of the ScienceDirect and MDConsult products and further launches made and planned of electronic reference materials, medical education resources, and specialist information services and workflow tools. The integration of the MediMedia MAP businesses acquired in August 2005 is now complete with revenue growth initiatives building momentum and adjusted operating margins improved significantly. The acquisition in May of the Gold Standard drug information database and related products is accelerating our market strategies in electronic health information services to enhance the efficacy of clinical diagnosis and treatment. In December, the Endeavor software business was sold following a reappraisal of its position within Elsevier's overall market strategies. At reported exchange rates, adjusted operating margins were 0.7 percentage points lower largely reflecting the low, but rapidly improving, margins of the MediMedia acquisition made in 2005 as well as the impact of the rolling three year currency hedging programme as the US dollar decline over the last few years works its way through the hedge rates. The outlook for Elsevier is positive. Subscription renewals are strong, customer satisfaction is improving, our publishing programmes are expanding, new electronic product is developing well, and distribution is widening. LEXISNEXIS 2006 2005 2006 2005 Change Â£m Â£m â‚¬m â‚¬m at constant currencies __________________________________________________________________________________________________________________ Revenue LexisNexis United States 1,129 1,061 1,660 1,549 +8% International 441 405 648 591 +9% __________________________________________________________________________________________________________________ 1,570 1,466 2,308 2,140 +8% __________________________________________________________________________________________________________________ Adjusted operating profit 380 338 559 493 +13% Adjusted operating margin 24.2% 23.1% 24.2% 23.1% +1.1pts __________________________________________________________________________________________________________________ LexisNexis had a successful year. Subscription renewals were strong, good growth was seen in new sales of its online information solutions both in the US and internationally, and further good growth was seen in risk information and analytics. Revenues and adjusted operating profits were up 8% and 13% respectively at constant currencies, or 7% and 13% before acquisitions. This 7% organic revenue growth compares with 6% in 2005 and 4% in 2004 and reflects the strengthening momentum in the business. The adjusted operating margin was 1.1 percentage points higher reflecting the good revenue growth and tight cost control. In US Legal Markets, strong subscription renewals and additional online information and solutions sales to both large and small firms drove organic growth of 6%. The Total Solutions strategy launched in the year has gained good traction in the market, focused on the distinctive needs of lawyers across four major areas of their workflow: litigation, client development, research and practice management. An integrated solutions product was also launched for the risk management market. The product portfolio was expanded through organic development and selective acquisition: Casesoft (litigation case analysis), Dataflight (online repository and tools for evidence management). In Corporate and Public Markets organic revenue growth was 8% with continued strengthening in online news and business information, higher patent volumes and strong demand in risk management. The Seisint business acquired in September 2004 saw continued strong revenue growth and LexisNexis' existing risk management business has now been fully migrated to the Seisint technology platform. The Seisint business delivered a 10% post tax return in only its second full year of ownership, and returns continue to grow. The LexisNexis International business outside the US saw underlying revenue growth of 8% driven by the growing demand for LexisNexis' online information services across its markets and new publishing. The Total Solutions strategy is also being rolled out in these international markets behind increasing online penetration. In the UK this was accelerated with the acquisition of Visualfiles (case management and compliance tools). Particularly strong growth was seen in the UK, France, Germany, Canada and South Africa. The outlook for LexisNexis is positive. Revenue momentum is good, with strong subscription renewals, increasing take up of new online services and total solutions across our markets, and strong demand growth in risk management. HARCOURT EDUCATION 2006 2005 2006 2005 Change Â£m Â£m â‚¬m â‚¬m at constant currencies __________________________________________________________________________________________________________________ Revenue Harcourt Education US Schools & Testing 796 806 1,170 1,177 0% International 93 95 137 138 +1% __________________________________________________________________________________________________________________ 889 901 1,307 1,315 0% __________________________________________________________________________________________________________________ Adjusted operating profit 129 161 190 235 -19% Adjusted operating margin 14.5% 17.9% 14.5% 17.9% -3.4pts __________________________________________________________________________________________________________________ Harcourt Education's basal textbook and supplemental businesses performed well against a weaker education market to hold overall revenues flat. Profits were lower through investment ahead of major adoptions and underperformance in assessment. Revenues at Harcourt Education were flat against the prior year at constant currencies, whilst adjusted operating profits were 19% lower, or 20% lower before minor disposals. Adjusted operating margin was 3.4 percentage points lower at 14.5% largely reflecting sales and marketing investment ahead of the much stronger 2007 adoption market, sales mix and the impact of the underperformance in assessment. The Harcourt US K-12 basal and supplemental businesses have performed well both achieving 1% revenue growth in a US textbook market estimated to be down around 6%. (The weaker market reflects the state textbook adoption cycle and reduced spending by elementary schools in non-adoption states partly as a result of significant prior year spending on federally supported Reading First programmes.) Harcourt won the leading market share, at 38%, in new state textbook adoptions in which it participated, with great success from new publishing particularly in the secondary schools market in literature and language arts, science and social studies. A good market response to new publishing in the supplemental business, and more manageable backlist attrition, continues the recovery in this business as it replaces traditional supplemental product with more comprehensive intervention programmes, and reorientates sales and marketing activities from individual school to district level. The assessment business saw revenues 4% lower reflecting the net loss of state testing contracts and lower catalog sales. Operational difficulties surrounding a major state testing contract and knock on effects on other contracts resulted in significant cost overruns. New management were appointed in the year and organisational changes made which are beginning to make a real difference to the business. Whilst revenues are expected to decline further due to lost contracts, the actions taken have positioned the business for a recovery in performance and margin this year and next. The Harcourt Education International business saw revenues 1% higher. Strong growth in South Africa and in UK export sales were offset by a weak performance in a flat UK market. The outlook for Harcourt Education is positive. The textbook adoption cycle has entered a strong growth phase, the new textbook programmes for 2007 are being well received in the market, and the pipeline is strong with a high level of development activity. The new publishing in the supplemental business is gaining momentum and assessment is on a firm recovery path. Organisational changes in the business are expected to deliver increasingly integrated market strategies and significant further cost efficiencies. REED BUSINESS 2006 2005 2006 2005 Change Â£m Â£m â‚¬m â‚¬m at constant currencies __________________________________________________________________________________________________________________ Revenue Reed Business Information 896 892 1,317 1,302 +1% Reed Exhibitions 522 471 767 688 +12% __________________________________________________________________________________________________________________ 1,418 1,363 2,084 1,990 +5% __________________________________________________________________________________________________________________ Adjusted operating profit 241 214 354 313 +14% Adjusted operating margin 17.0% 15.7% 17.0% 15.7% +1.3pts __________________________________________________________________________________________________________________ Reed Business has had a successful year. The online information services grew rapidly, more than compensating for print migration, and the exhibitions business again performed strongly. Revenues and adjusted operating profits were 5% and 14% ahead respectively at constant currencies, with acquisitions and disposals having no overall effect on these growth rates. Adjusted operating margins were 1.3 percentage points higher, reflecting the strong growth in the exhibitions business and tight cost control. At Reed Exhibitions, revenues were 12% higher, or 10% underlying. Strong growth was seen in key shows across the principal geographies in the US, Europe and Asia Pacific, with particularly good performances in Japan and in the international Midem entertainment and property shows held in Cannes. Whilst much of B2B marketing is moving online, the demand for exhibitions remains very strong as exhibitors and buyers place great value on physical meetings and events to balance other information sources and connections. Underlying profit growth was 16% including 6% from share of joint ventures cycling in. The net effect of other biennial shows cycling in and out is broadly neutral. The Sinopharm exhibitions acquired in a joint venture in China in 2005 are performing well ahead of plan and new shows are to be launched in 2007. The Reed Business Information magazine and information businesses saw continued strong underlying growth in online services of over 20%, more than compensating for the 3% decline in print as the business migrates online. Overall RBI revenues were up 2% underlying. With 24% of revenues now from online services, the overall growth trajectory is encouraging. Adjusted operating profits were up 12% through continued action on costs as resources are rebalanced to the digital opportunity. In the US, RBI underlying revenues were 2% lower. Online revenues are growing rapidly, particularly from advertising in community sites and new services, and are close to offsetting the print decline seen across most sectors. In the UK, RBI underlying revenues were up 6% reflecting the strong growth in online recruitment (up 39%) and online subscription services (up 17%). Online revenues now account for 41% of RBI UK revenues with strong growth and new launches set to increase this further. Print revenues benefited from innovative publishing and design. In continental Europe underlying revenues were up 3%, with again good growth in new online services and some further recovery in advertising markets. Revenues in Asia grew 6%. As part of a repositioning of the portfolio, the US manufacturing product news tabloid business was sold during the year as well as a number of other titles and North American manufacturing shows. In January 2007 RBI acquired Buyerzone, a fast growing online service for matching vendors and buyers in procurement tendering that can be leveraged across RBI's categories. The outlook for Reed Business is encouraging. Strong demand for online services, good growth in exhibitions and ongoing portfolio management are steadily repositioning the business for good long term growth. FINANCIAL REVIEW REED ELSEVIER COMBINED BUSINESSES Income statement Revenue, at Â£5,398m/â‚¬7,935m, increased by 4% expressed in sterling and 5% expressed in euros. At constant exchange rates, revenue was 6% higher, or 5% excluding acquisitions and disposals. Reported figures Reported operating profit, after amortisation of acquired intangible assets and acquisition integration costs, at Â£880m/â‚¬1,294m, was up 5% in sterling and 6% in euros. The increase reflects the strong underlying operating performance, partly offset by the effect of a weaker US dollar hedge rate applicable for Elsevier journal subscription revenues and other currency translation effects. The amortisation charge in respect of acquired intangible assets amounted to Â£297m/â‚¬436m, up Â£21m/â‚¬33m, principally as a result of recent acquisitions. Acquisition integration costs amounted to Â£23m/â‚¬34m (2005: Â£21m/â‚¬30m). Net losses on business disposals and other non-operating items were Â£1m/â‚¬1m (2005: net gain Â£2m/â‚¬2m). The reported profit before tax, including amortisation of acquired intangible assets, acquisition integration costs and non operating items, at Â£721m/â‚¬1,060m, was up 3% expressed in sterling and 4% in euros. The reported tax charge of Â£96m/â‚¬141m compares with a charge of Â£237m/â‚¬346m in the prior year principally reflecting favourable settlement of tax on prior year disposals and 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. The reported attributable profit of Â£623m/â‚¬916m compares with a reported attributable profit of Â£462m/â‚¬675m in 2005, reflecting the strong operating performance and the lower reported tax charge. 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 2005 average and hedge exchange rates. Adjusted operating profit, at Â£1,210m/â‚¬1,779m, was up 6% expressed in sterling and up 7% in euros. At constant exchange rates, adjusted operating profits were up 9%, or 8% excluding acquisitions and disposals. Underlying operating margins improved by 0.7 percentage points. Overall adjusted operating margins, up 0.3 percentage points at 22.4%, were held back by the inclusion of lower margin acquisitions and currency effects, most particularly the year on year movement in hedge rates in Elsevier's journal subscriptions. (The net benefit of the Elsevier science journal hedging programme is lower in 2006 than in 2005 as the effect of the weaker US dollar is systematically incorporated within the three year rolling hedging programme.) Within adjusted operating profit, the net pension expense (including the net pension financing items included within operating profit) was Â£20m/â‚¬28m lower than in the prior year principally reflecting a wider differential between the return on plan assets and interest on pension obligations. The charge for share based payments was Â£49m/â‚¬72m (2005: Â£57m/â‚¬83m). Restructuring costs, other than in respect of acquisition integration, were Â£21m/â‚¬31m (2005: Â£25m/â‚¬37m). Net finance costs, at Â£158m/â‚¬233m, were Â£18m/â‚¬29m higher than in the prior year due to higher short term interest rates and the financing cost of acquisitions and the share repurchase programme, partly offset by the benefit of strong free cash flow. Adjusted profit before tax was Â£1,052m/â‚¬1,546m, up 5% compared to the prior year expressed in sterling and 6% in euros. At constant exchange rates, adjusted profit before tax was up 9%. The effective tax rate on adjusted earning was 24.1% (2005: 24.6%). The effective tax rate on adjusted earnings excludes the effect of 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. The adjusted profit attributable to shareholders of Â£796m/â‚¬1,170m was up 6% compared to the prior year expressed in both sterling and euros. At constant exchange rates, adjusted profit attributable to shareholders was up 9%. Cash flows and debt Adjusted operating cash flow was Â£1,152m/â‚¬1,693m, up 7% expressed in both sterling and euros, and 7% at constant currencies. The rate of conversion of adjusted operating profits into cash flow was 95% (2005: 95%) reflecting the continuing focus on capital discipline and managing working capital as the business expands. Capital expenditure included within adjusted operating cash flow was Â£196m/â‚¬288m (2005: Â£195m/â‚¬285m), including Â£108m/â‚¬159m in respect of capitalised development costs included within intangible assets. Spend on acquisitions was Â£171m/â‚¬251m including deferred consideration payable. An amount of Â£87m/â‚¬128m was capitalised as acquired intangible assets and Â£102m/â‚¬150m as goodwill. Acquisition integration spend in respect of these and other recent acquisitions amounted to Â£26m/â‚¬37m principally in respect of the MediMedia MAP integration. Disposal proceeds amounted to Â£48m/â‚¬70m. Free cash flow - after interest and taxation - was Â£817m/â‚¬1,201m, up Â£53m/â‚¬85m. Dividends paid to shareholders in the year amount to Â£371m/â‚¬545m (2005: Â£336m/ â‚¬491m). Share repurchases by the parent companies amounted to Â£217m/â‚¬319m. Additional shares of the parent companies were purchased by the employee benefit trust for Â£68m/â‚¬100m to meet future obligations in respect of share based remuneration. Net proceeds from share issuance under share option programmes were Â£93m/â‚¬137m. Net borrowings at 31 December 2006 were Â£2,314m/â‚¬3,448m (2005: Â£2,694m/â‚¬3,933m), a decrease of Â£380m in sterling and â‚¬485m in euros since 31 December 2005 principally due to foreign exchange translation effects following the significant weakening of the US dollar between the beginning and end of the year. These translation effects decreased net debt expressed in sterling by Â£277m and in euros by â‚¬333m. Additionally, net debt benefited from the free cash flow less dividends and share buy backs and acquisition spend. Gross borrowings after fair value adjustments at 31 December 2006 amounted to Â£3,006m/â‚¬4,479m, denominated mostly in US dollars, and were partly offset by the fair value of related derivatives of Â£173m/â‚¬257m and cash balances totalling Â£519m/â‚¬774m invested in short term deposits and marketable securities. After taking into account interest rate and currency derivatives, a total of 68% of Reed Elsevier's gross borrowings (equivalent to 88% of net borrowings) were at fixed rates and had a weighted average remaining life of 5.2 years and interest coupon of 5.2%. The net pension deficit, ie pensions obligations less pension assets, at 31 December 2006 was Â£236m/â‚¬351m (2005: Â£405m/â‚¬591m). The reduction in the deficit of Â£169m/â‚¬240m principally arises from the good asset returns and the increase in long term corporate bond yields which are used to discount the pension obligations. Capital employed and returns The capital employed in the business at 31 December 2006 was Â£9,079m/â‚¬13,528m (2005: Â£9,705m/ â‚¬14,169m), after adding back accumulated amortisation of acquired intangible assets and goodwill. The decrease of Â£626m/â‚¬641m principally arises from currency translation effects (Â£913m/â‚¬1,063m), most particularly from the weakening of the US dollar between 1 January and 31 December 2006, partly offset by acquisition spend of Â£163m/â‚¬240m and the lower net pension deficit. The return on average capital employed in the year was 9.8% (2005: 9.4%). This return is based on adjusted operating profits, less tax at the 24% 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 capital discipline. 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 2004 to 2006 are delivering post tax returns in 2006 of 10%, 6% 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 were respectively up 7% at 33.6p (2005: 31.5p) and 9% at â‚¬0.76 (2005: â‚¬0.70). At constant rates of exchange, the adjusted earnings per share of both companies increased by 11% over the prior year. Shares repurchased in the year under the annual share repurchase plan announced in February 2006 totalled 20.6 million ordinary shares of Reed Elsevier PLC and 13.4 million ordinary shares of Reed Elsevier NV. Taking into account the associated financing cost, these share repurchases are estimated to have added approximately 0.5% to adjusted earnings per share in 2006. The reported earnings per share for Reed Elsevier PLC shareholders was 25.6p (2005: 18.6p) and for Reed Elsevier NV shareholders was â‚¬0.59 (2005: â‚¬0.43). The equalised final dividends proposed are 11.8p per share for Reed Elsevier PLC and â‚¬0.304 per share for Reed Elsevier NV up 10% and 14% on the prior year respectively. This gives total dividends for the year of 15.9p and â‚¬0.406, up 10% and 13% on 2005 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 2.1 times for Reed Elsevier PLC and 1.9 times for Reed Elsevier NV. Measured for the combined businesses on a similar basis, dividend cover was 2.0 times. 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. COMBINED FINANCIAL INFORMATION COMBINED INCOME STATEMENT For the year ended 31 December 2006 2006 2005 2006 2005 Note Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Revenue 2 5,398 5,166 7,935 7,542 Cost of sales (1,983) (1,890) (2,915) (2,759) __________________________________________________________________________________________________________________ Gross profit 3,415 3,276 5,020 4,783 Selling and distribution costs (1,148) (1,120) (1,688) (1,635) Administration and other expenses (1,405) (1,333) (2,065) (1,946) __________________________________________________________________________________________________________________ Operating profit before joint ventures 862 823 1,267 1,202 Share of results of joint ventures 18 16 27 23 __________________________________________________________________________________________________________________ Operating profit 2 880 839 1,294 1,225 __________________________________________________________________________________________________________________ Finance income 21 36 31 52 Finance costs (179) (176) (264) (256) __________________________________________________________________________________________________________________ Net finance costs (158) (140) (233) (204) __________________________________________________________________________________________________________________ Disposals and other non operating items (1) 2 (1) 2 __________________________________________________________________________________________________________________ Profit before tax 721 701 1,060 1,023 Taxation (96) (237) (141) (346) __________________________________________________________________________________________________________________ Net profit for the year 625 464 919 677 __________________________________________________________________________________________________________________ Attributable to: Parent companies' shareholders 623 462 916 675 Minority interests 2 2 3 2 __________________________________________________________________________________________________________________ Net profit for the year 625 464 919 677 __________________________________________________________________________________________________________________ Adjusted profit figures are presented in note 4 as additional performance measures. COMBINED CASH FLOW STATEMENT For the year ended 31 December 2006 2006 2005 2006 2005 Note Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Cash flows from operating activities Cash generated from operations 3 1,304 1,223 1,917 1,786 Interest paid (172) (153) (253) (223) Interest received 12 11 18 16 Tax paid (170) (171) (250) (250) __________________________________________________________________________________________________________________ Net cash from operating activities 974 910 1,432 1,329 __________________________________________________________________________________________________________________ Cash flows from investing activities Acquisitions (163) (317) (240) (463) Purchase of property, plant and equipment (88) (93) (129) (136) Expenditure on internally developed intangible (108) (102) (159) (149) assets Purchase of investments (9) (3) (13) (4) Proceeds from disposal of property, plant and 2 8 3 12 equipment Proceeds from other disposals 48 36 70 52 Dividends received from joint ventures 16 16 24 23 __________________________________________________________________________________________________________________ Net cash used in investing activities (302) (455) (444) (665) __________________________________________________________________________________________________________________ Cash flows from financing activities Dividends paid to shareholders of the parent (371) (336) (545) (491) companies Increase/(decrease) in bank loans, overdrafts 72 (492) 105 (718) and commercial paper Issuance of other loans 407 544 598 794 Repayment of other loans (337) (90) (495) (132) Repayment of finance leases (12) (13) (18) (19) Proceeds on issue of ordinary shares 93 25 137 37 Purchase of treasury shares (285) (27) (419) (39) __________________________________________________________________________________________________________________ Net cash used in financing activities (433) (389) (637) (568) __________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________ Increase in cash and cash equivalents 239 66 351 96 __________________________________________________________________________________________________________________ Movement in cash and cash equivalents At start of year 296 225 432 317 Increase in cash and cash equivalents 239 66 351 96 Exchange translation differences (16) 5 (9) 19 __________________________________________________________________________________________________________________ At end of year 519 296 774 432 __________________________________________________________________________________________________________________ Adjusted operating cash flow figures are presented in note 4 as additional performance measures. COMBINED BALANCE SHEET As at 31 December 2006 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Non-current assets Goodwill 2,802 3,030 4,175 4,424 Intangible assets 2,524 2,979 3,761 4,349 Investments in joint ventures 73 71 108 104 Other investments 50 44 75 64 Property, plant and equipment 298 314 444 458 Net pension assets 20 - 30 - Deferred tax assets 170 266 253 388 __________________________________________________________________________________________________________________ 5,937 6,704 8,846 9,787 __________________________________________________________________________________________________________________ Current assets Inventories and pre-publication costs 633 630 943 920 Trade and other receivables 1,443 1,437 2,150 2,098 Cash and cash equivalents 519 296 774 432 __________________________________________________________________________________________________________________ 2,595 2,363 3,867 3,450 __________________________________________________________________________________________________________________ Assets held for sale - 60 - 88 __________________________________________________________________________________________________________________ Total assets 8,532 9,127 12,713 13,325 __________________________________________________________________________________________________________________ Current liabilities Trade and other payables 1,934 1,982 2,882 2,893 Borrowings 921 900 1,372 1,314 Taxation 479 556 714 813 __________________________________________________________________________________________________________________ 3,334 3,438 4,968 5,020 __________________________________________________________________________________________________________________ Non-current liabilities Borrowings 2,085 2,264 3,107 3,305 Deferred tax liabilities 850 980 1,266 1,431 Net pension obligations 256 405 381 591 Provisions 28 44 42 64 __________________________________________________________________________________________________________________ 3,219 3,693 4,796 5,391 __________________________________________________________________________________________________________________ Liabilities associated with assets held for sale - 11 - 16 __________________________________________________________________________________________________________________ Total liabilities 6,553 7,142 9,764 10,427 __________________________________________________________________________________________________________________ Net assets 1,979 1,985 2,949 2,898 __________________________________________________________________________________________________________________ Capital and reserves Combined share capitals 191 190 285 277 Combined share premiums 1,879 1,805 2,800 2,635 Combined shares held in treasury (377) (93) (562) (136) Translation reserve (136) 89 (201) 130 Other combined reserves 409 (21) 607 (30) __________________________________________________________________________________________________________________ Combined shareholders' equity 1,966 1,970 2,929 2,876 Minority interests 13 15 20 22 __________________________________________________________________________________________________________________ Total equity 1,979 1,985 2,949 2,898 __________________________________________________________________________________________________________________ Approved by the boards of Reed Elsevier PLC and Reed Elsevier NV, 14 February 2007. COMBINED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2006 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Net profit for the year 625 464 919 677 Exchange differences on translation of foreign (244) 180 (300) 346 operations Actuarial gains/(losses) on defined benefit 139 (37) 204 (54) pension schemes Fair value movements on available for sale 3 3 4 4 investments Fair value movements on cash flow hedges 54 (10) 79 (15) Tax recognised directly in equity (60) (3) (88) (4) __________________________________________________________________________________________________________________ Net (expense)/income recognised directly in (108) 133 (101) 277 equity __________________________________________________________________________________________________________________ Transfer to net profit from hedge reserve (net of (5) (19) (7) (28) tax) __________________________________________________________________________________________________________________ Total recognised income and expense for the year 512 578 811 926 __________________________________________________________________________________________________________________ Attributable to: Parent companies' shareholders 510 576 808 924 Minority interests 2 2 3 2 __________________________________________________________________________________________________________________ Total recognised income and expense for the year 512 578 811 926 __________________________________________________________________________________________________________________ COMBINED SHAREHOLDERS' EQUITY RECONCILIATION For the year ended 31 December 2006 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Total recognised net income attributable to the 510 576 808 924 parent companies' shareholders Dividends declared (371) (336) (545) (491) Issue of ordinary shares, net of expenses 93 25 137 37 Increase in shares held in treasury (285) (27) (419) (39) Increase in share based remuneration reserve 49 57 72 83 __________________________________________________________________________________________________________________ Net (decrease)/increase in combined shareholders' (4) 295 53 514 equity Combined shareholders' equity at start of year 1,970 1,675 2,876 2,362 __________________________________________________________________________________________________________________ Combined shareholders' equity at end of year 1,966 1,970 2,929 2,876 __________________________________________________________________________________________________________________ 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 2006. Financial information is presented in both sterling and euros. The combined financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union. The Reed Elsevier accounting policies under IFRS are set out in the Reed Elsevier Annual Reports and Financial Statements 2005 on pages 60 to 64. The combined financial information has been prepared in accordance with those accounting policies. 2 Segment analysis Revenue 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Business segment Elsevier 1,521 1,436 2,236 2,097 LexisNexis 1,570 1,466 2,308 2,140 Harcourt Education 889 901 1,307 1,315 Reed Business 1,418 1,363 2,084 1,990 __________________________________________________________________________________________________________________ Total 5,398 5,166 7,935 7,542 __________________________________________________________________________________________________________________ Geographical origin North America 2,979 2,888 4,379 4,216 United Kingdom 898 870 1,320 1,270 The Netherlands 503 500 739 730 Rest of Europe 685 601 1,007 878 Rest of world 333 307 490 448 __________________________________________________________________________________________________________________ Total 5,398 5,166 7,935 7,542 __________________________________________________________________________________________________________________ Geographical market North America 3,082 2,974 4,531 4,342 United Kingdom 592 568 870 829 The Netherlands 202 202 297 295 Rest of Europe 880 804 1,294 1,174 Rest of world 642 618 943 902 __________________________________________________________________________________________________________________ Total 5,398 5,166 7,935 7,542 __________________________________________________________________________________________________________________ Adjusted operating profit 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Business segment Elsevier 465 449 683 655 LexisNexis 380 338 559 493 Harcourt Education 129 161 190 235 Reed Business 241 214 354 313 __________________________________________________________________________________________________________________ Subtotal 1,215 1,162 1,786 1,696 Corporate costs (39) (32) (57) (47) Unallocated net pension credit 34 12 50 18 __________________________________________________________________________________________________________________ Total 1,210 1,142 1,779 1,667 __________________________________________________________________________________________________________________ Geographical origin North America 602 595 885 869 United Kingdom 199 186 293 271 The Netherlands 176 166 259 242 Rest of Europe 172 141 253 206 Rest of world 61 54 89 79 __________________________________________________________________________________________________________________ Total 1,210 1,142 1,779 1,667 __________________________________________________________________________________________________________________ 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 4. The unallocated net pension credit of Â£34m/â‚¬50m (2005: Â£12m/â‚¬18m) comprises the expected return on pension scheme assets of Â£178m/â‚¬262m (2005: Â£149m/â‚¬218m) less interest on pension scheme liabilities of Â£144m/â‚¬212m (2005: Â£137m/â‚¬200m). Operating profit 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Business segment Elsevier 395 396 581 578 LexisNexis 264 218 388 318 Harcourt Education 43 87 63 127 Reed Business 183 158 269 231 __________________________________________________________________________________________________________________ Subtotal 885 859 1,301 1,254 Corporate costs (39) (32) (57) (47) Unallocated pension credit 34 12 50 18 __________________________________________________________________________________________________________________ Total 880 839 1,294 1,225 __________________________________________________________________________________________________________________ Geographical origin North America 364 364 535 531 United Kingdom 166 158 244 231 The Netherlands 173 161 254 235 Rest of Europe 120 106 177 155 Rest of world 57 50 84 73 __________________________________________________________________________________________________________________ Total 880 839 1,294 1,225 __________________________________________________________________________________________________________________ Share of post-tax results of joint ventures of Â£18m/â‚¬27m (2005: Â£16m/â‚¬23m) included in operating profit and adjusted operating profit comprises Â£3m/â‚¬5m (2005: Â£3m/â‚¬4m) relating to LexisNexis and Â£15m/â‚¬22m (2005: Â£13m/â‚¬19m) relating to Reed Business. 3 Combined cash flow statement Reconciliation of operating profit before joint ventures to cash generated from operations 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Operating profit before joint ventures 862 823 1,267 1,202 Amortisation of acquired intangible assets 297 276 436 403 Amortisation of internally developed intangible assets 71 57 104 83 Depreciation of property, plant and equipment 91 87 134 127 Share based remuneration 49 57 72 83 __________________________________________________________________________________________________________________ Total non cash items 508 477 746 696 __________________________________________________________________________________________________________________ Movement in working capital (66) (77) (96) (112) __________________________________________________________________________________________________________________ Cash generated from operations 1,304 1,223 1,917 1,786 __________________________________________________________________________________________________________________ Reconciliation of net borrowings 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ At start of year (2,694) (2,538) (3,933) (3,578) Increase in cash and cash equivalents 239 66 351 96 (Increase)/decrease in borrowings (130) 51 (190) 75 __________________________________________________________________________________________________________________ Changes in net borrowings resulting from cash flows 109 117 161 171 __________________________________________________________________________________________________________________ Inception of finance leases (9) (10) (13) (15) Fair value adjustments 3 5 4 7 Exchange translation differences 277 (268) 333 (518) __________________________________________________________________________________________________________________ At end of year (2,314) (2,694) (3,448) (3,933) __________________________________________________________________________________________________________________ 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. 4 Adjusted figures Reed Elsevier uses adjusted figures as key 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 profits are also grossed up to exclude the equity share of taxes in joint ventures. Adjusted operating cash flow is measured after dividends from joint ventures and net capital expenditure but before payments in relation to acquisition integration costs. 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m __________________________________________________________________________________________________________________ Operating profit 880 839 1,294 1,225 Adjustments: Amortisation of acquired intangible assets 297 276 436 403 Acquisition integration costs 23 21 34 30 Reclassification of tax in joint ventures 10 6 15 9 __________________________________________________________________________________________________________________ Adjusted operating profit 1,210 1,142 1,779 1,667 __________________________________________________________________________________________________________________ Profit before tax 721 701 1,060 1,023 Adjustments: Amortisation of acquired intangible assets 297 276 436 403 Acquisition integration costs 23 21 34 30 Reclassification of tax in joint ventures 10 6 15 9 Disposals and other non operating items 1 (2) 1 (2) __________________________________________________________________________________________________________________ Adjusted profit before tax 1,052 1,002 1,546 1,463 __________________________________________________________________________________________________________________ Profit attributable to parent companies' shareholders 623 462 916 675 Adjustments (post tax): Amortisation of acquired intangible assets 324 310 476 452 Acquisition integration costs 16 17 24 24 Disposals and other non operating items (64) (2) (95) (2) Deferred tax not expected to crystallise in the near term: Unrealised exchange differences on long term inter-affiliate (22) 44 (32) 64 lending Acquired intangible assets (87) (65) (128) (95) Other 6 (12) 9 (17) __________________________________________________________________________________________________________________ Adjusted profit attributable to parent companies' 796 754 1,170 1,101 shareholders __________________________________________________________________________________________________________________ Cash generated from operations 1,304 1,223 1,917 1,786 Dividends received from joint ventures 16 16 24 23 Purchase of property, plant and equipment (88) (93) (129) (136) Proceeds from disposal of property, plant and equipment 2 8 3 12 Expenditure on internally developed intangible assets (108) (102) (159) (149) Payments in relation to acquisition integration costs 26 28 37 41 __________________________________________________________________________________________________________________ Adjusted operating cash flow 1,152 1,080 1,693 1,577 __________________________________________________________________________________________________________________ Tax cash flow benefits of Â£5m/â‚¬7m (2005: Â£3m/â‚¬4m) were obtained in relation to acquisition integration costs and disposals and other non operating items. 5 Pension schemes Pension costs are accounted for in accordance with the International Financial Reporting Standard, IAS19, with actuarial gains and losses on defined benefit pension schemes recognised in full through the Statement of Recognised Income and Expense. Reed Elsevier operates a number of pension schemes around the world. The major schemes are of the defined benefit type with assets held in separate trustee administered funds. The largest schemes, which cover the majority of employees, are in the UK, the US and the Netherlands. Under these plans, employees are entitled to retirement benefits normally dependent on the number of years service. The net pension charge was Â£80m/â‚¬118m (2005: Â£100m/â‚¬146m), comprising Â£60m/â‚¬88m (2005: Â£79m/â‚¬115m) in relation to defined benefit pension schemes and Â£20m/â‚¬30m (2005: Â£21m/â‚¬31m) in relation to defined contribution schemes. Pension contributions made in the year amounted to Â£79m/â‚¬116m (2005: Â£68m/â‚¬99m). At 31 December 2006, the aggregate net deficit in respect of the defined benefit schemes under IAS19 was Â£236m/â‚¬351m (2005: Â£405m/â‚¬591m). 6 Exchange translation rates In preparing the combined financial information the following exchange rates have been applied: __________________________________________________________________________________________________________________ Income statement Balance sheet _________________ _________________ 2006 2005 2006 2005 __________________________________________________________________________________________________________________ Euro to sterling 1.47 1.46 1.49 1.46 US dollars to sterling 1.84 1.82 1.96 1.73 US dollars to euro 1.25 1.25 1.32 1.18 __________________________________________________________________________________________________________________ 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 accounting policies of the Reed Elsevier combined businesses as set out on pages 60 to 64 of the Reed Elsevier Annual Reports and Financial Statements 2005, which are in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union. 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 2006, 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 S237(2) or (3) of the Companies Act 1985. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2006 2006 2005 Â£m Â£m __________________________________________________________________________________________________________________ Administrative expenses (2) (2) Effect of tax credit equalisation on distributed earnings (10) (9) Share of results of joint ventures 343 252 __________________________________________________________________________________________________________________ Operating profit 331 241 Finance (charges)/income (3) 1 __________________________________________________________________________________________________________________ Profit before tax 328 242 Taxation (8) (7) __________________________________________________________________________________________________________________ Profit attributable to ordinary shareholders 320 235 __________________________________________________________________________________________________________________ EARNINGS PER ORDINARY SHARE 2006 2005 pence pence __________________________________________________________________________________________________________________ Basic earnings per share 25.6 18.6p Diluted earnings per share 25.3 18.4p __________________________________________________________________________________________________________________ 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 2006 2006 2005 Â£m Â£m __________________________________________________________________________________________________________________ Cash flows from operating activities Cash used by operations (2) (2) Interest (paid)/received (3) 1 Tax paid (6) (8) __________________________________________________________________________________________________________________ Net cash used in operating activities (11) (9) __________________________________________________________________________________________________________________ Dividends received from joint ventures 596 168 Cash flows from financing activities Equity dividends paid (186) (168) Proceeds on issue of ordinary shares 47 14 Purchase of treasury shares (112) - Increase in net funding balances due from joint ventures (334) (5) __________________________________________________________________________________________________________________ Net cash used in financing activities (585) (159) __________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________ Movement in cash and cash equivalents - - __________________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET As at 31 December 2006 2006 2005 Â£m Â£m __________________________________________________________________________________________________________________ Non-current assets Investments in joint ventures 156 490 Current assets Amounts due from joint ventures 934 600 __________________________________________________________________________________________________________________ Total assets 1,090 1,090 __________________________________________________________________________________________________________________ Current liabilities Amounts owed to joint ventures 36 - Payables 1 1 Taxation 13 11 __________________________________________________________________________________________________________________ 50 12 __________________________________________________________________________________________________________________ Non-current liabilities Amounts owed to joint ventures - 36 __________________________________________________________________________________________________________________ Total liabilities 50 48 __________________________________________________________________________________________________________________ Net assets 1,040 1,042 __________________________________________________________________________________________________________________ Capital and reserves Called up share capital 161 160 Share premium account 1,033 987 Shares held in treasury (200) (49) Capital redemption reserve 4 4 Translation reserve (98) 31 Other reserves 140 (91) __________________________________________________________________________________________________________________ Total equity 1,040 1,042 __________________________________________________________________________________________________________________ Approved by the board of directors, 14 February 2007. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2006 2006 2005 Â£m Â£m ___________________________________________________________________________________________________________________ Profit attributable to ordinary shareholders 320 235 Share of joint ventures' net (expense)/income recognised directly in equity (57) 71 Share of joint ventures' transfer to net profit from hedge reserve (3) (10) ___________________________________________________________________________________________________________________ Total recognised net income and expense for the year 260 296 ___________________________________________________________________________________________________________________ RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' EQUITY For the year ended 31 December 2006 2006 2005 Â£m Â£m ___________________________________________________________________________________________________________________ Total recognised net income for the year 260 296 Equity dividends declared (186) (168) Issue of ordinary shares, net of expenses 47 14 Increase in shares held in treasury (151) (14) Increase in share based remuneration reserve 26 30 Equalisation adjustments 2 (2) ___________________________________________________________________________________________________________________ Net (decrease)/increase in shareholders' equity (2) 156 Shareholders' equity at start of year 1,042 886 ___________________________________________________________________________________________________________________ Shareholders' equity at end of year 1,040 1,042 ___________________________________________________________________________________________________________________ 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 4 to the combined financial information. The adjusted figures are derived as follows: Profit attributable Basic earnings to per share ordinary shareholders ___________________________________________ 2006 2005 2006 2005 Â£m Â£m pence pence ___________________________________________________________________________________________________________________ Reported figures 320 235 25.6p 18.6p Effect of tax credit equalisation on distributed earnings 10 9 0.8p 0.7p ___________________________________________________________________________________________________________________ Profit attributable to ordinary shareholders based on 52.9% economic 330 244 26.4p 19.3p interest in the Reed Elsevier combined businesses Share of adjustments in joint ventures 91 155 7.2p 12.2p ___________________________________________________________________________________________________________________ Adjusted figures 421 399 33.6p 31.5p ___________________________________________________________________________________________________________________ 2 Dividends ___________________________________________________________________________________________________________________ Dividends declared in the year 2006 2005 2006 2005 pence pence Â£m Â£m ___________________________________________________________________________________________________________________ Ordinary shares of 12.5 pence each Final for prior financial year 10.7p 9.6p 135 120 Interim for financial year 4.1p 3.7p 51 48 ___________________________________________________________________________________________________________________ Total 14.8p 13.3p 186 168 ___________________________________________________________________________________________________________________ The Directors of Reed Elsevier PLC have proposed a final dividend of 11.8p (2005: 10.7p). The cost of the final dividend, if approved by shareholders, is expected to be Â£148m. No liability has been recognised at the balance sheet date. The Reed Elsevier PLC final dividend as approved will be paid on 11 May 2007, with ex-dividend and record dates of 18 April 2007 and 20 April 2007 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 2006 2005 pence pence ___________________________________________________________________________________________________________________ Ordinary shares of 12.5 pence each Interim (paid) 4.1p 3.7p Final (proposed) 11.8p 10.7p ___________________________________________________________________________________________________________________ Total 15.9p 14.4p ___________________________________________________________________________________________________________________ 3 Share capital and treasury shares ___________________________________________________________________________________________________________________ 2006 2005 ____________________________ Shares in Treasury Shares in Shares in issue shares issue net of issue net of treasury treasury shares shares millions millions millions millions ___________________________________________________________________________________________________________________ Number of ordinary shares At start of year 1,277.0 (10.8) 1,266.2 1,265.4 Issue of ordinary shares 10.4 - 10.4 3.6 Share repurchases - (20.6) (20.6) - Purchase of shares by employee benefit trust (net) - (6.4) (6.4) (2.8) ___________________________________________________________________________________________________________________ At end of year 1,287.4 (37.8) 1,249.6 1,266.2 ___________________________________________________________________________________________________________________ Average number of ordinary shares during the year 1,251.9 1,266.2 ___________________________________________________________________________________________________________________ 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£2,589m at 31 December 2006 (2005: Â£2,705m). 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 accounting policies of the Reed Elsevier combined businesses as set out on pages 60 to 64 of the Reed Elsevier Annual Reports and Financial Statements 2005, which are in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union. 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 2006 has been extracted from the consolidated financial statements of Reed Elsevier NV which have been audited and received an unqualified audit report. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2006 2006 2005 â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Administrative expenses (3) (3) Share of results of joint ventures 455 339 ___________________________________________________________________________________________________________________ Operating profit 452 336 Finance income 7 2 ___________________________________________________________________________________________________________________ Profit before tax 459 338 Taxation (1) - ___________________________________________________________________________________________________________________ Profit attributable to ordinary shareholders 458 338 ___________________________________________________________________________________________________________________ EARNINGS PER ORDINARY SHARE 2006 2005 â‚¬ â‚¬ ___________________________________________________________________________________________________________________ Basic earnings per share â‚¬0.59 â‚¬0.43 Diluted earnings per share â‚¬0.59 â‚¬0.43 ___________________________________________________________________________________________________________________ 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 2006 2006 2005 â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Cash flows from operating activities Cash used by operations (3) (5) Interest received 12 1 Tax (paid)/received (1) 2 ___________________________________________________________________________________________________________________ Net cash from/(used in) operating activities 8 (2) ___________________________________________________________________________________________________________________ Dividends received from joint ventures 1,111 189 Cash flows from financing activities Equity dividends paid (272) (245) Proceeds on issue of ordinary shares 68 18 Purchase of treasury shares (156) - (Increase)/decrease in net funding balances due from joint ventures (612) 16 ___________________________________________________________________________________________________________________ Net cash used in financing activities (972) (211) ___________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________ Movement in cash and cash equivalents 147 (24) ___________________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET As at 31 December 2006 2006 2005 â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Non-current assets Investments in joint ventures 760 1,487 Current assets Amounts due from joint ventures - funding 626 14 Amounts due from joint ventures - other 3 8 Cash and cash equivalents 148 1 ___________________________________________________________________________________________________________________ 777 23 ___________________________________________________________________________________________________________________ Total assets 1,537 1,510 ___________________________________________________________________________________________________________________ Current liabilities Payables 8 8 Taxation 64 64 ___________________________________________________________________________________________________________________ Total liabilities 72 72 ___________________________________________________________________________________________________________________ Net assets 1,465 1,438 ___________________________________________________________________________________________________________________ Capital and reserves Share capital issued 48 47 Paid-in surplus 1,562 1,495 Shares held in treasury (282) (68) Translation reserve (70) 76 Other reserves 207 (112) ___________________________________________________________________________________________________________________ Total equity 1,465 1,438 ___________________________________________________________________________________________________________________ Approved by the Combined Board of directors, 14 February 2007. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2006 2006 2005 â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Profit attributable to ordinary shareholders 458 338 Share of joint ventures' net (expense)/income recognised directly in equity (50) 138 Share of joint ventures' transfer to net profit from hedge reserve (4) (14) ___________________________________________________________________________________________________________________ Total recognised net income and expense for the year 404 462 ___________________________________________________________________________________________________________________ RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' EQUITY For the year ended 31 December 2006 2006 2005 â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Total recognised net income for the year 404 462 Equity dividends declared (272) (245) Issue of ordinary shares, net of expenses 68 18 Increase in shares held in treasury (210) (20) Increase in share based remuneration reserve 36 42 Equalisation adjustments 1 - ___________________________________________________________________________________________________________________ Net increase in shareholders' equity 27 257 Shareholders' equity at start of year 1,438 1,181 ___________________________________________________________________________________________________________________ Shareholders' equity at end of year 1,465 1,438 ___________________________________________________________________________________________________________________ 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 4 to the combined financial information. The adjusted figures are derived as follows: Profit attributable to Basic earnings ordinary shareholders per share ___________________________________________________ 2006 2005 2006 2005 â‚¬m â‚¬m â‚¬ â‚¬ ___________________________________________________________________________________________________________________ Reported figures 458 338 â‚¬0.59 â‚¬0.43 Share of adjustments in joint ventures 127 213 â‚¬0.17 â‚¬0.27 ___________________________________________________________________________________________________________________ Adjusted figures 585 551 â‚¬0.76 â‚¬0.70 ___________________________________________________________________________________________________________________ 2 Dividends ___________________________________________________________________________________________________________________ Dividends declared in the year 2006 2005 2006 2005 â‚¬ â‚¬ â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Ordinary shares of â‚¬0.06 each Final for prior financial year â‚¬0.267 â‚¬0.240 197 177 Interim for financial year â‚¬0.102 â‚¬0.092 75 68 R-shares of â‚¬0.60 each - - - - ___________________________________________________________________________________________________________________ Total â‚¬0.369 â‚¬0.332 272 245 ___________________________________________________________________________________________________________________ The Directors of Reed Elsevier NV have proposed a final dividend of â‚¬0.304 (2005: â‚¬0.267). The cost of the final dividend, if approved by shareholders, is expected to be â‚¬223m. No liability has been recognised at the balance sheet date. The Reed Elsevier NV final dividend as approved will be paid on 11 May 2007, with ex-dividend and record dates of 20 April 2007 and 24 April 2007 respectively. The ex-dividend and record dates are in accordance with the new rules and practices recently announced by Euronext, which will be implemented on 26 March 2007. 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 2006 2005 â‚¬ â‚¬ ___________________________________________________________________________________________________________________ Ordinary shares of â‚¬0.06 each Interim (paid) â‚¬0.102 â‚¬0.092 Final (proposed) â‚¬0.304 â‚¬0.267 R-shares of â‚¬0.60 each - - ___________________________________________________________________________________________________________________ Total â‚¬0.406 â‚¬0.359 ___________________________________________________________________________________________________________________ 3 Share capital and treasury shares ___________________________________________________________________________________________________________________ 2006 2005 __________________________________ Shares in Treasury Shares in Shares in issue shares issue net of issue net of treasury shares treasury shares millions millions millions millions ___________________________________________________________________________________________________________________ Number of ordinary shares At start of year 741.8 (5.5) 736.3 736.4 Issue of ordinary shares 6.8 - 6.8 1.9 Share repurchases - (13.4) (13.4) - Purchase of shares by employee benefit trust (net) - (3.7) (3.7) (2.0) ___________________________________________________________________________________________________________________ At end of year 748.6 (22.6) 726.0 736.3 ___________________________________________________________________________________________________________________ Average number of equivalent ordinary shares 772.1 783.1 during the year ___________________________________________________________________________________________________________________ The average number of equivalent ordinary shares takes into account the 'R' shares in the company held by Reed Elsevier PLC, which represents a 5.8% interest in the company's share capital. 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‚¬3,858m at 31 December 2006 (2005: â‚¬3,949m). 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 2006 2005 US$m US$m ___________________________________________________________________________________________________________________ Revenue 9,932 9,402 Operating profit 1,619 1,527 Profit before tax 1,327 1,276 Profit attributable to parent companies' shareholders 1,146 841 Adjusted operating profit 2,226 2,078 Adjusted profit before tax 1,936 1,824 Adjusted profit attributable to parent companies' shareholders 1,465 1,372 ___________________________________________________________________________________________________________________ Basic earnings per American Depositary Share (ADS) US$ US$ Reed Elsevier PLC (Each ADS comprises four ordinary shares) $1.88 $1.35 Reed Elsevier NV (Each ADS comprises two ordinary shares) $1.48 $1.07 Adjusted earnings per American Depositary Share (ADS) Reed Elsevier PLC (Each ADS comprises four ordinary shares) $2.47 $2.29 Reed Elsevier NV (Each ADS comprises two ordinary shares) $1.90 $1.75 ___________________________________________________________________________________________________________________ Adjusted earnings per American Depository Share is based on Reed Elsevier PLC shareholders' 52.9% and Reed Elsevier NV's 50% respective share of the adjusted profit attributable of the Reed Elsevier combined businesses. Adjusted figures are presented as additional performance measures and are reconciled to the reported figures in note 4 to the combined financial information and in note 1 to the summary financial information of each of the two parent companies. Combined cash flow statement 2006 2005 US$m US$m ___________________________________________________________________________________________________________________ Net cash from operating activities 1,792 1,656 Net cash used in investing activities (556) (828) Net cash used in financing activities (796) (708) ___________________________________________________________________________________________________________________ Increase in cash and cash equivalents 440 120 ___________________________________________________________________________________________________________________ Adjusted operating cash flow 2,120 1,966 ___________________________________________________________________________________________________________________ Combined balance sheet 2006 2005 US$m US$m ___________________________________________________________________________________________________________________ Non-current assets 11,637 11,598 Current assets 5,086 4,088 Assets held for sale - 104 ___________________________________________________________________________________________________________________ Total assets 16,723 15,790 Current liabilities 6,535 5,451 Non-current liabilities 6,309 6,885 Liabilities associated with assets held for sale - 20 ___________________________________________________________________________________________________________________ Total liabilities 12,844 12,356 ___________________________________________________________________________________________________________________ Net assets 3,879 3,434 ___________________________________________________________________________________________________________________ Summary of the principal differences between IFRS and US GAAP IFRS differ in certain significant respects to US GAAP. A more complete explanation of the accounting policies used by the combined businesses and the differences to US GAAP will be set out in the Reed Elsevier Annual Reports and Financial Statements 2006 and the Reed Elsevier Annual Report 2006 on Form 20-F. The effects on net income attributable to shareholders and combined shareholders' equity of material differences to US GAAP are set out below. 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Net income as reported (IFRS) 623 462 916 675 US GAAP adjustments: Intangible assets 1 5 1 7 Disposals (41) - (60) - Pensions (156) (78) (229) (114) Derivative financial instruments 3 (5) 4 (7) Current taxation (54) - (79) - Deferred taxation 20 3 29 4 Other 3 (13) 5 (19) ___________________________________________________________________________________________________________________ Net income under US GAAP 399 374 587 546 ___________________________________________________________________________________________________________________ 2006 2005 2006 2005 Â£m Â£m â‚¬m â‚¬m ___________________________________________________________________________________________________________________ Combined shareholders' equity as reported (IFRS) 1,966 1,970 2,929 2,876 US GAAP adjustments: Goodwill and intangible assets 1,256 1,491 1,871 2,177 Pensions - 409 - 597 Derivative financial instruments - 5 - 7 Deferred taxation (9) (119) (13) (174) Other 7 7 10 10 ___________________________________________________________________________________________________________________ Combined shareholders' equity under US GAAP 3,220 3,763 4,797 5,493 ___________________________________________________________________________________________________________________ Both Reed Elsevier PLC ('RUK', CUSIP No. 758205108) and Reed Elsevier NV ('ENL', CUSIP No. 758204101) 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 18 May 2007. 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 Annual Review 2006 and Reed Elsevier PLC 2006 Annual Report and Financial Statements are being posted to Reed Elsevier PLC shareholders on 9 March 2007. Copies of the Reed Elsevier Annual Review 2006 and Reed Elsevier NV 2006 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 Statement, 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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