Interim Results

Reed Elsevier PLC 27 July 2006 ISSUED ON BEHALF OF REED ELSEVIER PLC AND REED ELSEVIER NV 27 JULY 2006 REED ELSEVIER: HIGHLIGHTS OF 2006 INTERIM RESULTS GOOD OVERALL FINANCIAL PERFORMANCE â€¢ Revenues up 8%, adjusted pre-tax profits up 14% and earnings per share up 16% at constant exchange rates â€¢ Positive business progress - Elsevier: Good subscription renewals and growing online sales - LexisNexis: Strong growth in legal digital solutions, risk and international - Harcourt Education: Encouraging success in US textbook adoptions; supplemental building; assessment underperformed - Reed Business: Strong growth in online and Exhibitions; benefit from biennial show cycling - Phasing of business this year benefits first half growth â€¢ On track to meet 2006 financial targets â€¢ Reed Elsevier PLC and Reed Elsevier NV dividend up 11%; total of Â£288m/â‚¬420m shares repurchased Reed Elsevier combined businesses Change at constant 2006 2005 2006 2005 currencies Â£m Â£m â‚¬m â‚¬m % ------------------------------------------------------------------------------------------------------------------ Revenue 2,627 2,368 3,835 3,457 +8% Reported profit before tax 276 255 402 372 +14% Adjusted profit before tax 446 395 651 577 +14% ------------------------------------------------------------------------------------------------------------------ Adjusted figures are presented as additional performance measures and are stated before amortisation of acquired intangible assets and acquisition integration costs. Parent companies Reed Elsevier PLC Reed Elsevier NV Change at constant Change Change currencies 2006 2005 % 2006 2005 % % ------------------------------------------------------------------------------------------------------------------ Reported earnings per 8.6p 5.1p +69% â‚¬0.20 â‚¬0.13 +63% +71% share Adjusted earnings per 14.2p 12.3p +15% â‚¬0.32 â‚¬0.27 +15% +16% share Dividend per share 4.1p 3.7p +11% â‚¬0.102 â‚¬0.092 +11% ------------------------------------------------------------------------------------------------------------------ Sir Crispin Davis, Chief Executive Officer of Reed Elsevier, commented: 'The first half of 2006 has seen a good financial performance and further encouraging progress in the development of our business in an increasingly digital environment. Trusted information, technology enabled, and increasingly integrated into customer workflows, is making our customers more effective professionally and making Reed Elsevier a more valued partner. The first half financial performance provides a good platform to meet our 2006 financial goals.' ENQUIRIES Sybella Stanley (Investors) Catherine May (Media) +44 20 7166 5630 +44 20 7166 5657 Reed Elsevier combined businesses Year ended Six months ended Six months ended 31 December 30 June 30 June ----------- ---------------- ---------------- Change at 2005 2005 2006 2005 2006 2005 constant Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m currencies ----------------------------------------------------------------------------------------------------------------- Reported figures 5,166 7,542 Revenue 2,627 2,368 3,835 3,457 +8% 839 1,225 Operating profit 353 317 515 463 +15% 701 1,023 Profit before tax 276 255 402 372 +14% 462 675 Profit attributable to 217 134 317 196 +70% shareholders 2,694 3,933 Net borrowings 3,100 2,913 4,464 4,340 ----------------------------------------------------------------------------------------------------------------- Adjusted figures 1,142 1,667 Operating profit 523 461 764 673 +14% 1,002 1,463 Profit before tax 446 395 651 577 +14% 754 1,101 Profit attributable to 337 294 492 429 +16% shareholders 1,080 1,577 Operating cash flow 252 219 368 320 +14% ----------------------------------------------------------------------------------------------------------------- 22.1% 22.1% Operating margin 19.9% 19.5% 19.9% 19.5% 95% 95% Operating cash flow conversion 48% 48% 48% 48% ----------------------------------------------------------------------------------------------------------------- Adjusted figures are presented as additional performance measures and are stated before the amortisation of acquired intangible assets, acquisition integration costs, gains on disposals and movements on deferred tax balances not expected to crystallise in the near term. Reconciliations between the reported and adjusted figures are provided in the notes to the combined financial information. PARENT COMPANIES Reed Elsevier PLC NV Reed Elsevier PLC Reed Elsevier NV Year ended Six months ended Six months ended 31 December 30 June 30 June -------------- ----------------- ---------------- ----------- Change at 2005 2005 2006 2005 2006 2005 constant Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m currencies ----------------------------------------------------------------------------------------------------------------- 235 338 Reported profit attributable 108 65 159 98 +70% 399 551 Adjusted profit attributable 178 156 246 215 +16% 1.82 1.25 Average exchange rate US$: Â£/â‚¬ 1.79 1.87 1.23 1.28 ----------------------------------------------------------------------------------------------------------------- 18.6p â‚¬0.43 Reported earnings per share 8.6p 5.1p â‚¬0.20 â‚¬0.13 +71% 31.5p â‚¬0.70 Adjusted earnings per share 14.2p 12.3p â‚¬0.32 â‚¬0.27 +16% 14.4p â‚¬0.359 Dividend per share 4.1p 3.7p â‚¬0.102 â‚¬0.092 ----------------------------------------------------------------------------------------------------------------- The Reed Elsevier combined businesses encompass the businesses of Reed Elsevier Group plc and Elsevier Reed Finance BV, together with their two parent companies, Reed Elsevier PLC and Reed Elsevier NV (the 'Reed Elsevier combined businesses'). The results of Reed Elsevier PLC reflect its shareholders' 52.9% economic interest in the Reed Elsevier combined businesses. The results of Reed Elsevier NV reflect its shareholders' 50% economic interest in the Reed Elsevier combined businesses. The respective economic interests of the Reed Elsevier PLC and Reed Elsevier NV shareholders take account of Reed Elsevier PLC's 5.8% interest in Reed Elsevier NV. The percentage change at constant currencies refers to the movements at constant exchange rates, using 2005 full year average and hedged rates. REPORT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER The first half of 2006 has seen a good financial performance and further encouraging progress in the development of our business. Trusted information, technology enabled, and increasingly integrated into customer workflows, is making our customers more effective professionally and making Reed Elsevier a more valued partner. Business progress The transition of professional markets from printed reference materials to online information and technology enabled solutions continues to gather pace, and our focus is on innovation, customer workflows, and widening distribution. Across our business our investment in product innovation, delivery platforms, and new sales and marketing approaches, is paying off with strong growth in digital revenues. Although this is partly at the expense of print revenues, the productivity gains for our professional customers from new information and workflow solutions are expanding overall market demand. Additionally, the nature of digital products is enabling us to replicate or customise our product offerings much more easily for new market segments and geographies, widening our distribution. In the 2006 first half, within Elsevier, we expanded the Consult series of online information for clinicians and added the Gold Standard drug information database and tools. In LexisNexis, we launched Total Solutions combining authoritative information and software tools to support the distinctive needs of lawyers across five major areas: litigation, client development, research, practice management, and risk management. Harcourt Education has significantly expanded its online materials and services, with nearly four million student users now registered, and providing further differentiation in the school textbook market. Reed Business has continued to expand and launch online information services, and is expecting to grow its digital revenues by over 25% this year to almost $400m. Total digital revenues were 15% higher in the first half than in the prior first half and accounted for 37% of total revenues. This is delivering satisfactory overall revenue growth. Our focus is on maintaining this momentum and increasing operational gearing and margins in the business as we build scale in our digital activities. Financial performance The first half results, whilst favourably impacted by business phasing, represent a good financial performance. Total revenues in the six months to 30 June 2006 were Â£2,627m/â‚¬3,835m, up 11% against the prior first half. Adjusted operating profits at Â£523m/â‚¬764m, were up 13% in sterling and 14% in euros. Underlying revenue and adjusted operating profit growth, excluding acquisitions and disposals and currency effects, were up 6% and 12% respectively. The Elsevier science and medical business saw strong subscription renewals and good growth in online sales, and the book publishing programme is well positioned for the important second half. The LexisNexis business continues to see strong growth for its online information and digital solutions both in the US and internationally, and in risk management. Whilst school textbook revenues and operating profits in particular are seasonally skewed to the second half, Harcourt Education has had good success in new US state textbook adoptions and the new supplemental publishing programmes look to be building well. The assessment business underperformed in the first half as a result of operational issues; progress is being made in fixing them. Reed Business saw good growth in annual exhibitions and from the cycling in of a number of biennial shows, as well as strongly growing revenues from online services. Adjusted earnings per share were 14.2p for Reed Elsevier PLC and â‚¬0.32 for Reed Elsevier NV, both up 15% on the prior first half, or up 16% at constant exchange rates. The reported earnings per share, including the amortisation of acquired intangible assets, disposal gains and losses and lower deferred taxes, were 8.6p (2005: 5.1p) for Reed Elsevier PLC and â‚¬0.20 (2005: â‚¬0.13) for Reed Elsevier NV. The interim dividend is increased by 11% for both Reed Elsevier PLC and Reed Elsevier NV to 4.1p and â‚¬0.102 respectively. 20.6 million Reed Elsevier PLC ordinary shares and 13.4 million Reed Elsevier NV ordinary shares were repurchased in the first half at a total cost of Â£218m/ â‚¬318m in addition to Â£70m/â‚¬102m of shares purchased by the employee benefit trust. Subject to prevailing market and business conditions, share repurchases under the Â£600m/â‚¬870m three year share repurchase plan announced in February may be accelerated in the second half. Outlook The first half is encouraging. We are making good progress in the development of our business in an increasingly digital environment and the first half financial performance provides a good platform to meet our 2006 revenue and earnings goals. Jan Hommen Sir Crispin Davis Chairman Chief Executive Officer OPERATING AND FINANCIAL REVIEW Operating review Year ended Six months ended Six months ended 31 December 30 June 30 June ---------------- ---------------- ---------------- ----------- Change at 2005 2005 2006 2005 2006 2005 constant Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m currencies ---------------------------------------------------------------------------------------------------------------- Revenue 1,436 2,097 Elsevier 721 644 1,053 940 +11% 1,466 2,140 LexisNexis 768 683 1,121 997 +9% 901 1,315 Harcourt Education 390 366 569 534 +2% 1,363 1,990 Reed Business 748 675 1,092 986 +9% ---------------------------------------------------------------------------------------------------------------- 5,166 7,542 Total 2,627 2,368 3,835 3,457 +8% ---------------------------------------------------------------------------------------------------------------- Adjusted operating profit 449 655 Elsevier 196 189 286 277 +9% 338 493 LexisNexis 169 151 247 220 +8% 161 235 Harcourt Education 10 15 15 22 -38% 214 313 Reed Business 152 118 222 172 +27% (20) (29) Unallocated items (4) (12) (6) (18) ---------------------------------------------------------------------------------------------------------------- 1,142 1,667 Total 523 461 764 673 +14% ---------------------------------------------------------------------------------------------------------------- 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, and is grossed up to exclude the equity share of taxes in joint ventures. Constant currency growth rates are based on 2005 full year average and hedged rates. Underlying growth rates are calculated at constant currencies excluding businesses acquired or disposed (or held for sale) in the current or previous financial year. Unless otherwise indicated, all percentage movements in the following commentary refer to performance at constant exchange rates and are stated before the amortisation of acquired intangible assets and acquisition integration costs. Reported operating results, including amortisation of acquired intangible assets and acquisition integration costs, are analysed in note 2 to the combined financial information and discussed further below in the Financial Review, and are reconciled to the adjusted figures in note 4 to the combined financial information. Unallocated items comprise corporate costs, return on pension scheme assets and interest on pension scheme liabilities. -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS This Interim Statement contains forward looking statements within the meaning of Section 27A of the US Securities Act 1933, as amended, and Section 21E of the US Securities Exchange Act 1934, as amended. These statements are subject to a number of risks and uncertainties and actual results and events could differ materially from those currently being anticipated as reflected in such forward looking statements. The terms 'expect', 'should be', 'will be' and similar expressions identify forward looking statements. Factors which may cause future outcomes to differ from those foreseen in forward looking statements include, but are not limited to: general economic conditions in Reed Elsevier's markets; exchange rate fluctuations; customers' acceptance of our products and services; the actions of competitors; legislative, fiscal and regulatory developments; changes in law and legal interpretations affecting Reed Elsevier's intellectual property rights and internet communications; and the impact of technological change. -------------------------------------------------------------------------------- ELSEVIER Six months ended Six months ended 30 June 30 June ---------------- ---------------- Change 2006 2005 2006 2005 at constant Â£m Â£m â‚¬m â‚¬m currencies ----------------------------------------------------------------------------------------------------------------- Revenue Science & Technology 396 381 578 556 +5% Health Sciences 325 263 475 384 +20% ----------------------------------------------------------------------------------------------------------------- 721 644 1,053 940 +11% ----------------------------------------------------------------------------------------------------------------- Adjusted operating profit 196 189 286 277 +9% Adjusted operating margin 27.2% 29.3% 27.2% 29.3% -0.6pts ----------------------------------------------------------------------------------------------------------------- The Elsevier science and medical business has had a solid first half, with 5% organic revenue growth. The second half is expected to continue well with strong subscription revenues, growing online sales and the more important second half publishing programme. Revenues and adjusted operating profits were 11% and 9% higher respectively than in the prior first half at constant currencies, or 5% and 6% before acquisitions and disposals. Underlying operating margins were slightly ahead, with more meaningful improvement expected in the second half reflecting the seasonal weighting of revenues. The Science & Technology business saw underlying revenue growth of 5% at constant currencies with some small benefit from publishing phasing compared to the prior year. Subscription renewals are strong and there is good growth in new online sales and widening distribution. The Scopus abstracts and indexing database roll out has continued to be well received in the market. In Health Sciences, revenue growth was 20% at constant currencies, or 6% underlying with strong sales in the nursing and allied health professional sectors and new US society journal publishing. Outside the US, the International business saw good growth. The integration of the MediMedia MAP business acquired last year is well progressed and the business is delivering on expectations. In May 2006 we extended the scope of the fast growing Consult series of electronic reference materials and tools and expanded the range of electronic health information services with the acquisition of the Gold Standard drug information database and products. At reported exchange rates, adjusted operating margins were 2.1 percentage points lower reflecting the relatively low, but improving, margins of the MediMedia MAP and other businesses acquired last year, the impact of the rolling three year currency hedging programme as the 2002 to 2004 US dollar decline works its way through the hedge rates, and other currency translation effects. The second half should see continued good revenue momentum with a successful second half publishing programme. Underlying operating margins are expected to improve for the year with good revenue growth and further cost efficiency. LEXISNEXIS Six months ended Six months ended 30 June 30 June 2006 2005 2006 2005 ---------------- ---------------- Change at constant Â£m Â£m â‚¬m â‚¬m currencies ------------------------------------------------------------------------------------------------------------------ Revenue LexisNexis North America 582 511 850 746 +9% International 186 172 271 251 +7% ------------------------------------------------------------------------------------------------------------------ 768 683 1,121 997 +9% ------------------------------------------------------------------------------------------------------------------ Adjusted operating profit 169 151 247 220 +8% Adjusted operating margin 22.0% 22.1% 22.0% 22.1% -0.1pts ------------------------------------------------------------------------------------------------------------------ LexisNexis has continued to perform well, with 8% organic revenue growth, reflecting its expanding total solutions strategy for law firms, government and corporate clients, and good growth in international markets and in risk management. Revenues and adjusted operating profits were up 9% and 8% respectively at constant currencies, or 8% and 9% before acquisitions, with strong growth across LexisNexis and a small phasing benefit. Underlying adjusted operating margin was only slightly ahead reflecting the phasing of investment last year which flattered the prior first half. LexisNexis North America saw underlying revenue growth of 8%. In US Legal Markets, strong subscription renewals and additional online information and solutions sales to both large and small law firms drove organic revenue growth of 7%. In Corporate and Federal Markets organic revenue growth was 10%. Strong growth was seen in risk management with Seisint revenue up over 25%, in corporate legal and tax with a good take up of electronic discovery and litigation tools, and in processing volumes for the US patent and trademark office. The LexisNexis International business outside the US saw underlying revenue growth of 7% driven by further penetration of online information services across its markets and new online content and legal workflow solutions in the UK, France, Germany and South Africa. During the first half LexisNexis expanded its Total Solutions product portfolio through organic investment and selective acquisitions: Casesoft (litigation case analysis) and Dataflight (the Concordance online repository and associated tools for evidence management) in the US and Visualfiles (case management and compliance tools) serving the UK legal market. Continued revenue momentum is expected in the second half in US and international markets with good market conditions, strong subscription renewals and increasing take up of new online services and total practice solutions. Underlying operating margins are expected to show good improvement reflecting the growth in the business and operational gearing. HARCOURT EDUCATION Six months ended Six months ended 30 June 30 June ---------------- ---------------- ----------- Change 2006 2005 2006 2005 at constant Â£m Â£m â‚¬m â‚¬m currencies ------------------------------------------------------------------------------------------------------------------ Revenue Harcourt Education US Schools & Testing 354 329 517 480 +3% International 36 37 52 54 -3% ------------------------------------------------------------------------------------------------------------------ 390 366 569 534 +2% ------------------------------------------------------------------------------------------------------------------ Adjusted operating profit 10 15 15 22 -38% Adjusted operating margin 2.6% 4.1% 2.6% 4.1% -1.6pts ------------------------------------------------------------------------------------------------------------------ Harcourt Education has performed strongly in new US state textbook adoptions and is showing initial signs of recovery in the supplemental business. The assessment business is working through the loss of state testing contracts last year and operational performance issues. Revenues were 2% higher than in the prior first half at constant currencies, or 3% underlying. Whilst the majority of revenues and nearly all of the profits are generated in the second half of the year, this is a satisfactory start in a weak 2006 market. Adjusted operating profits were Â£5m/â‚¬7m lower, or 38% at constant currencies, the percentage exaggerated due to the marginal profitability of the education business in the first half. The Harcourt US K-12 business has performed strongly in the available 2006 state textbook adoptions, which will come through in second half sales. The adoptions market is however significantly lower than in the prior year due to the adoption calendar and little if any market growth is expected this year in US education. With its good adoption performance, Harcourt is expecting to do better than the market, particularly in the secondary market where its new programmes have performed exceptionally well. Underlying revenue growth of 6% in the first half reflects the earlier call off of product than in the prior year. Within this, the supplemental business was broadly flat on the prior first half, although initial signs are that the new publishing should perform well and, with the backlist attrition becoming more manageable, the business should deliver growth this year. The assessment business (3% of total Reed Elsevier revenues) saw revenues 3% lower in the first half reflecting the net loss last year of state testing contracts. Operational difficulties particularly surrounding the Illinois contract also impacted performance in the first half. Organisational changes have been made, processes are being improved, accountabilities made clearer, and, most recently, a new chief executive appointed. Whilst revenues and adjusted operating profits are now expected to decline this year, the actions taken will better position the business for recovery in performance next year. The Harcourt Education International business saw underlying revenues 3% lower in the first half in a generally weak UK market. Stronger performance is expected in the more important second half particularly with new publishing for the fast-growing vocational market. Harcourt Education is targeting revenue growth for 2006 in a flat to declining market. The US basal business is performing well against the market and the supplemental business looks to be improving. 2006 will be a difficult transition year for assessment but progress is being made and should positively impact next year. Operating margins will be lower this year reflecting the performance in assessment and the sales and marketing spend ahead of the larger 2007 adoption opportunities. REED BUSINESS Six months ended Six months ended 30 June 30 June ---------------- ---------------- ----------- Change 2006 2005 2006 2005 at constant Â£m Â£m â‚¬m â‚¬m currencies ----------------------------------------------------------------------------------------------------------------- Revenue Reed Business Information US 162 159 237 232 -3% UK 138 124 201 181 +11% Continental Europe 139 132 203 193 +5% Asia Pacific 19 18 28 26 +8% Reed Exhibitions 290 242 423 354 +19% ----------------------------------------------------------------------------------------------------------------- 748 675 1,092 986 +9% ----------------------------------------------------------------------------------------------------------------- Adjusted operating profit 152 118 222 172 +27% Adjusted operating margin 20.3% 17.5% 20.3% 17.5% +2.9pts ----------------------------------------------------------------------------------------------------------------- Reed Business has had a very successful first half, driven by a strong performance in exhibitions and the net cycling in of a number of non annual shows. Good growth in online revenues has delivered overall growth in the magazine and information businesses. The second half will see a reversal of the favourable cycling effect. Revenues and adjusted operating profits were 9% and 27% higher respectively than in the prior first half at constant currencies, or 7% and 25% before acquisitions and disposals. Adjusted operating margins were 2.9 percentage points higher, reflecting in particular the strong growth in the exhibitions business and tight cost control. At Reed Exhibitions, revenues were 19% ahead of the prior first half at constant currencies, or 13% before acquisitions and disposals. Strong growth was seen in key shows across the principal geographies in the US, Europe and Asia Pacific. Underlying profit growth was 34% with 15% from the favourable cycling including the contribution of joint venture shows. The favourable cycling effects largely reverse in the second half of the year as some of last year's major European biennial shows cycle out. The Reed Business Information magazine and information publishing businesses (RBI) saw continued strong growth in online services, which now account for 23% of RBI revenues, and grew at 31% in the first half. Partly this is at the expense of print advertising as it migrates online, with print revenues down 2%. Overall, RBI revenues were up 3% and adjusted operating profits up 11% at constant currencies before acquisitions and disposals. In the US, underlying revenues were 2% lower as titles were rationalised and repositioned to exploit the online growth opportunities as print migrates. Additionally, the manufacturing product news tabloid business and certain other titles were sold in June. In the UK, RBI underlying revenues were 8% ahead driven by the continuing success of the online services, particularly in recruitment. In Continental Europe, RBI saw underlying growth of 4% as advertising markets improved over the prior first half. Overall RBI adjusted operating margins were 0.7 percentage points higher reflecting tight cost management. Reed Business is well positioned for a satisfactory year driven by good growth in exhibitions and in online services. The second half will however see reversal of first half exhibition cycling gains. FINANCIAL REVIEW REED ELSEVIER COMBINED BUSINESSES Income statement Revenue, at Â£2,627m/â‚¬3,835m, increased by 11% expressed in both sterling and euros. At constant exchange rates, revenue was 8% higher, or 6% excluding acquisitions and disposals. Reported figures Reported operating profit, after amortisation of acquired intangible assets and acquisition integration costs, at Â£353m/â‚¬515m, was up 11% in both sterling and euros compared to the prior first half. The increase reflects the strong underlying operating performance and the contribution from acquisitions, partly offset by the effect of a weaker US dollar hedge rate applicable for Elsevier journal subscription revenues. The amortisation charge in respect of acquired intangible assets amounted to Â£151m/â‚¬221m, up Â£20m/â‚¬30m on the comparative period, principally as a result of prior year acquisitions and currency translation effects. Acquisition integration costs amounted to Â£12m/â‚¬18m (2005: Â£8m/â‚¬12m). Non operating gains on business disposals of Â£2m/â‚¬3m were offset by fair value changes in the portfolio of venture capital investments (2005: net gain Â£4m/ â‚¬5m). The reported profit before tax, including amortisation of acquired intangible assets, acquisition integration costs and non operating items, at Â£276m/â‚¬402m, was up 8% expressed in both sterling and euros compared to the 2005 first half. The reported tax charge of Â£58m/â‚¬84m, compares with a charge of Â£120m/â‚¬175m in the prior first half. The significant decrease principally reflects movements in deferred tax balances in the prior first half 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£217m/â‚¬317m compares with a reported attributable profit of Â£134m/â‚¬196m in the first half of 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 full year average and hedged exchange rates. Adjusted operating profit, at Â£523m/â‚¬764m, was up 13% expressed in sterling and up 14% in euros. At constant exchange rates, adjusted operating profits were up 14%, or 12% excluding acquisitions and disposals. Underlying operating margins improved by 1.1 percentage points. Overall adjusted operating margins, up 0.4 percentage points at 19.9%, 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 unallocated net pension financing credit) was Â£26m/â‚¬38m, Â£13m/â‚¬19m lower than in the prior first half principally reflecting a wider differential between the return on plan assets and interest on pension obligations. The charge for share based payments was slightly higher at Â£29m/â‚¬42m (2005: Â£26m/â‚¬38m). Restructuring costs, other than in respect of acquisition integration, were Â£11m /â‚¬16m (2005: Â£9m/â‚¬13m). Net finance costs, at Â£77m/â‚¬113m, were Â£11m/â‚¬17m higher than in the prior first half due to higher short term interest rates and the financing cost of acquisitions and the share repurchase programme. Adjusted profit before tax was Â£446m/â‚¬651m, up 13% compared to the prior first half expressed in both sterling and euros. At constant exchange rates, adjusted profit before tax was up 14%. The effective tax rate on adjusted earnings, at 24.3%, was little changed from the 24.6% effective rate for the full year in 2005 but lower than the 25.3% rate in the prior first half. The effective rate for the 2006 year is expected to be similar to the first half rate. 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£337m/â‚¬492m was up 15% compared to the prior first half expressed in both sterling and euros. At constant exchange rates, adjusted profit attributable to shareholders was up 16%. Cash flows and debt Adjusted operating cash flow was Â£252m/â‚¬368m, up 15% on the prior first half expressed in both sterling and euros, or 14% at constant currencies. The rate of conversion of adjusted operating profits into cash flow in the first half was 48% (2005: 48%). This reflects that the substantial majority of Reed Elsevier's annual operating cash flows arise in the second half of the year due to the timing of subscription and other advance receipts and working capital movements. The Harcourt Education businesses have a significant cash outflow in the first half of each year as product is produced and expenses are incurred ahead of the peak sales period in June through September, after which there is substantial cash inflow in the second half. In the 12 months to 30 June 2006, the adjusted operating cash flow conversion rate was 92% (2005 full year: 95%), the reduction principally reflecting higher product investment in Harcourt Education in advance of the important 2007 and 2008 state textbook adoptions. Capital expenditure included within adjusted operating cash flow was Â£83m/â‚¬121m (2005: Â£80m/â‚¬117m), including Â£46m/â‚¬67m in respect of capitalised development costs included within intangible assets. Spend on acquisitions was Â£136m/â‚¬198m. Including deferred consideration payable, an amount of Â£62m/â‚¬91m was capitalised as acquired intangible assets and Â£91m/â‚¬133m as goodwill. Acquisition integration spend in respect of these and other recent acquisitions amounted to Â£13m/â‚¬19m. Disposal proceeds amounted to Â£39m/â‚¬56m. Free cash flow - after interest and taxation - was Â£84m/â‚¬123m, up Â£20m/â‚¬29m on the prior first half. Dividends paid to shareholders in the first half, relating to the 2005 final dividend, amounted to Â£269m/â‚¬393m (2005: Â£244m/ â‚¬356m). Share repurchases by the parent companies in the first half amounted to Â£218m/â‚¬318m. Additional shares of the parent companies were purchased by the employee benefit trust for Â£70m/â‚¬102m to meet future obligations in respect of share based remuneration. Net proceeds from share issuance under share option programmes were Â£43m/â‚¬63m. Net borrowings at 30 June 2006 were Â£3,100m/â‚¬4,464m, an increase of Â£406m/â‚¬531m since 31 December 2005, principally reflecting the dividends, share repurchases and acquisition spend, less free cash flow in the first half and the effect of the weakening of the US dollar between the beginning and end of the period. Overall currency translation effects decreased net debt expressed in sterling by Â£136m and in euros by â‚¬260m. The net pension deficit, ie pensions obligations less pension assets, at 30 June 2006 was Â£81m/â‚¬117m (31 December 2005: Â£405m/â‚¬591m). The reduction in the deficit of Â£324m/â‚¬474m principally arises from the increase in long term corporate bond yields which are used to discount the pension obligations. PARENT COMPANIES For the parent companies, Reed Elsevier PLC and Reed Elsevier NV, adjusted earnings per share were respectively up 15% at 14.2p (2005: 12.3p) and â‚¬0.32 (2005: â‚¬0.27). At constant rates of exchange, the adjusted earnings per share of both companies increased by 16% over the prior first half. Shares repurchased in the first half under the annual share repurchase plan announced in February 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 add 0.4% to adjusted earnings per share in 2006. The reported earnings per share for Reed Elsevier PLC shareholders was 8.6p (2005: 5.1p) and for Reed Elsevier NV shareholders was â‚¬0.20 (2005: â‚¬0.13). The equalised interim dividends are 4.1p per share for Reed Elsevier PLC and â‚¬0.102 per share for Reed Elsevier NV, both up 11% on the prior first half. COMBINED FINANCIAL INFORMATION COMBINED INCOME STATEMENT For the six months ended 30 June 2006 Year ended Six months ended Six months ended 31 December 30 June 30 June ----------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ----------------------------------------------------------------------------------------------------------------- 5,166 7,542 Revenue 2,627 2,368 3,835 3,457 (1,890) (2,759) Cost of sales (974) (876) (1,422) (1,279) ----------------------------------------------------------------------------------------------------------------- 3,276 4,783 Gross profit 1,653 1,492 2,413 2,178 (1,120) (1,635) Selling and distribution costs (593) (552) (866) (806) (1,333) (1,946) Administration and other expenses (721) (631) (1,052) (921) ----------------------------------------------------------------------------------------------------------------- 823 1,202 Operating profit before joint ventures 339 309 495 451 16 23 Share of results of joint ventures 14 8 20 12 ----------------------------------------------------------------------------------------------------------------- 839 1,225 Operating profit 353 317 515 463 ----------------------------------------------------------------------------------------------------------------- 36 52 Finance income 11 18 16 27 (176) (256) Finance costs (88) (84) (129) (123) ----------------------------------------------------------------------------------------------------------------- (140) (204) Net finance costs (77) (66) (113) (96) ----------------------------------------------------------------------------------------------------------------- 2 2 Disposals and other non operating items - 4 - 5 ----------------------------------------------------------------------------------------------------------------- 701 1,023 Profit before tax 276 255 402 372 (237) (346) Taxation (58) (120) (84) (175) ----------------------------------------------------------------------------------------------------------------- 464 677 Net profit for the period 218 135 318 197 ----------------------------------------------------------------------------------------------------------------- Attributable to: 462 675 Parent companies' shareholders 217 134 317 196 2 2 Minority interests 1 1 1 1 ----------------------------------------------------------------------------------------------------------------- 464 677 Net profit for the period 218 135 318 197 ----------------------------------------------------------------------------------------------------------------- Adjusted profit figures are presented in note 4 as additional performance measures. COMBINED CASH FLOW STATEMENT For the six months ended 30 June 2006 Year ended Six months ended Six months ended 31 December 30 June 30 June -------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities 1,223 1,786 Cash generated from operations 315 277 460 404 (153) (223) Interest paid (77) (68) (112) (99) 11 16 Interest received 5 8 7 12 (171) (250) Tax paid (94) (93) (137) (136) ---------------------------------------------------------------------------------------------------------------- 910 1,329 Net cash from operating activities 149 124 218 181 ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities (317) (463) Acquisitions (136) (62) (198) (91) (93) (136) Purchase of property, plant and equipment (37) (38) (54) (56) (102) (149) Expenditure on internally developed intangible assets (46) (42) (67) (61) (3) (4) Purchase of investments (3) (2) (5) (3) 8 12 Proceeds from disposal of property, plant and 1 2 1 3 equipment 36 52 Proceeds from other disposals 39 14 56 20 16 23 Dividends received from joint ventures 6 8 9 12 ---------------------------------------------------------------------------------------------------------------- (455) (665) Net cash used in investing activities (176) (120) (258) (176) ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities (336) (491) Dividends paid to shareholders of the parent (269) (244) (393) (356) companies (492) (718) Increase/(decrease) in bank loans, overdrafts 568 (234) 829 (341) and commercial paper 544 794 Issuance of other loans 7 529 10 772 (90) (132) Repayment of other loans (31) (88) (45) (128) (13) (19) Repayment of finance leases (7) (6) (10) (9) 25 37 Proceeds on issue of ordinary shares 43 16 63 23 (27) (39) Purchase of treasury shares (288) (3) (420) (4) ---------------------------------------------------------------------------------------------------------------- (389) (568) Net cash from/(used in) financing activities 23 (30) 34 (43) ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 66 96 (Decrease)/increase in cash and cash equivalents (4) (26) (6) (38) ---------------------------------------------------------------------------------------------------------------- Movement in cash and cash equivalents 225 317 At start of period 296 225 432 317 66 96 (Decrease)/increase in cash and cash (4) (26) (6) (38) equivalents 5 19 Exchange translation differences (2) 1 (8) 19 ---------------------------------------------------------------------------------------------------------------- 296 432 At end of period 290 200 418 298 ---------------------------------------------------------------------------------------------------------------- Adjusted operating cash flow figures are presented in note 4 as additional performance measures. Combined balance sheet As at 30 June 2006 As at 31 December As at 30 June As at 30 June ----------------- ------------- ------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ----------------------------------------------------------------------------------------------------------------- Non-current assets 3,030 4,424 Goodwill 2,983 2,778 4,296 4,139 2,979 4,349 Intangible assets 2,777 2,884 3,999 4,297 115 168 Investments 121 108 174 161 314 458 Property, plant and equipment 296 303 426 452 - - Net pension assets 166 - 239 - 266 388 Deferred tax assets 139 274 200 408 ----------------------------------------------------------------------------------------------------------------- 6,704 9,787 6,482 6,347 9,334 9,457 ----------------------------------------------------------------------------------------------------------------- Current assets 630 920 Inventories and pre-publication costs 661 610 952 909 1,437 2,098 Trade and other receivables 1,314 1,276 1,891 1,901 296 432 Cash and cash equivalents 290 200 418 298 ----------------------------------------------------------------------------------------------------------------- 2,363 3,450 2,265 2,086 3,261 3,108 ----------------------------------------------------------------------------------------------------------------- 60 88 Assets held for sale 20 - 29 - ----------------------------------------------------------------------------------------------------------------- 9,127 13,325 Total assets 8,767 8,433 12,624 12,565 ----------------------------------------------------------------------------------------------------------------- Current liabilities 1,982 2,893 Trade and other payables 1,677 1,569 2,415 2,337 900 1,314 Borrowings 1,637 780 2,357 1,162 269 393 Taxation 257 303 370 451 ----------------------------------------------------------------------------------------------------------------- 3,151 4,600 3,571 2,652 5,142 3,950 ----------------------------------------------------------------------------------------------------------------- Non-current liabilities 2,264 3,305 Borrowings 1,906 2,545 2,745 3,792 287 420 Taxation 288 192 415 286 980 1,431 Deferred tax liabilities 897 928 1,292 1,382 405 591 Net pension obligations 247 467 356 696 44 64 Provisions 37 50 52 75 ----------------------------------------------------------------------------------------------------------------- 3,980 5,811 3,375 4,182 4,860 6,231 ----------------------------------------------------------------------------------------------------------------- 11 16 Liabilities associated with assets held for sale 3 - 4 - ----------------------------------------------------------------------------------------------------------------- 7,142 10,427 Total liabilities 6,949 6,834 10,006 10,181 ----------------------------------------------------------------------------------------------------------------- 1,985 2,898 Net assets 1,818 1,599 2,618 2,384 ----------------------------------------------------------------------------------------------------------------- Capital and reserves 190 277 Combined share capitals 191 189 275 282 1,805 2,635 Combined share premiums 1,858 1,776 2,676 2,646 (93) (136) Combined shares held in treasury (382) (69) (550) (103) 89 130 Translation reserve (40) (15) (63) 113 (21) (30) Other combined reserves 177 (295) 260 (574) ----------------------------------------------------------------------------------------------------------------- 1,970 2,876 Combined shareholders' equity 1,804 1,586 2,598 2,364 15 22 Minority interests 14 13 20 20 ----------------------------------------------------------------------------------------------------------------- 1,985 2,898 Total equity 1,818 1,599 2,618 2,384 ----------------------------------------------------------------------------------------------------------------- Approved by the boards of Reed Elsevier PLC and Reed Elsevier NV, 26 July 2006. COMBINED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the six months ended 30 June 2006 Year ended Six months ended Six months ended 31 December 30 June 30 June ------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ 464 677 Net profit for the period 218 135 318 197 180 346 Exchange differences on translation of foreign (118) 107 (208) 288 operations (37) (54) Actuarial gains/(losses) on defined benefit 290 (143) 423 (209) pension schemes 3 4 Fair value movements on available for sale 2 - 3 - investments (10) (15) Fair value movements on cash flow hedges 32 (4) 47 (6) 10 15 Tax on actuarial gains/losses on defined benefit (90) 41 (131) 60 pension schemes (13) (19) Tax on fair value movements on cash flow hedges (10) (7) (15) (10) ----------------------------------------------------------------------------------------------------------------- 133 277 Net income/(expense) recognised directly in equity 106 (6) 119 123 ----------------------------------------------------------------------------------------------------------------- (19) (28) Transfer to net profit from hedge reserve (4) (12) (6) (18) ----------------------------------------------------------------------------------------------------------------- 578 926 Total recognised income and expense for the period 320 117 431 302 ----------------------------------------------------------------------------------------------------------------- Attributable to: 576 924 Parent companies' shareholders 319 116 430 301 2 2 Minority interests 1 1 1 1 ----------------------------------------------------------------------------------------------------------------- 578 926 Total recognised income and expense for the period 320 117 431 302 ----------------------------------------------------------------------------------------------------------------- COMBINED SHAREHOLDERS' EQUITY RECONCILIATION For the six months ended 30 June 2006 Year ended Six months ended Six months ended 31 December 30 June 30 June -------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ 576 924 Total recognised net income attributable to the 319 116 430 301 parent companies' shareholders (336) (491) Dividends declared (269) (244) (393) (356) 25 37 Issue of ordinary shares, net of expenses 43 16 63 23 (27) (39) Increase in shares held in treasury (288) (3) (420) (4) 57 83 Increase in share based remuneration reserve 29 26 42 38 ------------------------------------------------------------------------------------------------------------------ 295 514 Net (decrease)/increase in combined shareholders' equity (166) (89) (278) 2 1,675 2,362 Combined shareholders' equity at start of period 1,970 1,675 2,876 2,362 ------------------------------------------------------------------------------------------------------------------ 1,970 2,876 Combined shareholders' equity at end of period 1,804 1,586 2,598 2,364 ------------------------------------------------------------------------------------------------------------------ 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 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 polices and with IAS34 - Interim Financial Reporting. The combined financial information for the six months ended 30 June 2006 and the comparative amounts to 30 June 2005 are unaudited but have been reviewed by the auditors. The combined financial information for the year ended 31 December 2005 has been abridged from the Reed Elsevier Annual Reports and Financial Statements 2005, which received an unqualified audit report. 2 Segment analysis Revenue Year ended Six months ended Six months ended 31 December 30 June 30 June -------------- ---------------- ----------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ Business segment 1,436 2,097 Elsevier 721 644 1,053 940 1,466 2,140 LexisNexis 768 683 1,121 997 901 1,315 Harcourt Education 390 366 569 534 1,363 1,990 Reed Business 748 675 1,092 986 ------------------------------------------------------------------------------------------------------------------ 5,166 7,542 Total 2,627 2,368 3,835 3,457 ------------------------------------------------------------------------------------------------------------------ Geographical origin 2,888 4,216 North America 1,451 1,307 2,118 1,908 870 1,270 United Kingdom 411 393 600 574 500 730 The Netherlands 269 249 393 363 601 878 Rest of Europe 331 270 483 394 307 448 Rest of world 165 149 241 218 ------------------------------------------------------------------------------------------------------------------ 5,166 7,542 Total 2,627 2,368 3,835 3,457 ------------------------------------------------------------------------------------------------------------------ Geographical market 2,974 4,342 North America 1,485 1,347 2,168 1,966 568 829 United Kingdom 288 259 420 378 202 295 The Netherlands 104 97 152 142 804 1,174 Rest of Europe 419 354 612 517 618 902 Rest of world 331 311 483 454 ------------------------------------------------------------------------------------------------------------------ 5,166 7,542 Total 2,627 2,368 3,835 3,457 ------------------------------------------------------------------------------------------------------------------ Adjusted operating profit Year ended Six months ended Six months ended 31 December 30 June 30 June ------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m --------------------------------------------------------------------------------------------------------------- Business segment 449 655 Elsevier 196 189 286 277 338 493 LexisNexis 169 151 247 220 161 235 Harcourt Education 10 15 15 22 214 313 Reed Business 152 118 222 172 --------------------------------------------------------------------------------------------------------------- 1,162 1,696 Subtotal 527 473 770 691 (32) (47) Corporate costs (21) (18) (31) (27) 12 18 Unallocated net pension credit 17 6 25 9 --------------------------------------------------------------------------------------------------------------- 1,142 1,667 Total 523 461 764 673 --------------------------------------------------------------------------------------------------------------- Geographical origin 595 869 North America 223 202 326 295 186 271 United Kingdom 70 69 102 101 166 242 The Netherlands 106 92 155 134 141 206 Rest of Europe 90 69 131 101 54 79 Rest of world 34 29 50 42 --------------------------------------------------------------------------------------------------------------- 1,142 1,667 Total 523 461 764 673 --------------------------------------------------------------------------------------------------------------- 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£17m/â‚¬25m (2005 interim: Â£6m/â‚¬9m) comprises the expected return on pension scheme assets of Â£90m/â‚¬131m (2005 interim: Â£74m/â‚¬108m) less interest on pension scheme liabilities of Â£73m/â‚¬106m (2005 interim: Â£68m/â‚¬99m). Operating profit Year ended Six months ended Six months ended 31 December 30 June 30 June ------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m --------------------------------------------------------------------------------------------------------------- Business segment 396 578 Elsevier 157 166 229 242 218 318 LexisNexis 114 95 167 139 87 127 Harcourt Education (34) (22) (50) (32) 158 231 Reed Business 120 90 175 131 --------------------------------------------------------------------------------------------------------------- 859 1,254 Subtotal 357 329 521 480 (32) (47) Corporate costs (21) (18) (31) (26) 12 18 Unallocated pension credit 17 6 25 9 --------------------------------------------------------------------------------------------------------------- 839 1,225 Total 353 317 515 463 --------------------------------------------------------------------------------------------------------------- Geographical origin 364 531 North America 99 92 145 134 158 231 United Kingdom 53 55 77 80 161 235 The Netherlands 105 90 153 132 106 155 Rest of Europe 63 53 92 77 50 73 Rest of world 33 27 48 40 --------------------------------------------------------------------------------------------------------------- 839 1,225 Total 353 317 515 463 --------------------------------------------------------------------------------------------------------------- Share of post-tax results of joint ventures of Â£14m/â‚¬20m (2005 interim: Â£8m/ â‚¬12m) included in operating profit comprises Â£2m/â‚¬2m (2005 interim: Â£2m/â‚¬3m) relating to LexisNexis and Â£12m/â‚¬18m (2005 interim: Â£6m/â‚¬9m) relating to Reed Business. 3 Combined cash flow statement Reconciliation of operating profit before joint ventures to cash generated from operations Year ended 31 Six months ended Six months ended December 30 June 30 June -------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ----------------------------------------------------------------------------------------------------------------- 823 1,202 Operating profit before joint ventures 339 309 495 451 276 403 Amortisation of acquired intangible assets 151 131 221 191 57 83 Amortisation of internally developed intangible 34 29 50 42 assets 87 127 Depreciation of property, plant and equipment 47 40 69 58 57 83 Share based remuneration 29 26 42 38 ----------------------------------------------------------------------------------------------------------------- 477 696 Total non cash items 261 226 382 329 ----------------------------------------------------------------------------------------------------------------- (77) (112) Movement in working capital (285) (258) (417) (376) ----------------------------------------------------------------------------------------------------------------- 1,223 1,786 Cash generated from operations 315 277 460 404 ----------------------------------------------------------------------------------------------------------------- Reconciliation of net borrowings Six months ended 30 June Year ---------------- ended 31 Related December Cash & derivative -------- cash financial 2005 equivalents Borrowings instruments 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m -------------------------------------------------------------------------------------------------------------------- (2,538) At start of period 296 (3,164) 174 (2,694) (2,538) 66 (Decrease)/increase in cash and cash (4) - - (4) (26) equivalents 51 (Increase)/decrease in borrowings - (537) - (537) (201) -------------------------------------------------------------------------------------------------------------------- 117 Changes resulting from cash flows (4) (537) - (541) (227) -------------------------------------------------------------------------------------------------------------------- - Borrowings in acquired businesses - - - - (1) (10) Inception of finance leases - (3) - (3) (7) 5 Fair value adjustments - 13 (11) 2 1 (268) Exchange translation differences (2) 148 (10) 136 (141) -------------------------------------------------------------------------------------------------------------------- (2,694) At end of period 290 (3,543) 153 (3,100) (2,913) -------------------------------------------------------------------------------------------------------------------- Six months ended 30 June Year ---------------- ended 31 Related December Cash & derivative -------- cash financial 2005 equivalents Borrowings instruments 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m -------------------------------------------------------------------------------------------------------------------- (3,578) At start of period 432 (4,619) 254 (3,933) (3,578) 96 (Decrease)/increase in cash and cash (6) - - (6) (38) equivalents 75 (Increase)/decrease in borrowings - (784) - (784) (294) -------------------------------------------------------------------------------------------------------------------- 171 Changes resulting from cash flows (6) (784) - (790) (332) -------------------------------------------------------------------------------------------------------------------- - Borrowings in acquired businesses - - - - (1) (15) Inception of finance leases - (4) - (4) (9) 7 Fair value adjustments - 19 (16) 3 1 (518) Exchange translation differences (8) 286 (18) 260 (421) -------------------------------------------------------------------------------------------------------------------- (3,933) At end of period 418 (5,102) 220 (4,464) (4,340) -------------------------------------------------------------------------------------------------------------------- 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. Year ended Six months ended Six months ended 31 December 30 June 30 June ------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ 839 1,225 Operating profit 353 317 515 463 Adjustments: 276 403 Amortisation of acquired intangible assets 151 131 221 191 21 30 Acquisition integration costs 12 8 18 12 6 9 Reclassification of tax in joint ventures 7 5 10 7 ------------------------------------------------------------------------------------------------------------------ 1,142 1,667 Adjusted operating profit 523 461 764 673 ------------------------------------------------------------------------------------------------------------------ 701 1,023 Profit before tax 276 255 402 372 Adjustments: 276 403 Amortisation of acquired intangible assets 151 131 221 191 21 30 Acquisition integration costs 12 8 18 12 6 9 Reclassification of tax in joint ventures 7 5 10 7 (2) (2) Disposals and other non operating items - (4) - (5) ------------------------------------------------------------------------------------------------------------------ 1,002 1,463 Adjusted profit before tax 446 395 651 577 ------------------------------------------------------------------------------------------------------------------ 462 675 Profit attributable to parent companies' 217 134 317 196 shareholders Adjustments (post tax): 310 452 Amortisation of acquired intangible assets 163 145 238 211 17 24 Acquisition integration costs 10 7 15 10 (2) (2) Disposals and other non operating items 2 (3) 2 (4) (33) (48) Deferred tax adjustment (55) 11 (80) 16 ------------------------------------------------------------------------------------------------------------------ 754 1,101 Adjusted profit attributable to parent companies' shareholders 337 294 492 429 ------------------------------------------------------------------------------------------------------------------ 1,223 1,786 Cash generated from operations 315 277 460 404 16 23 Dividends received from joint ventures 6 8 9 12 (93) (136) Purchase of property, plant and equipment (37) (38) (54) (56) 8 12 Proceeds from disposal of property, plant and 1 2 1 3 equipment (102) (149) Expenditure on internally developed intangible (46) (42) (67) (61) assets 28 41 Payments in relation to acquisition integration 13 12 19 18 costs ------------------------------------------------------------------------------------------------------------------ 1,080 1,577 Adjusted operating cash flow 252 219 368 320 ------------------------------------------------------------------------------------------------------------------ Tax cash flow benefits of Â£2m/â‚¬3m (2005 interim: Â£2m/â‚¬3m) were obtained in relation to acquisition integration costs and disposals and other non operating items. 5 Exchange translation rates In preparing the combined financial information the following exchange rates have been applied: Year ended 31 December 2005 Income statement Balance sheet Income Balance 30 June 30 June 30 June 30 June statement sheet 2006 2005 2006 2005 1.46 1.46 Euro to sterling 1.46 1.46 1.44 1.49 1.82 1.73 US dollars to sterling 1.79 1.87 1.83 1.80 0.80 0.84 Euro to US dollars 0.82 0.78 0.79 0.83 1.25 1.18 US dollars to euro 1.23 1.28 1.27 1.21 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, and is in accordance with IAS34 - Interim Financial Reporting. 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 summary financial information does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. The interim figures for the six months ended 30 June 2006 and the comparative amounts to 30 June 2005 are unaudited but have been reviewed by the auditors. The summary financial information for the year ended 31 December 2005 has been abridged from the Reed Elsevier Annual Reports and Financial Statements 2005, which have been filed with the UK Registrar of Companies and received an unqualified audit report. Consolidated income statement For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------- (2) Administrative expenses - - (9) Effect of tax credit equalisation on distributed earnings (7) (6) 252 Share of results of joint ventures 120 72 ------------------------------------------------------------------------------------------------------------------- 241 Operating profit 113 66 1 Finance (costs)/income (2) 1 ------------------------------------------------------------------------------------------------------------------- 242 Profit before tax 111 67 (7) Taxation (3) (2) ------------------------------------------------------------------------------------------------------------------- 235 Profit attributable to ordinary shareholders 108 65 ------------------------------------------------------------------------------------------------------------------- Earnings per ordinary share Year ended Six months ended 31 December 30 June ----------- ---------------- 2005 2006 2005 pence pence pence ------------------------------------------------------------------------------------------------------------------- 18.6p Basic earnings per share 8.6p 5.1p 18.4p Diluted earnings per share 8.5p 5.1p ------------------------------------------------------------------------------------------------------------------- Adjusted profit and earnings per share figures are presented in note 1 as additional performance measures. Consolidated cash flow statement For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities (2) Cash used by operations - - 1 Interest (paid)/received (1) 3 (8) Tax paid (2) (3) ------------------------------------------------------------------------------------------------------------------- (9) Net cash used in operating activities (3) - ------------------------------------------------------------------------------------------------------------------- 168 Dividends received from joint ventures 285 120 Cash flows from financing activities (168) Equity dividends paid (135) (120) 14 Proceeds on issue of ordinary shares 21 8 - Purchase of treasury shares (111) - (5) Increase in net funding balances due from joint ventures (57) (8) ------------------------------------------------------------------------------------------------------------------- (159) Net cash used in financing activities (282) (120) ------------------------------------------------------------------------------------------------------------------- - Movement in cash and cash equivalents - - ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET As at 30 June 2006 As at As at 31 December 30 June ------------------ --------------- 2005 2006 2005 Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------- Non-current assets 490 Investments in joint ventures 347 286 Current assets 600 Amounts due from joint ventures 657 601 ------------------------------------------------------------------------------------------------------------------- 1,090 Total assets 1,004 887 ------------------------------------------------------------------------------------------------------------------- Current liabilities 1 Payables 2 1 11 Taxation 12 11 ------------------------------------------------------------------------------------------------------------------- 12 14 12 ------------------------------------------------------------------------------------------------------------------- Non-current liabilities 36 Amounts owed to joint ventures 36 36 ------------------------------------------------------------------------------------------------------------------- 48 Total liabilities 50 48 ------------------------------------------------------------------------------------------------------------------- 1,042 Net assets 954 839 ------------------------------------------------------------------------------------------------------------------- Capital and reserves 160 Called up share capital 160 159 987 Share premium account 1,008 982 (49) Shares held in treasury (201) (37) 4 Capital redemption reserve 4 4 31 Translation reserve (31) (8) (91) Other reserves 14 (261) ------------------------------------------------------------------------------------------------------------------- 1,042 Total equity 954 839 ------------------------------------------------------------------------------------------------------------------- Approved by the board of directors, 26 July 2006. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------- 235 Profit attributable to ordinary shareholders 108 65 71 Share of joint ventures' net income/(expense) recognised directly in equity 56 (4) (10) Share of joint ventures' transfer to net profit from hedge reserve (2) (6) ------------------------------------------------------------------------------------------------------------------- 296 Total recognised net income and expense for the period 162 55 ------------------------------------------------------------------------------------------------------------------- Reconciliation of consolidated shareholders' equity For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ---------------- 2005 2006 2005 Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------- 296 Total recognised net income for the period 162 55 (168) Equity dividends declared (135) (120) 14 Issue of ordinary shares, net of expenses 21 8 (14) Increase in shares held in treasury (152) (2) 30 Increase in share based remuneration reserve 15 14 (2) Equalisation adjustments 1 (2) ------------------------------------------------------------------------------------------------------------------- 156 Net (decrease)/increase in shareholders' equity (88) (47) 886 Shareholders' equity at start of period 1,042 886 ------------------------------------------------------------------------------------------------------------------- 1,042 Shareholders' equity at end of period 954 839 ------------------------------------------------------------------------------------------------------------------- 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: Year ended Six months ended 30 June 31 December --------------- ------------------------ Profit Profit attributable Basic attributable to to ordinary earnings ordinary Basic earnings shareholders per share shareholders per share ----------------------- ------------------------------- 2005 2005 2006 2005 2006 2005 Â£m pence Â£m Â£m pence pence -------------------------------------------------------------------------------------------------------------------- 235 18.6p Reported figures 108 65 8.6p 5.1p 9 0.7p Effect of tax credit equalisation on distributed earnings 7 6 0.5p 0.5p -------------------------------------------------------------------------------------------------------------------- 244 19.3p Profit attributable to ordinary shareholders based on 115 71 9.1p 5.6p 52.9% economic interest in the Reed Elsevier combined businesses 155 12.2p Share of adjustments in joint ventures 63 85 5.1p 6.7p -------------------------------------------------------------------------------------------------------------------- 399 31.5p Adjusted figures 178 156 14.2p 12.3p -------------------------------------------------------------------------------------------------------------------- 2 Dividends On 26 July 2006 an interim dividend of 4.1p per ordinary share (2005 interim: 3.7p per ordinary share) was declared by the Directors of Reed Elsevier PLC. The total cost of funding this dividend of Â£51m (2005 interim: Â£48m) will be recognised when paid. During the six months ended 30 June 2006, the final 2005 dividend of 10.7p per ordinary share was paid, at a total cost of Â£135m (2005 interim: 9.6p per ordinary share; Â£120m). 3 Share capital and treasury shares Year ended 31 December Six months ended 2005 30 June 2006 2005 ----------- ---------------- Shares in issue net Shares in Shares in of issue net issue net treasury of of shares Treasury treasury treasury Shares in issue shares shares shares millions millions millions millions millions ---------------------------------------------------------------------------------------------------------------- Number of ordinary shares 1,265.4 At start of period 1,277.0 (10.8) 1,266.2 1,265.4 3.6 Issue of ordinary shares 4.7 0.2 4.9 2.1 - Share repurchases - (20.6) (20.6) - (2.8) Purchase of shares by employee benefit trust - (6.9) (6.9) (2.8) ---------------------------------------------------------------------------------------------------------------- 1,266.2 At end of period 1,281.7 (38.1) 1,243.6 1,264.7 ---------------------------------------------------------------------------------------------------------------- 1,266.2 Average number of ordinary shares during the period 1,257.4 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£3,117m at 30 June 2006 (31 December 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, and is in accordance with IAS34 - Interim Financial Reporting. 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 interim figures for the six months ended 30 June 2006 and the comparative amounts to 30 June 2005 are unaudited but have been reviewed by the auditors. The summary financial information for the year ended 31 December 2005 has been abridged from the Reed Elsevier Annual Reports and Financial Statements 2005, which received an unqualified audit report. Consolidated income statement For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 â‚¬m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ (3) Administrative expenses (1) (1) 339 Share of results of joint ventures 159 97 ------------------------------------------------------------------------------------------------------------------ 336 Operating profit 158 96 2 Finance income 1 2 ------------------------------------------------------------------------------------------------------------------ 338 Profit before tax 159 98 - Taxation - - ------------------------------------------------------------------------------------------------------------------ 338 Profit attributable to ordinary shareholders 159 98 ------------------------------------------------------------------------------------------------------------------ EARNINGS PER ORDINARY SHARE Year ended Six months ended 31 December 30 June ----------- ---------------- 2005 2006 2005 â‚¬ â‚¬ â‚¬ ------------------------------------------------------------------------------------------------------------------ â‚¬0.43 Basic earnings per share â‚¬0.20 â‚¬0.13 â‚¬0.43 Diluted earnings per share â‚¬0.20 â‚¬0.13 ------------------------------------------------------------------------------------------------------------------ Adjusted profit and earnings per share figures are presented in note 1 as additional performance measures. Consolidated cash flow statement For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 â‚¬m â‚¬m â‚¬m ----------------------------------------------------------------------------------------------------------------- Cash flows from operating activities (5) Cash used by operations (1) (1) 1 Interest received 8 1 2 Tax received - 1 ----------------------------------------------------------------------------------------------------------------- (2) Net cash from operating activities 7 1 ----------------------------------------------------------------------------------------------------------------- 189 Dividends received from joint ventures 599 120 Cash flows from financing activities (245) Equity dividends paid (197) (177) 18 Proceeds on issue of ordinary shares 32 10 - Purchase of treasury shares (156) - 16 (Increase)/decrease in net funding balances due from joint ventures (181) 25 ----------------------------------------------------------------------------------------------------------------- (211) Net cash used in financing activities (502) (142) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- (24) Movement in cash and cash equivalents 104 (21) ----------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET As at 30 June 2006 As at 31 December As at 30 June 2005 2006 2005 ------------ --------------- â‚¬m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ Non-current assets 1,487 Investments in joint ventures 1,070 1,238 Current assets 14 Amounts due from joint ventures - funding 195 5 8 Amounts due from joint ventures - other 1 6 1 Cash and cash equivalents 105 4 ------------------------------------------------------------------------------------------------------------------ 23 301 15 ------------------------------------------------------------------------------------------------------------------ 1,510 Total assets 1,371 1,253 ------------------------------------------------------------------------------------------------------------------ Current liabilities 8 Payables 8 8 6 Taxation 6 5 ------------------------------------------------------------------------------------------------------------------ 14 14 13 ------------------------------------------------------------------------------------------------------------------ Non-current liabilities 58 Taxation 58 58 ------------------------------------------------------------------------------------------------------------------ 72 Total liabilities 72 71 ------------------------------------------------------------------------------------------------------------------ 1,438 Net assets 1,299 1,182 ------------------------------------------------------------------------------------------------------------------ Capital and reserves 47 Share capital issued 47 47 1,495 Paid-in surplus 1,527 1,495 (68) Shares held in treasury (278) (49) 76 Translation reserve (28) 46 (112) Other reserves 31 (357) ------------------------------------------------------------------------------------------------------------------ 1,438 Total equity 1,299 1,182 ------------------------------------------------------------------------------------------------------------------ Approved by the Combined Board of directors, 26 July 2006. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ------------ ---------------- 2005 2006 2005 â‚¬m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------ 338 Profit attributable to ordinary shareholders 159 98 138 Share of joint ventures' net income recognised directly in equity 60 61 (14) Share of joint ventures' transfer to net profit from hedge reserve (3) (9) ------------------------------------------------------------------------------------------------------------------ 462 Total recognised net income and expense for the period 216 150 ------------------------------------------------------------------------------------------------------------------ Reconciliation of consolidated shareholders' equity For the six months ended 30 June 2006 Year ended Six months ended 31 December 30 June ----------- ---------------- 2005 2006 2005 â‚¬m â‚¬m â‚¬m ----------------------------------------------------------------------------------------------------------------- 462 Total recognised net income for the period 216 150 (245) Equity dividends declared (197) (177) 18 Issue of ordinary shares, net of expenses 32 10 (20) Increase in shares held in treasury (210) (2) 42 Increase in share based remuneration reserve 21 19 - Equalisation adjustments (1) 1 257 Net (decrease)/increase in shareholders' equity (139) 1 1,181 Shareholders' equity at start of period 1,438 1,181 ----------------------------------------------------------------------------------------------------------------- 1,438 Shareholders' equity at end of period 1,299 1,182 ----------------------------------------------------------------------------------------------------------------- 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: Year ended Six months ended 30 June 31 December ---------------- ------------------------ Profit Basic Profit attributable earnings attributable to to ordinary per ordinary Basic earnings shareholders share shareholders per share --------------------- ------------------------------- 2005 2005 2006 2005 2006 2005 â‚¬m â‚¬ â‚¬m â‚¬m â‚¬ â‚¬ ------------------------------------------------------------------------------------------------------------------- 338 â‚¬0.43 Reported figures 159 98 â‚¬0.20 â‚¬0.13 213 â‚¬0.27 Share of adjustments in joint ventures 87 117 â‚¬0.12 â‚¬0.14 ------------------------------------------------------------------------------------------------------------------- 551 â‚¬0.70 Adjusted figures 246 215 â‚¬0.32 â‚¬0.27 ------------------------------------------------------------------------------------------------------------------- 2 Dividends On 26 July 2006 an interim dividend of â‚¬0.102 per ordinary share (2005 interim: â‚¬0.092 per ordinary share) was declared by the Boards of Reed Elsevier NV. The total cost of funding this dividend of â‚¬74m (2005 interim: â‚¬68m) will be recognised when paid. During the six months ended 30 June 2006, the final 2005 dividend of â‚¬0.267 per ordinary share was paid, at a total cost of â‚¬197m (2005 interim: â‚¬0.24 per ordinary share; â‚¬177m). 3 Share capital and treasury shares Year ended 31 December Six months ended 2005 30 June 2006 2005 ----------- ---------------- Shares in issue net Shares in Shares in of issue net issue net treasury of of shares Treasury treasury treasury Shares in issue shares shares shares millions millions millions millions millions ---------------------------------------------------------------------------------------------------------------- Number of ordinary shares 736.4 At start of period 741.8 (5.5) 736.3 736.4 1.9 Issue of ordinary shares 3.4 0.2 3.6 1.2 - Share repurchases - (13.4) (13.4) - (2.0) Purchase of shares by employee benefit trust - (4.1) (4.1) (2.0) 736.3 At end of period 745.2 (22.8) 722.4 735.6 783.1 Average number of equivalent ordinary shares during the period 775.7 783.7 ----------------------------------------------------------------------------------------------------------------- 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‚¬4,491m at 30 June 2006 (31 December 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 5 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 Year ended Six months ended 31 December 30 June ----------- ----------------- 2005 2006 2005 US$m US$m US$m ------------------------------------------------------------------------------------------------------------------ 9,402 Revenue 4,702 4,428 1,527 Operating profit 632 593 1,276 Profit before tax 494 477 841 Profit attributable to parent companies' shareholders 388 251 2,078 Adjusted operating profit 936 862 1,824 Adjusted profit before tax 798 739 1,372 Adjusted profit attributable to parent companies' shareholders 603 550 ------------------------------------------------------------------------------------------------------------------ US$ Basic earnings per American Depositary Share (ADS) US$ US$ $1.35 Reed Elsevier PLC (Each ADS comprises four ordinary shares) $0.62 $0.38 $1.07 Reed Elsevier NV (Each ADS comprises two ordinary shares) $0.49 $0.33 Adjusted earnings per American Depositary Share (ADS) $2.29 Reed Elsevier PLC (Each ADS comprises four ordinary shares) $1.02 $0.92 $1.75 Reed Elsevier NV (Each ADS comprises two ordinary shares) $0.78 $0.69 ------------------------------------------------------------------------------------------------------------------ Adjusted earnings per American Depository Share is based on Reed Elsevier PLC shareholders' 52.9% and Reed Elsevier NV's 50% respective share of the adjusted profit attributable of the Reed Elsevier combined businesses. Adjusted figures are presented as additional performance measures and are reconciled to the reported figures at their sterling and euro amounts in note 4 to the combined financial information and in note 1 to the summary financial information of each of the two parent companies. Combined cash flow statement Year ended Six months ended 31 December 30 June ----------- ------------------ 2005 2006 2005 US$m US$m US$m ------------------------------------------------------------------------------------------------------------------ 1,656 Net cash from operating activities 267 232 (828) Net cash used in investing activities (315) (225) (708) Net cash from/(used in) financing activities 41 (56) ------------------------------------------------------------------------------------------------------------------ 120 (Decrease)/increase in cash and cash equivalents (7) (49) ------------------------------------------------------------------------------------------------------------------ 1,966 Adjusted operating cash flow 451 410 ------------------------------------------------------------------------------------------------------------------ Combined balance sheet As at As at 31 December 30 June ------------------------------------------------------------------------------------------------------------------ 2005 2006 2005 US$m US$m US$m ------------------------------------------------------------------------------------------------------------------ 11,598 Non-current assets 11,862 11,424 4,088 Current assets 4,145 3,755 104 Assets held for sale 37 - ------------------------------------------------------------------------------------------------------------------ 15,790 Total assets 16,044 15,179 ------------------------------------------------------------------------------------------------------------------ 5,451 Current liabilities 6,535 4,774 6,885 Non-current liabilities 6,176 7,527 20 Liabilities associated with assets held for sale 6 - ------------------------------------------------------------------------------------------------------------------ 12,356 Total liabilities 12,717 12,301 ------------------------------------------------------------------------------------------------------------------ 3,434 Net assets 3,327 2,878 ------------------------------------------------------------------------------------------------------------------ Summary of the principal differences between IFRS and US GAAP IFRS differ in certain significant respects to US GAAP. The Annual Reports and Financial Statements 2005 set out the principal differences, insofar as they relate to Reed Elsevier. The effects on net income attributable to shareholders and combined shareholders' equity of material differences to US GAAP are set out below. Year ended Six months ended Six months ended 31 December 30 June 30 June ----------------- ---------------- ---------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ------------------------------------------------------------------------------------------------------------------- 462 675 Net income as reported (IFRS) 217 134 317 196 US GAAP adjustments: 5 7 Goodwill and intangible assets 2 1 3 1 (78) (114) Pensions (86) (35) (126) (51) (5) (7) Derivative financial instruments 2 7 3 10 3 4 Deferred taxation 11 (13) 16 (19) (13) (19) Other (4) 3 (6) 5 ------------------------------------------------------------------------------------------------------------------ 374 546 Net income under US GAAP 142 97 207 142 ------------------------------------------------------------------------------------------------------------------ As at 31 December As at 30 June As at 30 June ----------------- --------------- --------------- 2005 2005 2006 2005 2006 2005 Â£m â‚¬m Â£m Â£m â‚¬m â‚¬m ---------------------------------------------------------------------------------------------------------------- 1,970 2,876 Shareholders' equity as reported (IFRS) 1,804 1,586 2,598 2,364 US GAAP adjustments: 1,491 2,177 Goodwill and intangible assets 1,428 1,439 2,056 2,144 409 597 Pensions 43 596 62 888 5 7 Derivative financial instruments - - - - (119) (174) Deferred taxation (17) (166) (24) (247) 7 10 Other 3 25 4 36 ---------------------------------------------------------------------------------------------------------------- 3,763 5,493 Shareholders' equity under US GAAP 3,261 3,480 4,696 5,185 ---------------------------------------------------------------------------------------------------------------- INDEPENDENT REVIEW REPORT TO REED ELSEVIER PLC AND REED ELSEVIER NV Introduction We have been instructed by the boards of Reed Elsevier PLC and Reed Elsevier NV to review the combined financial information of Reed Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures (together 'the Combined Businesses') for the six months ended 30 June 2006 which comprises the combined income statement, combined cash flow statement, combined balance sheet, combined statement of recognised income and expense, combined shareholders' equity reconciliation and related notes 1 to 5. We have also reviewed the summary financial information of Reed Elsevier PLC and Reed Elsevier NV for the six months ended 30 June 2006 which comprise, respectively, the consolidated income statement, consolidated cash flow statement, consolidated balance sheet, consolidated statement of recognised income and expense, reconciliation of consolidated shareholders' equity and the related notes 1 to 4. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to Reed Elsevier PLC and Reed Elsevier NV in accordance with Bulletin 1999/4 issued by the United Kingdom Auditing Practices Board. Our review work has been undertaken so that we might state to Reed Elsevier PLC and Reed Elsevier NV those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by applicable law, we do not accept or assume responsibility to anyone other than Reed Elsevier PLC and Reed Elsevier NV, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The Reed Elsevier Interim Statement, including the financial information contained therein, is the responsibility of, and has been approved by, the directors of Reed Elsevier PLC and Reed Elsevier NV. The directors of Reed Elsevier PLC and Reed Elsevier NV are responsible for preparing the Reed Elsevier Interim Statement in accordance with the Listing Rules of the UK Financial Services Authority and the requirements of International Accounting Standard 34: 'Interim Financial Reporting' which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the United Kingdom Auditing Practices Board and in accordance with standards for review engagements generally accepted in the Netherlands. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing and International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2006. Deloitte & Touche LLP Deloitte Accountants BV Chartered Accountants JPM Hopmans London Amsterdam United Kingdom The Netherlands 26 July 2006 26 July 2006 Investor information - Financial calendar 2006 27 July PLC Announcement of interim results for the six months to 30 June 2006 NV 28 July NV Record date - 2006 interim dividend, Reed Elsevier NV ordinary shares 31 July NV Ex-dividend date - 2006 interim dividend, Reed Elsevier NV ordinary shares and ADRs 2 August NV Record date - 2006 interim dividend, Reed Elsevier NV ADRs 2 August PLC Ex-dividend date - 2006 interim dividends, Reed Elsevier PLC ordinary shares and ADRs 4 August PLC Record date - 2006 interim dividends, Reed Elsevier PLC ordinary shares and ADRs 25 August PLC Payment date - 2006 interim dividends, Reed Elsevier PLC and Reed Elsevier NV ordinary NV shares 1 September PLC Payment date - 2006 interim dividends, Reed Elsevier PLC and Reed Elsevier NV ADRs NV 16 November PLC Trading update issued in relation to the 2006 financial year NV 2007 15 February PLC Announcement of Preliminary Results for the year to 31 December 2006 NV 17 April PLC Annual General Meeting - Reed Elsevier PLC, London 18 April NV Annual General Meeting - Reed Elsevier NV, Amsterdam 26 July PLC Announcement of interim results for the six months to 30 June 2007 NV LISTINGS Reed Elsevier PLC Reed Elsevier NV London Stock Exchange Euronext Amsterdam Ordinary shares (REL) Ordinary shares (REN) New York Stock Exchange New York Stock Exchange American Depositary Shares (RUK) - CUSIP No. 758205108 American Depositary Shares (ENL) - CUSIP No. 758204101 Each ADR represents four ordinary shares Each ADR represents two ordinary shares CONTACTS Reed Elsevier PLC Reed Elsevier NV 1-3 Strand Radarweg 29 London WC2N 5JR 1043 NX Amsterdam United Kingdom The Netherlands Tel: +44 (0) 20 7930 7077 Tel: +31 (0) 20 485 2222 Fax: +44 (0) 20 7166 5799 Fax: +31 (0) 20 618 0325 Auditors Deloitte & Touche LLP Deloitte Accountants BV Hill House, 1 Little New Street Orlyplein 50 London EC4A 3TR 1043 DP Amsterdam United Kingdom The Netherlands Stockbrokers JP Morgan Cazenove Limited ABN AMRO Bank NV 20 Moorgate Gustav Mahlerlann 10 London EC2R 6DA 1082 PP Amsterdam United Kingdom The Netherlands Reed Elsevier PLC Registrar Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA United Kingdom Tel: +44 (0) 870 600 3970 (UK callers) +44 121 415 7047 (non-UK callers) http://www.shareview.co.uk/ Reed Elsevier PLC and Reed Elsevier NV ADR Depositary The Bank of New York Investor Relations PO Box 11258 Church Street Station New York NY10286-1258 USA Tel: +1 888 269 2377 +1 212 815 3700 (outside the US) email: shareowners@bankofny.com http://www.adrbny.com/ For further investor information visit: www.reedelsevier.com This statement is being mailed to the shareholders of Reed Elsevier PLC and will be available to the shareholders of Reed Elsevier NV upon request. Copies are available to the public from the registered offices of the respective companies shown above. Reed Elsevier PLC has given email notification to those shareholders who have requested it of the availability of the Interim Results on the Reed Elsevier website. This information is provided by RNS The company news service from the London Stock Exchange

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