Annual Reports

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  • 20-F (Mar 12, 2012)
  • 20-F (Mar 9, 2011)
  • 20-F (Mar 18, 2010)
  • 20-F (Mar 13, 2009)

 
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Reed Elsevier 20-F 2008
e20vf
Table of Contents

As filed with the Securities and Exchange Commission on March 20, 2008
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
     
(Mark One)
   
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Or  
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2007
 
Or  
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to  
 
Or  
     
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
     
REED ELSEVIER PLC
  REED ELSEVIER NV
(Exact name of Registrant as specified in its charter)
  (Exact name of Registrant as specified in its charter)
England
  The Netherlands
(Jurisdiction of incorporation or organisation)
  (Jurisdiction of incorporation or organisation)
1-3 Strand, London, WC2N 5JR, England
  Radarweg 29, 1043 NX, Amsterdam, The Netherlands
(Address of principal executive offices)
  (Address of principal executive offices)
Stephen Cowden
Company Secretary
Reed Elsevier PLC
1-3 Strand, London, WC2N 5JR, England
011 44 20 7166 5681
steve.cowden@reedelsevier.com
(Name, telephone, e-mail and/or facsimile number and address of Company Contact Person)
  Erik Ekker
Company Secretary
Reed Elsevier NV
Radarweg 29, 1043 NX, Amsterdam, The Netherlands
011 31 20 485 2906
erik.ekker@reedelsevier.com
(Name, telephone, e-mail and/or facsimile number and address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
    Name of exchange on which
Title of each class
  registered
Reed Elsevier PLC:
   
American Depositary Shares
(each representing four Reed Elsevier PLC ordinary shares)
  New York Stock Exchange
Ordinary shares of 12.5p each(1)
(the “Reed Elsevier PLC ordinary shares”)
  New York Stock Exchange*
     
Reed Elsevier NV:
   
American Depositary Shares
(each representing two Reed Elsevier NV ordinary shares)
  New York Stock Exchange
Ordinary shares of €0.06 each(2)
(the “Reed Elsevier NV ordinary shares”)
  New York Stock Exchange*
 
 
Listed, not for trading, but only in connection with the listing of the applicable Registrant’s American Depositary Shares issued in respect thereof.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
 
Indicate the number of outstanding shares of each of the issuers’ classes of capital or common stock as of December 31, 2007:
 
Reed Elsevier PLC: Number of outstanding shares
     
Ordinary shares of 12.5p each(1)
  1,305,891,497
Reed Elsevier NV:
   
Ordinary shares of €0.06 each(2)
  760,250,364
R-shares of €0.60 each (held by a subsidiary of Reed Elsevier PLC)(2)
  4,679,249
 
(1) On January 7, 2008 the existing ordinary shares of 12.5p each were consolidated into new ordinary shares of 14 51/116 p each on the basis of 58 new ordinary shares for every 67 existing shares held.
 
(2) On January 7, 2008 the existing ordinary shares of €0.06 each were consolidated into new ordinary shares of €0.07 each on the basis of 58 new ordinary shares for every 67 existing ordinary shares held. The R-Shares were consolidated on a similar basis into new R-Shares of €0.70 each.
 
 
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
Yes          þ            No          o
 
If this report is an annual or transition report, indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes          o            No          þ
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days:
 
Yes          þ            No          o
 
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer          þ            Accelerated filer          o            Non-accelerated filer          o
 
Indicate by check mark which basis of accounting the registrants have used to prepare the financial statements included in this filing.
 
     o  US GAAP       þ  International Financial Reporting Standards as issued by the International Accounting Standards Board       o  Other     
 
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrants have elected to follow:
 
Item 17      o            Item 18      o
 
If this is an annual report, indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act):
 
Yes          o            No          þ
 


Table of Contents

 
 
         
        Page
 
  GENERAL
  SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
         
       
ITEM 1:
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   N/A
ITEM 2:
  OFFER STATISTICS AND EXPECTED TIMETABLE   N/A
  KEY INFORMATION   3
      Selected financial data   3
    Risk factors   7
  INFORMATION ON REED ELSEVIER   10
      History and development   10
      Business overview   12
      Organisational structure   18
      Property, plants and equipment   19
ITEM 4A:
  UNRESOLVED STAFF COMMENTS   N/A
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS   20
      Operating results — Reed Elsevier   20
      Liquidity and capital resources — Reed Elsevier   30
      Operating results — Reed Elsevier PLC and Reed Elsevier NV   33
      Trend information   34
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   35
      Directors   35
      Senior management   37
      Compensation   37
      Board practices   49
      Employees   50
      Share ownership   52
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   62
      Major shareholders   62
      Related party transactions   63
  FINANCIAL INFORMATION   64
  THE OFFER AND LISTING   65
      Trading markets   65
  ADDITIONAL INFORMATION   67
      Memorandum and articles of association   67
      Material contracts   68
      Exchange controls   68
      Taxation   68
      Documents on display   70
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   71
ITEM 12:
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   N/A


Table of Contents

         
        Page
 
       
ITEM 13:
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   N/A
ITEM 14:
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   N/A
  CONTROLS AND PROCEDURES   73
  AUDIT COMMITTEE FINANCIAL EXPERT   76
  CODES OF ETHICS   76
  PRINCIPAL ACCOUNTANT FEES AND SERVICES   76
  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   76
  PURCHASES OF EQUITY SECURITIES BY THE ISSUERS AND AFFILIATED PURCHASERS   77
         
       
  FINANCIAL STATEMENTS*   78
  FINANCIAL STATEMENTS   F-1
  EXHIBITS   F-83
 Exhibit 1.2
 Exhibit 4.12
 Exhibit 4.13
 Exhibit 4.14
 Exhibit 8
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 12.3
 Exhibit 12.4
 Exhibit 13.1
 Exhibit 13.2
 Exhibit 13.3
 Exhibit 13.4
 Exhibit 15.1
 Exhibit 15.2
 Exhibit 15.3
 Exhibit 15.4
 Exhibit 15.5
 Exhibit 15.6
 
*  The registrants have responded to Item 18 in lieu of responding to this Item.


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Reed Elsevier PLC and Reed Elsevier NV conduct their business through two jointly owned companies, Reed Elsevier Group plc and Elsevier Reed Finance BV. Reed Elsevier PLC and Reed Elsevier NV have retained their separate legal and national identities. Reed Elsevier is not a legal entity but a collective reference to the separate legal entities of Reed Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures. The businesses of all of the entities comprising Reed Elsevier are collectively referred to in this annual report as “Reed Elsevier”, and the financial statements of the combined businesses are referred to as the “combined financial statements”. In this annual report, references to “we”, “our”, or “us” are to all of the entities comprising Reed Elsevier.
 
In this annual report, references to US dollars, $ and ¢ are to US currency; references to sterling, £, pence or p are to UK currency; references to euro and € are to the currency of the European Economic and Monetary Union.


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This document contains or incorporates by reference a number of forward looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act 1934, as amended, with respect to:
 
  •   financial condition;
 
  •   results of operations;
 
  •   competitive positions;
 
  •   the features and functions of and markets for the products and services we offer; and
 
  •   our business plans and strategies.
 
We consider any statements that are not historical facts to be “forward looking statements”. These statements are based on the current expectations of the management of our businesses and are subject to risks and uncertainties that could cause actual results or outcomes to differ from those expressed in any forward looking statement. These differences could be material; therefore, you should evaluate forward looking statements in light of various important factors, including those set forth or incorporated by reference in this annual report.
 
Important factors that could cause actual results to differ materially from estimates or forecasts contained in the forward looking statements include, among others:
 
  •   general economic and business conditions;
 
  •   exchange rate fluctuations;
 
  •   the impact of technological change, including the impact of electronic or other distribution formats, on our businesses;
 
  •   competitive factors in the industries in which we operate;
 
  •   demand for our products and services;
 
  •   uncertainties as to whether our strategies and business plans will produce the expected returns;
 
  •   changes in the market values of defined benefit pension scheme assets and in the market related assumptions used to value scheme liabilities;
 
  •   significant failures or interruptions of our electronic delivery platforms;
 
  •   breaches of our data security systems or other unauthorised access to our databases;
 
  •   our ability to maintain high quality management;
 
  •   changes in law and legal interpretation affecting our intellectual property rights and internet communications;
 
  •   legislative, fiscal and regulatory developments and political risks;
 
  •   requirements or actions of anti-trust authorities;
 
  •   changes in the seasonal and cyclical nature of the markets for our products and services;
 
  •   changes in, and the timing of, public funding and spending by academic institutions and states;
 
  •   failure of third parties to whom we have outsourced business activities;
 
  •   disruption to our business or markets arising from natural disasters, international security or public health concerns and acts of terrorism or war;
 
  •   failure to obtain regulatory approval for the acquisition of ChoicePoint, Inc. or the approval of its shareholders for the proposed merger; and
 
  •   other risks referenced from time to time in the filings of Reed Elsevier PLC and Reed Elsevier NV with the Securities and Exchange Commission (the “SEC”).
 
The terms “estimate”, “project”, “plan”, “intend”, “expect”, “believe”, “should” and similar expressions identify forward looking statements. These forward looking statements are found at various places throughout this annual report and the other documents incorporated by reference in this annual report (see “Item 19: Exhibits” on page F-83 of this annual report).
 
You should not place undue reliance on these forward looking statements, which speak only as of the date of this annual report. We undertake no obligation to publicly update or release any revisions to these forward looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.


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PART I
 
 
SELECTED FINANCIAL DATA
 
 
The selected combined financial data for Reed Elsevier should be read in conjunction with, and is qualified by, the combined financial statements included in this annual report. In addition, as separate legal entities, Reed Elsevier PLC and Reed Elsevier NV prepare separate consolidated financial statements which reflect their respective shareholders’ economic interests in Reed Elsevier accounted for on an equity basis.
 
All of the selected financial data for Reed Elsevier set out below has been extracted or derived from the combined financial statements which have been audited by Deloitte & Touche LLP, London and Deloitte Accountants BV, Amsterdam.
 
 
                                         
    As at December 31,  
    2007(2)     2007     2006     2005     2004  
    (in millions)  
 
Amounts in accordance with IFRS:
                                       
Revenue from continuing operations
  $ 9,168       £4,584       £4,509       £4,265       £3,944  
Operating profit from continuing operations(3)
    1,776       888       837       752       699  
Net finance costs
    (278 )     (139 )     (158 )     (140 )     (132 )
Disposals and other non operating items(4)
    126       63       (1 )     2       (3 )
Profit before tax from continuing operations
    1,624       812       678       614       564  
Taxation in continuing operations(5)
    164       82       (86 )     (219 )     (156 )
Profit from discontinued operations(6)
    618       309       33       69       53  
Minority interests
    (6 )     (3 )     (2 )     (2 )     (2 )
Profit attributable to parent companies’ shareholders
    2,400       1,200       623       462       459  
                                         
 
 
                                         
    As at December 31,  
    2007(2)     2007     2006     2005     2004  
    (in millions)  
 
Amounts in accordance with IFRS:
                                       
Total assets
  $ 19,556       £9,778       £8,532       £9,127       £7,952  
Long term obligations less current portion
    (4,004 )     (2,002 )     (2,085 )     (2,264 )     (1,706 )
Minority interests
    (22 )     (11 )     (13 )     (15 )     (13 )
Combined shareholders’ equity
    5,930       2,965       1,966       1,970       1,664  
 
 
(1) The combined financial statements are prepared in accordance with accounting policies that are in conformity with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and IFRS as issued by the International Accounting Standards Board (“IASB”). As permitted, following the transition to IFRS on January 1, 2004 only four years of IFRS information are presented. Pursuant to SEC Release 33-8879 eliminating the requirement for foreign private issuers to reconcile their financial statements to US GAAP, no US GAAP reconciliation has been presented. The figures for 2004 have been derived from the combined financial statements for the year ended December 31, 2004, not included herein, and after adjusting for the effects of the classification of Harcourt Education as a discontinued operation.
 
(2) Noon buying rates as at December 31, 2007 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 6. At December 31, 2007 the noon buying rate was $2.00 per £1.00.
 
(3) Operating profit from continuing operations is stated after charging £221 million in respect of amortisation of acquired intangible assets (2006: £211 million; 2005: £203 million; 2004: £181 million); £20 million in respect of acquisition integration costs (2006: £23 million; 2005: £20 million; 2004: £21 million); and £8 million in respect of taxation in joint ventures (2006: £10 million; 2005: £6 million; 2004: £7 million).
 
(4) Disposals and other non operating items comprise a £65 million gain on disposal of businesses and other assets (2006: £2 million loss; 2005: £1 million loss; 2004: £3 million loss) and a £2 million loss relating to the revaluation of held for trading investments (2006: £1 million gain; 2005: £3 million gain; 2004: nil).


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(5) Taxation in continuing operations in 2007 includes credits of £223 million in respect of previously unrecognised deferred tax assets and capital losses that have been realised as a result of the disposal of discontinued operations. Taxation in continuing operations in 2006 includes credits of £65 million in respect of prior period disposals.
 
(6) Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented for current and prior periods as a discontinued operation.
 
 
The selected financial data for Reed Elsevier PLC should be read in conjunction with, and is qualified by, the consolidated financial statements of Reed Elsevier PLC included in this annual report. The results and financial position of Reed Elsevier PLC reflect the 52.9% economic interest of Reed Elsevier PLC’s shareholders in Reed Elsevier, after taking account of results arising in Reed Elsevier PLC and its subsidiaries. These interests have been accounted for on an equity basis.
 
All of the selected consolidated financial data for Reed Elsevier PLC set out below has been extracted or derived from the financial statements of Reed Elsevier PLC, which have been audited by Deloitte & Touche LLP, London.
 
                                         
    As at December 31,  
    2007(3)     2007     2006     2005     2004  
    (in millions, except per share amounts)  
 
Amounts in accordance with IFRS:(1)
                                       
Profit before tax(2)
    $1,286       £643       £328       £242       £240  
Taxation
    (38 )     (19 )     (8 )     (7 )     (5 )
Profit attributable to ordinary shareholders
    1,248       624       320       235       235  
Earnings per Reed Elsevier PLC ordinary share from total operations of the combined businesses
    99.4 ¢     49.7 p     25.6 p     18.6 p     18.6 p
Earnings per Reed Elsevier PLC ordinary share from continuing operations of the combined businesses(4)
    73.2 ¢     36.6 p     24.1 p     15.7 p     16.4 p
Dividends per Reed Elsevier PLC ordinary share(5)
    32.6 ¢     16.3 p     14.8 p     13.3 p     12.1 p
Total assets
    $3,168       £1,584       £1,090       £1,090       £929  
Long term obligations
                      (36 )     (36 )
Total equity/Net assets
    3,136       1,568       1,040       1,042       880  
Weighted average number of shares(6)
    1,256.5       1,256.5       1,251.9       1,266.2       1,264.6  
 
 
(1) The consolidated financial statements of Reed Elsevier PLC are prepared in accordance with accounting policies that are in conformity with IFRS as adopted by the EU and IFRS as issued by the IASB. As permitted, following the transition to IFRS on January 1, 2004 only four years of IFRS information are presented. Pursuant to SEC Release 33-8879 eliminating the requirement for foreign private issuers to reconcile their financial statements to US GAAP, no US GAAP reconciliation has been presented. The figures for 2004 have been derived from the consolidated financial statements for the year ended December 31, 2004, not included herein, and after adjusting for the effects of the classification of Harcourt Education as a discontinued operation.
 
(2) Profit before tax includes Reed Elsevier PLC’s share of the post-tax earnings of joint ventures, being both the continuing and discontinued operations of the Reed Elsevier combined businesses.
 
(3) Noon buying rates as at December 31, 2007 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 6. At December 31, 2007 the noon buying rate was $2.00 per £1.00.
 
(4) Following announcement in February 2007 of the planned sale of Harcourt Education and its subsequent classification as a discontinued operation, earnings per Reed Elsevier PLC ordinary share from continuing operations of the combined businesses has been presented.
 
(5) The amount of dividends per Reed Elsevier PLC ordinary share shown excludes the UK tax credit available to certain Reed Elsevier PLC shareholders, including beneficial owners of Reed Elsevier PLC ADSs who are residents of the United States for the purposes of the UK Tax Treaty, and do not include any deduction on account of UK withholding taxes, currently at the rate of 15% of the sum of the dividend and the related tax credit in most cases; see “Item 10: Additional Information — Taxation”.
 
Dividends declared in the year, in amounts per ordinary share, comprise a 2006 final dividend of 11.8p and 2007 interim dividend of 4.5p giving a total of 16.3p. The directors of Reed Elsevier PLC have proposed a 2007 final dividend of 13.6p (2006: 11.8p; 2005: 10.7p; 2004: 9.6p), giving a total dividend in respect of the financial year of 18.1p (2006: 15.9p; 2005: 14.4p; 2004: 13.0p).
 
Dividends per Reed Elsevier PLC ordinary share for the year ended December 31, 2006 translated into cents at the noon buying rate on December 31, 2006 were 29.0 cents. See “— Exchange Rates” on page 6.
 
(6) Weighted average number of shares excludes shares held in treasury and shares held by the Reed Elsevier Group plc Employee Benefit Trust.


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REED ELSEVIER NV
 
The selected financial data for Reed Elsevier NV should be read in conjunction with, and is qualified by, the consolidated financial statements of Reed Elsevier NV included in this annual report. The results and financial position of Reed Elsevier NV reflect the 50% economic interest of Reed Elsevier NV’s shareholders in Reed Elsevier. These interests are accounted for on an equity basis.
 
All of the selected financial data for Reed Elsevier NV set out below has been extracted or derived from the consolidated financial statements of Reed Elsevier NV, which have been audited by Deloitte Accountants BV, Amsterdam.
 
                                     
    As at December 31,
    2007(3)     2007     2006     2005   2004
    (in millions, except per share amounts)
 
Amounts in accordance with IFRS:(1)
                                   
                                     
Profit before tax(2)
    $1,283       €873       €459       €338     €338
Taxation
    (26 )     (18 )     (1 )        
Profit attributable to ordinary shareholders
    1,257       855       458       338     338
Earnings per Reed Elsevier NV ordinary share from total operations of the combined businesses
    $1.62       €1.10       €0.59       €0.43     €0.43
Earnings per Reed Elsevier NV ordinary share from continuing operations of the combined businesses(4)
    $1.23       €0.84       €0.56       €0.37     €0.38
Dividends per Reed Elsevier NV ordinary share(5)
    61.4 ¢     €0.418       €0.369       €0.332     €0.310
Total assets
    $3,071       €2,089       €1,537       €1,510     €1,245
Total equity/Net assets
    2,964       2,016       1,465       1,438     1,173
Weighted average number of shares(6)
    774.9       774.9       772.1       783.1     783.3
 
 
(1) The consolidated financial statements of Reed Elsevier NV are prepared in accordance with accounting policies that are in conformity with IFRS as adopted by the EU and IFRS as issued by the IASB. As permitted, following the transition to IFRS on January 1, 2004 only four years of IFRS information are presented. Pursuant to SEC Release 33-8879 eliminating the requirement for foreign private issuers to reconcile their financial statements to US GAAP, no US GAAP reconciliation has been presented. The figures for 2004 have been derived from the consolidated financial statements for the year ended December 31, 2004, not included herein, and after adjusting for the effects of the classification of Harcourt Education as a discontinued operation.
 
(2) Profit before tax includes Reed Elsevier NV’s share of post-tax earnings of joint ventures, being both the continuing and discontinued operations of the Reed Elsevier combined businesses.
 
(3) Noon buying rates as at December 31, 2007 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 6. At December 31, 2007 the Noon Buying Rate was $1.47 per €1.00.
 
(4) Following announcement in February 2007 of the planned sale of Harcourt Education and it subsequent classification as a discontinued operation, earnings per Reed Elsevier NV ordinary share from continuing operations of the combined businesses has been presented.
 
(5) Dividends declared in the year comprise, in amounts per ordinary share, a 2006 final dividend of €0.304 and 2007 interim dividend of €0.114 giving a total of €0.418. The directors of Reed Elsevier NV have proposed a 2007 final dividend of €0.311 (2006: €0.304; 2005: €0.267; 2004: €0.240), giving a total dividend in respect of the financial year of €0.425 (2006: €0.406; 2005: €0.359; 2004: €0.330).
 
Dividends per Reed Elsevier NV ordinary share for the year ended December 31, 2006 translated into cents at the noon buying rate on December 31, 2006 were 48.7 cents. See “— Exchange Rates” on page 6.
 
(6) Weighted average number of shares excludes shares held in treasury and shares held by the Reed Elsevier Group plc Employee Benefit Trust.


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For a discussion of the impact of currency fluctuations on Reed Elsevier’s combined results of operations and combined financial position, see “Item 5: Operating and Financial Review and Prospects”.
 
The following tables illustrate, for the periods and dates indicated, certain information concerning the Noon Buying Rate for pounds sterling expressed in US dollars per £1.00 and for the euro expressed in US dollars per €1.00. The exchange rate on February 20, 2008 was £1.00 = $1.94 and €1.00 = $1.47.
 
 
                         
    Period
Year ended December 31,
  End   Average(1)   High   Low
 
2007
    2.00     2.00     2.11     1.92
2006
    1.96     1.85     1.98     1.73
2005
    1.73     1.82     1.93     1.71
2004
    1.93     1.83     1.95     1.75
2003
    1.78     1.64     1.78     1.55
 
             
Month
  High   Low
 
February 2008 (through February 20, 2008)
    1.98     1.94
January 2008
    1.99     1.95
December 2007
    2.07     1.97
November 2007
    2.11     2.05
October 2007
    2.08     2.03
September 2007
    2.04     1.99
August 2007
    2.04     1.98
 
 
                         
    Period
Year ended December 31,
  End   Average(1)   High   Low
 
2007
    1.47     1.37     1.49     1.29
2006
    1.32     1.26     1.33     1.18
2005
    1.18     1.24     1.37     1.17
2004
    1.37     1.24     1.36     1.18
2003
    1.26     1.13     1.26     1.04
 
             
Month
  High   Low
 
February 2008 (through February 20, 2008)
    1.49     1.45
January 2008
    1.49     1.46
December 2007
    1.48     1.43
November 2007
    1.49     1.44
October 2007
    1.45     1.41
September 2007
    1.42     1.36
August 2007
    1.38     1.34
 
 
(1) The average of the Noon Buying Rates on the last day of each month during the relevant period.
 
Noon Buying Rates have not been used in the preparation of the Reed Elsevier combined financial statements, the Reed Elsevier PLC consolidated financial statements or the Reed Elsevier NV consolidated financial statements but have been used for certain convenience translations where indicated.


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The key material risks to our business are included below. Additional risks not presently known to us or that we currently deem immaterial may also impair our business.
 
 
Our businesses operate in highly competitive markets. These markets continue to change in response to technological innovations, changing legislation and other factors. We cannot predict with certainty the changes that may occur and the effect of those changes on the competitiveness of our businesses. In particular, the means of delivering our products and services, and the products and services themselves, may be subject to rapid technological and other changes. We cannot predict whether technological innovations will, in the future, make some of our products wholly or partially obsolete. We may be required to invest significant resources to further adapt to the changing competitive environment.
 
We cannot assure you that there will be continued demand for our products and services.
 
Our businesses are dependent on the continued acceptance by our customers of our products and services and the prices which we charge for our products and services. We cannot predict whether there will be changes in the future, either in the market demand or from the actions of competitors, which will affect the acceptability of products, services and prices to our customers.
 
 
Our financial statements are expressed in pounds sterling and euros and are, therefore, subject to movements in exchange rates on the translation of the financial information of businesses whose operational currencies are other than our reporting currencies. The United States is our most important market and, accordingly, significant fluctuations in US dollar/sterling and US dollar/euro exchange rates can significantly affect our reported results from year to year. In addition, in some of our businesses we incur costs in currencies other than those in which revenues are earned. The relative movements between the exchange rates in the currencies in which costs are incurred and the currencies in which revenues are earned can significantly affect the results of those businesses.
 
 
Our businesses operate in over 100 locations worldwide and our earnings are subject to taxation in many differing jurisdictions and at differing rates. We seek to organise our affairs in a tax efficient manner, taking account of the jurisdictions in which we operate. Tax laws that apply to Reed Elsevier businesses may be amended by the relevant authorities, for example as a result of changes in fiscal circumstances or priorities. Such amendments, or their application to Reed Elsevier businesses, may adversely affect our reported results.
 
 
Legal regulation relating to internet communications, data protection, e-commerce, direct marketing and digital advertising and use of public records is becoming more prevalent. Existing and proposed legislation and regulations, including changes in the manner in which such legislation and regulations are interpreted by courts, in the United States, the European Union and other jurisdictions may impose limits on our collection and use of certain kinds of information about individuals and our ability to communicate such information effectively with our customers. We are unable to predict in what form laws and regulations will be adopted or how they will be construed by the courts, or the extent to which any changes might adversely affect our business.
 
 
A number of our businesses rely extensively upon content and data from external sources to maintain our databases. Data is obtained from public records, governmental authorities and other information companies, including competitors. In the case of public records including social security number data which are obtained from public authorities, our access is governed by law. We also obtain the credit header data in our databases from consumer credit reporting agencies. The disruption or loss of data sources in the future, because of changes in the law or because data suppliers decide not to supply them, could adversely affect our business if we were unable to arrange for substitute sources in a timely manner or at all.
 
 
Our businesses provide customers with access to database information such as caselaw, treatises, journals, and publications as well as other data. Our LexisNexis risk management business also provides authorised customers with access to public records and other information on US individuals made available in accordance with applicable privacy laws and regulations. There are persons who try to breach our data security systems or gain other unauthorised access to our databases in order to


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misappropriate such information for potentially fraudulent purposes and we have previously disclosed incidents of such unauthorised access. Because the techniques used by such persons change frequently, we may be unable to anticipate or protect against the threat of breaches of data security or other unauthorised access. Breaches of our data security systems or other unauthorised access to our databases could damage our reputation and expose us to a risk of loss or litigation and possible liability, as well as increase the likelihood of more extensive governmental regulation of these activities in a way that could adversely affect this aspect of our business.
 
 
The principal customers for the information products and services offered by our Elsevier science and medical publishing business are academic institutions, which fund purchases of these products and services from limited budgets that may be sensitive to changes in private and governmental sources of funding. Accordingly any decreases in budgets of academic institutions or changes in the spending patterns of academic institutions could adversely affect our businesses.
 
 
Our products and services are largely comprised of intellectual property content delivered through a variety of media, including journals, books, CDs, and online, including the internet. We rely on trademark, copyright, patent and other intellectual property laws to establish and protect our proprietary rights in these products and services. However, we cannot assure you that our proprietary rights will not be challenged, limited, invalidated or circumvented. Despite trademark and copyright protection and similar intellectual property protection laws, third parties may be able to copy, infringe or otherwise profit from our proprietary rights without our authorisation. These unauthorised activities may be facilitated by the internet.
 
In addition, whilst there is now certain internet-specific copyright legislation in the United States and in the European Union, there remains significant uncertainty as to the date from which these will be enforced and the form copyright law regulating digital content may ultimately take. In the United States, copyright laws are increasingly coming under legal challenge and, in the European Union, national legislation by the member states implementing the EU Copyright Directive has not yet been adopted. These factors create additional challenges for us in protecting our proprietary rights to content delivered through the internet and electronic platforms. Moreover, whilst non-copyrightable databases are protected in many circumstances by law in the European Union, there is no equivalent legal protection in the United States.
 
 
We operate a number of pension schemes around the world, the largest schemes being of the defined benefit type in the United Kingdom, the United States and the Netherlands. The assets and obligations associated with defined benefit pension schemes are particularly sensitive to changes in the market values of assets and the market related assumptions used to value scheme liabilities. In particular, a decrease in the discount rate used to value scheme liabilities, an increase in life expectancy of scheme members, an increase in the rate of inflation or a decline in the market value of investments held by the defined benefit pension schemes (absent any change in their expected long term rate of return) may adversely affect the reported results and financial position of the combined businesses.
 
 
The implementation and execution of our strategic and business plans depend on the availability of high quality management resources across all our businesses. We cannot predict that in the future such resources will be available.
 
 
We are investing significant amounts to develop and promote electronic products and platforms. The provision of electronic products and services is very competitive and we may experience difficulties developing this aspect of our business due to a variety of factors, many of which are beyond our control. These factors may include competition from comparable and new technologies, new business models and changes in regulation.
 
 
Our businesses are increasingly dependent on electronic platforms and distribution systems, primarily the internet, for delivery of their products and services. Although plans and procedures are in place to reduce such risks, our businesses could be adversely affected if their electronic delivery platforms and networks experience a significant failure or interruption.


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The scientific, technical and medical (STM) primary publications of Elsevier, like those of most of our competitors, are published on a paid subscription basis. There has been recent debate in the academic and library communities, which are the principal customers for our STM publications, regarding whether such publications should be free and funded instead through fees charged to authors and from governmental and other subsidies or made freely available after a period following publication. If these methods of STM publishing are widely adopted or mandated, it could adversely affect our revenue from Elsevier’s paid subscription publications.
 
 
Approximately 15% of our revenue in 2007 was derived from advertising and 12% from exhibitions. The Reed Business segment in particular is highly dependent on advertising and exhibitions revenue. In 2007, 34% of Reed Business segment revenue was derived from advertising and 39% from exhibitions.
 
Traditionally, spending by companies on advertising and other marketing activities has been cyclical with companies spending significantly less on advertising in times of economic slowdown or recession. Our results could be adversely affected by a reduction of advertising revenues following economic slowdown or recession.
 
The exhibitions business is similarly affected by cyclical pressures on spending by companies. Additionally, participation and attendance at exhibitions is affected by the availability of exhibition venues and the propensity of exhibitors and attendees to travel. Our results could be adversely affected if the availability of venues or the demand from exhibitors and attendees were reduced, for example due to international security or public health concerns or acts of terrorism or war.
 
 
New organisational and operational structures have been developed and new appointments made to leverage more effectively our skills, technology and resources across an increasingly synergistic portfolio. This includes outsourcing and offshoring activities such as IT, production and development engineering and will in the future extend into further operational and administrative activities. The failure of third parties to whom we have outsourced business functions could adversely affect our reputation and financial condition.


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Reed Elsevier came into existence in January 1993, when Reed Elsevier PLC and Reed Elsevier NV contributed their businesses to two jointly owned companies, Reed Elsevier Group plc, a UK registered company which owns the publishing and information businesses, and Elsevier Reed Finance BV, a Dutch registered company which owns the financing activities. Reed Elsevier PLC and Reed Elsevier NV have retained their separate legal and national identities and are publicly held companies. Reed Elsevier PLC’s securities are listed in London and New York, and Reed Elsevier NV’s securities are listed in Amsterdam and New York.
 
 
Reed Elsevier PLC and Reed Elsevier NV each hold a 50% interest in Reed Elsevier Group plc. Reed Elsevier PLC holds a 39% interest in Elsevier Reed Finance BV, with Reed Elsevier NV holding a 61% interest. Reed Elsevier PLC additionally holds a 5.8% indirect equity interest in Reed Elsevier NV, reflecting the arrangements entered into between the two companies at the time of the merger, which determined the equalisation ratio whereby one Reed Elsevier NV ordinary share is, in broad terms, intended to confer equivalent economic interests to 1.538 Reed Elsevier PLC ordinary shares. The equalisation ratio is subject to change to reflect share splits and similar events that affect the number of outstanding ordinary shares of either Reed Elsevier PLC or Reed Elsevier NV.
 
Under the equalisation arrangements, Reed Elsevier PLC shareholders have a 52.9% economic interest in Reed Elsevier, and Reed Elsevier NV shareholders (other than Reed Elsevier PLC) have a 47.1% economic interest in Reed Elsevier. Holders of ordinary shares in Reed Elsevier PLC and Reed Elsevier NV enjoy substantially equivalent dividend and capital rights with respect to their ordinary shares.
 
The boards of both Reed Elsevier PLC and Reed Elsevier NV have agreed, other than in special circumstances, to recommend equivalent gross dividends (including, with respect to the dividend on Reed Elsevier PLC ordinary shares, the associated UK tax credit), based on the equalisation ratio. A Reed Elsevier PLC ordinary share pays dividends in sterling and is subject to UK tax law with respect to dividend and capital rights. A Reed Elsevier NV ordinary share pays dividends in euros and is subject to Dutch tax law with respect to dividend and capital rights.
 
The principal assets of Reed Elsevier PLC comprise its 50% interest in Reed Elsevier Group plc, its 39% interest in Elsevier Reed Finance BV, its indirect equity interest in Reed Elsevier NV and certain amounts receivable from subsidiaries of Reed Elsevier Group plc. The principal assets of Reed Elsevier NV comprise its 50% interest in Reed Elsevier Group plc, its 61% interest in Elsevier Reed Finance BV and certain amounts receivable from subsidiaries of Reed Elsevier Group plc and Elsevier Reed Finance BV. Reed Elsevier NV also owns shares, carrying special dividend rights, in Reed Elsevier Overseas BV, a Dutch registered subsidiary of Reed Elsevier Group plc. These shares enable Reed Elsevier NV to receive dividends from companies within its tax jurisdiction, thereby mitigating Reed Elsevier’s potential tax costs.
 
 
Total acquisition expenditure in the three years ended December 31, 2007 was £797 million, after taking into account borrowings and cash acquired. During 2007 a number of acquisitions were made for a total consideration of £319 million, none of which were individually material and the most significant of which was the purchase of the Beilstein chemical compound database. During 2006 a number of acquisitions were made for a total consideration of £171 million, none of which were individually material. During 2005 a number of acquisitions were made for a total consideration of £307 million, the most significant of which was MediMedia MAP, a medical books and journals publishing business based principally in France, Spain, Italy and the United States, for £188 million in August, 2005.
 
On May 4, 2007 the sale of the Harcourt Assessment and Harcourt Education International businesses for $950 million was announced, and on July 16, 2007 the sale of Harcourt US Schools Education businesses for $4.0 billion was announced. With the exception of Harcourt Assessment and certain Harcourt International businesses, the sales had completed by December 31, 2007. The sale of the remaining Harcourt Education businesses completed on January 30, 2008.
 
On February 20, 2008 Reed Elsevier approved a plan to divest Reed Business Information. In the year to December 31, 2007 Reed Business Information reported revenues of £906 million and operating profits of £89 million.
 
Also on February 20, 2008 Reed Elsevier entered into a definitive merger agreement with ChoicePoint Inc. to acquire the company for cash. Taking into account ChoicePoint’s estimated net debt of $0.6 billion, the total value of the transaction is $4.1 billion. The merger is subject to customary regulatory approvals and the approval of ChoicePoint’s shareholders. It is expected to be completed later in the year.


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Capital expenditure on property, plant, equipment and internally developed intangible assets principally relates to investment in systems infrastructure to support electronic publishing activities, computer equipment and office facilities. Total such capital expenditure, which is financed from operating cash flows, amounted to £145 million in 2007 (2006: £167 million; 2005: £173 million) for continuing operations of the combined businesses. Further information on capital expenditure is given in notes 17 and 19 to the combined financial statements.
 
 
The principal executive offices of Reed Elsevier PLC are located at 1-3 Strand, London WC2N 5JR, England. Tel: +44 20 7930 7077. The principal executive offices of Reed Elsevier NV are located at Radarweg 29, 1043 NX Amsterdam, the Netherlands. Tel: +31 20 485 2434. The principal executive office located in the United States is at 125 Park Avenue, 23rd Floor, New York, New York, 10017. Tel +1 212 309 5498. Our internet address is www.reedelsevier.com. The information on our website is not incorporated by reference into this report.


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We are one of the world’s leading publishers and information providers. Our activities include science and medical, legal and business publishing. Our principal operations are in North America and Europe. For the year ended December 31, 2007 we had total revenue from continuing operations of approximately £4.6 billion and an average of approximately 31,600 employees. As at December 31, 2007 we had approximately 31,500 employees. In 2007, North America represented our largest single geographic market, based on revenue by destination, contributing 49% of our total revenue from continuing operations.
 
Our businesses provide products and services that are organised in three business divisions: Elsevier serves the science and medical sector; LexisNexis, the legal and other professional sectors; and Reed Business, the business to business sector.
 
Revenue is derived principally from subscriptions, circulation sales, advertising sales and exhibition fees. In 2007, 46% of Reed Elsevier’s revenue from continuing operations was derived from subscriptions; 20% from circulation sales; 15% from advertising sales; 12% from exhibition fees; and 7% from other sources. An increasing proportion of revenue is derived from electronic information products, principally internet based, and in 2007, 47% of our revenue was derived from such sources, including 72% of LexisNexis revenue, 48% of Elsevier revenue and 19% of Reed Business revenue.
 
Subscription sales are defined as revenue derived from the periodic distribution or update of a product or from the provision of access to online services, which is often prepaid. Circulation sales include all other revenue from the distribution of a product and transactional sales of online services, usually on cash or credit terms. The level of publishing related advertising sales and exhibition fees has historically been tied closely to the economic and business investment cycle with changes in the profit performance of advertisers, business confidence and other economic factors having a high correlation with changes in the size of the market. Subscription sales and circulation sales have tended to be more stable than advertising sales through economic cycles.
 
Revenue is recognised for the various categories as follows: subscriptions — on periodic despatch of subscribed product or rateably over the period of the subscription where performance is not measurable by despatch; circulation — on despatch; advertising — on publication or period of online display; exhibitions — on occurrence of the exhibition. Where sales consist of two or more independent components whose value can be reliably measured, revenue is recognised on each component as it is completed by performance, based on attribution of relative value.
 
Certain of our businesses are seasonal in nature. In Elsevier, a significant proportion of annual revenue is derived from calendar year based journal subscriptions, with the substantial majority of annual cash inflow from these arising in the fourth quarter of each financial year. The majority of medical publishing and sales arise in the second half of the year. This, together with the phasing of other subscription receipts and exhibition deposits, results in significant cash flow seasonality whereby the substantial majority of annual operating cash inflows normally arise in the second half of the year.
 
Our businesses compete for subscription, circulation and marketing expenditures in scientific and medical, legal and business sectors. The bases of competition include, for readers and users of the information, the quality and variety of the editorial content, the quality of the software to derive added value from the information, the timeliness and the price of the products and, for advertisers, the quality and the size of the audiences targeted.
 
                                           
    Revenue from continuing operations(1)
 
    Year ended December 31,  
    2007     2006     2005  
    (in millions, except percentages)  
 
Elsevier
  £ 1,507     33 %   £ 1,521     34 %   £ 1,436     34 %
LexisNexis
    1,594     35       1,570     35       1,466     34  
Reed Business
    1,483     32       1,418     31       1,363     32  
                                           
Total
  £ 4,584     100 %   £ 4,509     100 %   £ 4,265     100 %
                                           
 
 
(1) Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented in the financial statements as a discontinued operation and is excluded from the above analysis.


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    Year ended December 31,
    2007   2006   2005
    (in millions)
 
Revenue
           
Elsevier
           
Science & Technology
  £774   £792   £785
Health Sciences
  733   729   651
             
    £1,507   £1,521   £1,436
             
 
Elsevier comprises worldwide scientific, technical and medical publishing and communications businesses. Elsevier’s principal operations are located in Amsterdam, London, Oxford, New York, Philadelphia, St. Louis, San Diego, Boston, Paris, Munich, Madrid, Singapore, Tokyo and Delhi.
 
Elsevier is managed as two customer-facing divisions: Science & Technology and Health Sciences, supported by shared service functions that provide book and journal production, application management, information technology, fulfilment and distribution services.
 
 
The Science & Technology division contributed 51% of the total Elsevier revenue in 2007. Of this revenue, 77% came from journals (both print and electronic), 11% from books and the rest mainly from databases and software. Approximately 35% of Science & Technology revenue in 2007 was derived from North America, 34% from Europe and the remaining 31% from the rest of the world.
 
Through a number of imprints, including Elsevier, Academic Press, Focal Press and Butterworth Heinemann, Elsevier supplies scientific and technical information through journals and books, in print and electronic media, to libraries, scientists and professionals serving a wide range of research fields including the life sciences, social sciences, materials, engineering, chemistry, physics, economics, mathematics, earth sciences, computer sciences, management and psychology. Among Elsevier’s scientific journals well known in their fields are Cell, Brain Research, Neuroscience, Journal of Molecular Biology, Molecular Therapy and Developmental Biology in the life sciences; Tetrahedron and Journal of Chromatography A in chemistry; Physics Letters A, Solid State Communications, Journal of Computational Physics and Journal of Sound and Vibration in physics; Journal of Financial Economics and Social Sciences in Medicine in the fields of economics and social sciences; Artificial Intelligence in the computer sciences field; and Biomaterials in the field of material sciences and engineering.
 
Science & Technology’s flagship electronic product is ScienceDirect, the world’s largest database of scientific, technical and medical journal articles. ScienceDirect now holds almost nine million scientific research articles and an expanding portfolio of books currently comprising over 65 major reference works, over 50 book series, seven handbooks totaling over 175 volumes, and more than 4,000 e-books. Beginning in 2008 over 500 e-books will be added to ScienceDirect each year. Elsevier also publishes secondary material in the form of supporting bibliographic data, indexes and abstracts, and tertiary information in the form of review and reference works.
 
Elsevier’s online products include Scopus, which provides scientists with a comprehensive database and intuitive tool to navigate their way quickly through the world’s accumulated scientific research. The Scopus database now has nearly 33 million records of scientific research articles from 15,000 peer reviewed journals, over 21 million patents, and references to over 386 million web pages.
 
Elsevier offers secondary databases, available electronically, online or on CD. These include: EMBASE, covering pharmaceutical and biomedical sciences; Compendex, which is largely distributed through the online discovery platform Engineering Village, covering the engineering disciplines; CrossFire Beilstein, a database in organic chemistry; and Geobase, focusing on geoscience and related areas.
 
Competition within the science and technology publishing fields is generally on a title by title and product by product basis. Competing journals, books and databases are typically published by other professional publishers and learned societies such as the American Chemical Society, the Institute of Electrical and Electronics Engineers and the American Institute of Physics in the United States and the Royal Society of Chemistry in the United Kingdom.
 
Elsevier’s print science journals are generally sold to libraries on a paid subscription basis, with subscription agents facilitating the administrative process. Electronic products, such as ScienceDirect, are sold directly to libraries, corporations and other end users through our dedicated sales force which has offices around the world including Amsterdam, New York, Rio de Janeiro, Singapore and Tokyo. Books are sold through book stores, both traditional and online, wholesalers and direct marketing.


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The Health Sciences division of Elsevier operates an international network of nursing, health professions and medical publishing and communications businesses under the Saunders, Mosby, Churchill Livingstone, Excerpta Medica, Masson, Doyma and Netter imprints and brands. It also operates an electronic health care content delivery business including such brands as MD Consult, Evolve, Gold Standard and MC Strategies. Its principal geographic markets are the United States, the United Kingdom, Germany, France and Spain, while other important markets include Italy, Canada, Australia, Japan, China, India and South East Asia.
 
Health Sciences contributed approximately 49% of the total Elsevier revenue in 2007. Of this revenue, 48% came from journals and related activities, 43% from books and related activities, both delivered in print and electronic form, and the remainder mainly from the pharmaceutical communication business. Approximately 56% of Health Sciences revenue by destination in 2007 was derived from North America, 28% from Europe and the remaining 16% from the rest of the world.
 
Elsevier publishes a broad range of journals serving both the healthcare researcher and practitioner, such as The Lancet, The Journal of the American College of Cardiology, Gastroenterology, The Journal of Allergy and Clinical Immunology, Pain, Journal of Emergency Medical Services, The Journal of Urology, The American Journal of Obstetrics and Gynecology, and European Journal of Cancer. Within its journal publishing programme, Elsevier publishes a number of journals for learned societies.
 
Elsevier publishes English language textbooks and reference works for students and practising professionals in the medical, nursing and health professions in the United States, the United Kingdom, Canada and Australia. Elsevier also publishes local language medical books and journals and provides communications services in many other geographies. Elsevier’s medical textbooks include Gray’s Anatomy, Cecil Medicine, Guyton’s Textbook of Medical Physiology, Robbins & Cotran Pathologic Basis of Disease, and Rang and Dale’s Pharmacology. Elsevier’s nursing titles include Mosby’s Medical, Nursing and Allied Health Dictionary, Mosby’s Nursing Drug Reference, Medical-Surgical Nursing, Potter and Perry’s Fundamentals of Nursing and Wong’s Essentials of Pediatric Nursing. In the allied health professions markets, Elsevier publishes Chabner’s The Language of Medicine, Merrill’s Atlas of Radiographic Positioning & Procedures, Ettinger’s Textbook of Veterinary Internal Medicine and Sturdevant’s Art and Science of Operative Dentistry. Elsevier’s local language book and journal titles include Encyclopédie Médico-Chirurgicale and the book series Les Conférences d’Enseignement in France, Medicina Interna in Spain and Sobotta’s Atlas der Anatomie des Menschen in Germany. Notable local language journals include La Presse Medicale and Archives de Maladies du Coeur et des Vaisseaux (France) and Jano (Spain).
 
As an extension of its medical reference works programme, Elsevier publishes fully searchable online web editions.
 
Elsevier offers a suite of electronic products serving both students and practising professionals across health science markets. In addition to offering medical journals online through ScienceDirect and other electronic platforms, Health Sciences’ Consult suite of products provides web access to major medical reference works, databases, clinical journals, drug information, video based procedures content, practice guidelines, education programmes, expert commentaries and medical news for medical students, physicians and other healthcare professionals. In 2007, Elsevier has continued to develop its online health sciences education platform, Evolve, which provides electronic content, services and course management tools to support and develop its health sciences textbook programme.
 
Through Excerpta Medica, Elsevier publishes customised information for healthcare professionals, medical societies and pharmaceutical companies internationally. Excerpta Medica also works closely with pharmaceutical companies to provide international marketing and communications platforms for new drugs.
 
The medical publishing field is fragmented with competition generally on a title by title and product by product basis. In the United States, Elsevier faces regional competition from a number of information publishers and service providers, including Wolters Kluwer Health (Ovid, Adis International and Lippincott Williams & Wilkins); The Thomson Corporation (Thomson Healthcare); McGraw Hill (Harrison’s); Pearson (Prentice Hall); Wiley-Blackwell; Informa (Informa Healthcare, Taylor & Francis); the American Medical Association (JAMA); and the Massachusetts Medical Society (New England Journal of Medicine).
 
Books are sold by book stores and wholesalers, and directly, generally through our dedicated sales force. Print journals are generally sold to libraries, with subscription agents facilitating the administrative process, and to individuals, through direct mail and through societies. Electronic products, such as MD Consult, are generally sold directly to hospitals, medical practitioners, health care payers and other end users directly through our dedicated sales force.
 
 
The shared service functions provide book and journal production, application management, information technology, customer service and support, and fulfillment and distribution for both the Science & Technology and Health Sciences divisions.
 
Much of the pre-press production for journals and books is outsourced. An electronic production system manages the journal production process from author submission to delivery of the full text of journal articles in whichever format the customer requires, via ScienceDirect, MD Consult, learned society websites, on CD or in print.


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All printing is outsourced to unaffiliated printers in many locations including North America, Europe and Asia. Elsevier’s book warehouse in the United States is owned and operated by Elsevier, but all other distribution and warehousing services are outsourced.
 
 
                   
    Year ended December 31,
    2007   2006   2005
    (in millions)
 
Revenue
                 
LexisNexis
                 
United States
  £ 1,113   £ 1,129   £ 1,061
International
    481     441     405
                   
    £ 1,594   £ 1,570   £ 1,466
                   
 
LexisNexis provides legal, tax, regulatory, risk management, information analytics and business information solutions aligned to the workflow of professional, business and government customers in the US and internationally and comprises LexisNexis United States and LexisNexis International.
 
Legal and regulatory markets worldwide are seeing continuing growth driven by the increasing level of legislation and litigation, as well as the increasing number of lawyers. Additional opportunities are also developing beyond the core research market, through the delivery of value added solutions to meet demands for greater legal efficiency and productivity.
 
Increasingly legal information and services are being delivered online, with potential to deliver such products and solutions in markets outside the United States where online migration is at significantly lower levels than in the US legal market. In recent years, LexisNexis has, with its comprehensive US public records databases, expanded in the market for risk information and analytics, which is growing due to increasing consumer credit losses and fraud and the demand for identity verification.
 
In 2007, LexisNexis United States contributed approximately 70% of the total LexisNexis revenue, with LexisNexis International accounting for 30%.
 
 
LexisNexis United States comprises US Legal Markets and US Corporate and Public Markets. In 2007, approximately 62% of LexisNexis United States’ revenue came from subscription sales, including online services, 19% from transactional sales, including online services, 8% from advertising, including directory listings, 2% from circulation and copy sales and the remaining 9% from other sources.
 
US Legal Markets develops, markets and sells LexisNexis information products and services in electronic and print formats to law firms and practitioners, law schools and state and local governments. During 2007, we have selectively acquired a number of small businesses, including providers of software tools for litigation professionals that complement the assets and customer relationships we already have.
 
The flagship online legal research service, lexisnexis.com, provides online access to state and federal case law; codes and statutes; court documents; over seven billion searchable documents from over 35,000 sources online; business news, legal news, and regional news; expert commentary on the law; and sophisticated searching and linking tools customised for the needs of legal researchers.
 
US Legal Markets is increasingly providing Total Practice Solutions, combining content with online workflow tools to provide products and solutions in Client Development, Research, Practice Management and Litigation Services.
 
Client Development solutions include the Martindale-Hubbell electronic network that showcases the qualifications and credentials of over one million lawyers and law firms worldwide. In addition, it provides a suite of business intelligence tools that help lawyers find and target clients, along with customer relationship management workflow tools. In Research, LexisNexis provides statutes and case law for all 50 US states as well as research, analysis and citation services. They include Matthew Bender publications Collier on Bankruptcy, Moore’s Federal Practice and Nimmer on Copyright, Michie’s 600 practice-enhancing titles, 400 custom legal publications and annotated codes as well as its United States Code Service and United States Supreme Court Reports, Lawyer’s Edition. It also includes Shepard’s, the publisher of Shepard’s Citations Service, a legal citation service delivered online and in print. “Shepardizing” is a common process for US lawyers checking the continuing authority of cases or statutory references. Practice Management solutions include time and billing, case management, cost recovery and document management. Litigation Services include a range of workflow solutions for litigators including Total Litigator, electronic discovery services, evidence management through Casesoft’s Casemap product, Concordance’s Dataflight case analysis product, court docket tracking and e-filing with our Courtlink service, expert identification and legal document preparation.


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US Corporate and Public Markets develops, markets and sells LexisNexis products and services to corporations, federal government agencies and academic institutions and also manages news, business, financial and public records content acquisition and enhancements. The risk management and information analytic applications of US Corporate and Public Markets are designed to assist customers in managing risk through fraud detection and prevention, identity verification, pre-employment screening and due diligence; and allow business, financial services, legal and government customers to quickly and easily extract valuable knowledge from a vast array of data.
 
In US legal markets, LexisNexis United States’ principal competitor is West (The Thomson Corporation). The principal competitors in corporate and public markets are West and Dialog (The Thomson Corporation), Factiva (News Corporation) and ChoicePoint.
 
 
The LexisNexis International division comprises LexisNexis Europe, Canada, Latin America and Africa, headquartered in London, and LexisNexis Asia Pacific, headquartered in Singapore. In 2007, approximately 62% of LexisNexis International’s revenue was derived from subscriptions, 27% from circulation sales, 2% from advertising and 9% from other sources. In the same year, approximately 40% of revenue came from the UK, 29% from Continental Europe and 31% from the rest of the world. The most significant business within Continental Europe is in France.
 
LexisNexis Butterworths in the United Kingdom is a professional publisher, providing legal, tax and business information and solutions via online, print and CD media. The web-based LexisNexis Butterworths service provides a resource for legal, tax, regulatory and business information, including access to a range of UK, US, Australian, New Zealand, South African and other legal materials, via a single gateway. LexisNexis Butterworths’ principal publications are Halsbury’s Laws of England, The Encyclopaedia of Forms and Precedents, Simon’s Taxes and Butterworths Company Law Service. The principal competitors in the United Kingdom are Sweet & Maxwell and Westlaw (both part of the Thomson Corporation) in legal markets; CCH Croner (Wolters Kluwer) in tax and regulatory markets; and Factiva (News Corporation) in corporate markets.
 
LexisNexis in France is a provider of information to lawyers, notaries and courts, with JurisClasseur and La Semaine Juridique being the principal publications. Under the brand of Infolib LexisNexis also provides practice management and computation software tools for lawyers, notaries and accountants. The major competitors of LexisNexis in France are Editions Francis Lefèbvre, Editions Legislatives, Dalloz (Lefèbvre) and Lamy (Wolters Kluwer).
 
 
             
    Year ended December 31,
    2007   2006   2005
    (in millions)
 
Revenue
           
Reed Business Information
  £906   £896   £892
Reed Exhibitions
  577   522   471
             
    £1,483   £1,418   £1,363
             
 
Reed Business comprises Reed Business Information, the business magazine, website and information businesses operating principally in the United States, the United Kingdom, Continental Europe and Asia Pacific, and Reed Exhibitions, an international exhibition organising business.
 
 
Reed Business Information contributed approximately 61% of Reed Business revenue in 2007. In the United States, business to business magazines are primarily distributed on a “controlled circulation” basis, whereby the product is delivered without charge to qualified buyers within a targeted industry group based upon circulation lists developed and maintained by the publisher. Magazines distributed on a “controlled circulation” basis are therefore wholly dependent on advertising for their revenues. In the United Kingdom, business magazines are distributed both on a “controlled circulation” basis and a “paid circulation” basis, with “paid circulation” titles also dependent on advertising for a significant proportion of their revenues. In the Netherlands, a higher proportion of publications are sold by “paid circulation”.
 
In 2007, approximately 56% of Reed Business Information revenue came from advertising, 26% from subscription sales, 6% from circulation sales, 3% from training and 9% from other sources. Approximately 33% of Reed Business Information revenue in 2007 came from North America, 25%, from the United Kingdom, 35% from Continental Europe and 7% from the rest of the world.
 
Online revenue grew by 27% in 2007 to over £250 million reflecting user and advertising demand for our community websites (webzines), recruitment, lead generation and search, as well as our online data services. Supporting the continued


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online growth is an established network of online focused sales, search and marketing resources. Attracting and retaining appropriately skilled people is critical as the business continues to expand and develop its online portfolio.
 
Reed Business Information US (“RBI US”) is a publisher of business information, with over 60 trade magazines. Amongst the RBI US titles are Variety, Broadcasting & Cable, Multichannel News, Publishers Weekly, EDN, Design News and Interior Design, all of which provide online communities to their users by way of associated websites. Through its Reed Construction Data business, RBI US provides national coverage of construction project information, through subscription newsletters, CD and the online service Connect. Other products and services include websites, direct mail, newspapers, newsletters and custom published supplements. The online lead generation business BuyerZone was acquired in January 2007, enhancing the overall online portfolio.
 
RBI US operates circulation management and fulfilment facilities in Colorado and the Caribbean island of St Kitts, through which it identifies, qualifies and maintains subscriber lists for substantially all of its titles. Paper and printing services are purchased on a coordinated basis with other Reed Elsevier businesses in the United States. Distribution of magazines is conducted primarily through the US postal service, supplemented by news-stand sales through unaffiliated wholesalers.
 
Reed Elsevier’s US business titles compete on an individual basis with the titles, print and digital, of individual publishers, including Advanstar, CMP Media (United Business Media), Hanley Wood, McGraw Hill, Penton and Nielsen (formerly VNU).
 
Reed Business Information UK (“RBI UK”), a business information publisher, has a portfolio of over 100 business magazines, directories, market access products and online services. Its business magazines include Computer Weekly, Farmers Weekly, Estates Gazette, Flight International, New Scientist, Caterer & Hotelkeeper, Commercial Motor and Community Care, all of which provide online communities via associated websites. Its other online services include recruitment sites such as totaljobs.com and CWjobs.co.uk, an online targeted newsletter provider, eMedia, and data services supplying information to the aerospace, property, banking, chemicals industries and XPertHR for the human resources sector.
 
Paper and printing services are purchased from unaffiliated third parties, primarily on a coordinated basis with other Reed Elsevier businesses in the United Kingdom. RBI UK’s distribution is generally through public postal systems, with news-stand distribution for some titles through outside wholesalers. RBI UK competes directly with EMAP Business Communications, Nielsen and CMP Media in a number of sectors in the United Kingdom, and also with many smaller companies on an individual title by title basis.
 
Reed Business Information competes for online advertising with other business-to-business websites as well as Google and other internet search engines.
 
In Continental Europe, the principal business is Reed Business Information Netherlands (“RBI NL”), a business magazine and information publisher, publishing over 160 titles. Through trade journals, product news tabloids, directories, documentary systems, databases, newspapers, and websites, RBI NL serves industries which include agriculture, catering, construction, engineering, food, fashion, horticulture, tourism and travel. Its principal titles include Elsevier, a current affairs weekly, Beleggers Belangen and FEM in business and management, Boerderij in agriculture and Distrifood in retail. Its titles are predominantly subscription based and revenue is principally divided between subscriptions and advertising. Other publications within Continental Europe include Stratégies in France, Arte y Cemento in Spain and Detail in Germany.
 
Printing and production is contracted out to third parties and distribution is mainly through the postal system. RBI NL competes with a number of companies on a title by title basis in individual market sectors, the largest competitors in print being Wolters Kluwer and Nielsen.
 
In Asia Pacific, principal titles include Australian Doctor and Money Management in Australia and EDN, a design news magazine for the electronics industry, in Asia.
 
 
Reed Exhibitions organises trade exhibitions and conferences internationally, with over 500 events in 38 countries, attracting over 90,000 exhibitors and six million visitors annually. The business contributed approximately 39% of the revenue of Reed Business in 2007. 72% of Reed Exhibitions’ revenue is derived from exhibition participation fees, with the balance primarily attributable to conference fees, advertising in exhibition guides, sponsorship fees and admission charges. In 2007, approximately 21% of Reed Exhibitions’ revenue came from North America, 46% from Continental Europe, 11% from the United Kingdom and the remaining 22% from the rest of the world. As some events are held other than annually, revenue in any single year may be affected by the cycle of non-annual exhibitions.
 
Reed Exhibitions’ events are concentrated primarily in the following industries: aerospace; building and construction; electronics; energy; oil and gas; waste management; food and hospitality; jewellery; pharmaceuticals; property; publishing; sport and recreation; and travel. They include JCK International Jewellery Shows, Professional Golfers Association (PGA) Merchandise Show and National Hardware Show in North America; World Travel Market and London Book Fair in the United Kingdom; Batimat, MIDEM, MIPTV, MIPcom, MIPIM, MAPIC, Salon Nautique, Pollutec and Maison et Objet in France; AIMEX and Australian Gift Fairs in Australia; International Jewellery Tokyo in Japan; and Thai Metalex in South-East Asia. In April 2007 Reed Exhibitions acquired a 60% interest in a Brazilian exhibition business, comprising many market leading events.


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The exhibition industry has historically been extremely fragmented. The main US competitor is Nielsen, and the main UK competitor is CMP. Outside the United States, competition comes primarily from industry focused trade associations and convention centre and exhibition hall owners who are also seeking an international presence.
 
HARCOURT EDUCATION — DISCONTINUED OPERATIONS
 
                   
    Year ended December 31,
    2007   2006   2005
    (in millions)
 
Revenue
                 
Harcourt Education
                 
US Schools and Testing
  £ 708   £ 776   £ 785
International
    44     113     116
                   
    £ 752   £ 889   £ 901
                   
 
Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented as a discontinued operation. On May 4, 2007 the sale of Harcourt Assessment and Harcourt Education International businesses for $950 million was announced, and on July 16, 2007 the sale of Harcourt US Schools Education businesses for $4.0 billion was announced. The sales had completed by December 31, 2007 with the exception of Harcourt Assessment and certain Harcourt International businesses, the sale of which completed on January 30, 2008.
 
 
Elsevier Reed Finance BV, the Dutch parent company of the Elsevier Reed Finance BV group (“ERF”), is directly owned by Reed Elsevier PLC and Reed Elsevier NV. ERF provides treasury, finance, intellectual property and insurance services to the Reed Elsevier Group plc businesses through its subsidiaries in Switzerland: Elsevier Finance SA (“EFSA”), Elsevier Properties SA (“EPSA”) and Elsevier Risks SA (“ERSA”). These three Swiss companies are organised under one Swiss holding company, which is in turn owned by Elsevier Reed Finance BV.
 
EFSA is the principal treasury centre for the combined businesses. It is responsible for all aspects of treasury advice and support for Reed Elsevier Group plc’s businesses operating in Continental Europe, South America, the Pacific Rim, India, China and certain other territories, and undertakes foreign exchange and derivatives dealing services for the whole of Reed Elsevier. EFSA also arranges or directly provides Reed Elsevier Group plc businesses with financing for acquisitions and product development and manages cash pools and investments on their behalf.
 
EPSA is responsible for the management of tangible and intangible property rights whilst ERSA is responsible for insurance activities relating to risk retention.
 
In 2007, EPSA issued a CHF350 million bond in the Swiss public market and concluded several term financing agreements. It renegotiated a number of banking and cash management arrangements in Continental Europe and Asia and continued to provide advice to Reed Elsevier Group plc companies on treasury matters, including interest and foreign currency exposures particularly in the context of the disposal of the Harcourt Education businesses.
 
The average balance of cash under management by EFSA in 2007, on behalf of Reed Elsevier Group plc and its parent companies, was approximately $0.9 billion (2006: $0.5 billion).
 
EPSA acquired additional intangible assets in the period, including the rights to the Beilstein chemical compound database.
 
At the end of 2007, 89% (2006: 88%) of ERF’s gross assets were held in US dollars and 10% (2006: 10%) in euros, including $8.5 billion (2006: $8.4 billion) and €0.7 billion (2006: €0.8 billion) in loans to Reed Elsevier Group plc subsidiaries. Loans made to Reed Elsevier Group plc businesses are funded from equity, long term debt of $1.3 billion and short term debt of $1.1 billion backed by committed bank facilities. Long term debt is derived from a Swiss domestic public bond issue, bilateral term loans and private placements. Short term debt is primarily derived from euro and US commercial paper programmes.
 
 
A description of the corporate structure is included under “— History and Development” on page 10. A list of significant subsidiaries, associates, joint ventures and business units is included as an exhibit, see “Item 19: Exhibits” on page F-83.


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We own or lease over 350 properties around the world, the majority being in the United States. The table below identifies the principal owned and leased properties which we use in our business.
 
             
            Floor space
Location
 
Business segment(s)
  Principal use(s)   (square feet)
 
Owned properties
           
Miamisburg, Ohio
  LexisNexis   Office   403,638
Linn, Missouri
  Elsevier   Warehouse   236,105
Albany, New York
  LexisNexis   Office   194,780
Oak Brook, Illinois
  Reed Business   Office   181,659
Colorado Springs, Colorado
  LexisNexis   Office   181,197
             
Leased properties
           
San Antonio, Texas
  Harcourt Assessment   Office and warehouse   559,258
New York, New York
  Reed Business and Elsevier   Office   451,800
Amsterdam, Netherlands
  Reed Business and Elsevier   Office   429,308
Miamisburg, Ohio
  LexisNexis and Elsevier   Office and data centre   213,802
Sutton, England
  Reed Business   Office   191,960
Binghamton, New York
  LexisNexis   Office and warehouse   162,000
 
 
 
All of the above properties are substantially occupied by Reed Elsevier businesses.
 
None of the real property owned or leased by Reed Elsevier which is considered material to Reed Elsevier taken as a whole is presently subject to liabilities relating to environmental regulations.


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The following discussion is based on the combined financial statements of Reed Elsevier for the three years ended December 31, 2007 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
 
The following discussion should be read in conjunction with, and is qualified by reference to, the combined financial statements.
 
Reed Elsevier derives its revenue principally from subscriptions, circulation sales, advertising sales and exhibition fees.
 
Revenue by source for continuing operations(1)
Year ended December 31,
 
                                           
    2007     2006     2005  
    (in millions, except percentages)  
 
Subscriptions
  £ 2,079     46 %   £ 2,083     46 %   £ 1,926     45 %
Circulation
    916     20       894     20       876     20  
Advertising
    699     15       697     16       668     16  
Exhibition fees
    569     12       516     11       479     11  
Other
    321     7       319     7       316     8  
                                           
Total
  £ 4,584     100 %   £ 4,509     100 %   £ 4,265     100 %
                                           
 
Revenue by geographic market for continuing operations(1)
Year ended December 31,
 
                                           
    2007     2006     2005  
    (in millions, except percentages)  
 
North America
  £ 2,233     49 %   £ 2,322     52 %   £ 2,212     52 %
United Kingdom
    603     13       531     12       503     12  
The Netherlands
    206     4       196     4       195     4  
Rest of Europe
    897     20       866     19       790     19  
Rest of world
    645     14       594     13       565     13  
                                           
Total
  £ 4,584     100 %   £ 4,509     100 %   £ 4,265     100 %
                                           
 
 
 
(1) Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented as a discontinued operation and is excluded from the above analysis.
 
The cost profile of individual businesses within Reed Elsevier varies widely and costs are controlled on an individual business unit basis. The most significant cost item for Reed Elsevier as a whole is staff costs, which in 2007 for continuing operations represented 41% of Reed Elsevier’s total cost of sales and operating expenses before amortisation of acquired intangible assets (2006: 41%; 2005: 42%).


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The following tables show revenue, operating profit and adjusted operating profit for each of Reed Elsevier’s continuing business segments in each of the three years ended December 31, 2007 together with the percentage change in 2007 and 2006 at both actual and constant exchange rates. Adjusted operating profit is included on the basis that it is a key financial measure used by management to evaluate performance and allocate resources to the business segments, as reported under IAS 14: Segment Reporting in note 3 to the combined financial statements. Adjusted operating profit represents operating profit before amortisation of acquired intangible assets and acquisition integration costs, and is grossed up to exclude the equity share of taxes in joint ventures. A reconciliation of adjusted operating profit to operating profit is included below.
 
                                                                           
    Revenue from continuing operations(5)
 
    Year ended December 31,  
    2007     2006     % change     2005     % change  
                        actual
    constant
              actual
    constant
 
                        rates     rates(1)               rates     rates(2)  
    (in millions, except percentages)  
 
Elsevier
  £ 1,507     33 %   £ 1,521     34 %     -1 %     +4 %   £ 1,436     34 %     +6 %     +8 %
LexisNexis
    1,594     35       1,570     35       +2       +8       1,466     34       +7       +8  
Reed Business
    1,483     32       1,418     31       +5       +7       1,363     32       +4       +5  
                                                                           
Total
  £ 4,584     100 %   £ 4,509     100 %     +2 %     +6 %   £ 4,265     100 %     +6 %     +7 %
                                                                           
 
                                                                                 
    Operating Profit from continuing operations(5)
 
    Year ended December 31,  
    2007     2006     % change     2005     % change  
                            actual
    constant
                actual
    constant
 
                            rates     rates(1)                 rates     rates(2)  
    (in millions, except percentages)  
 
Elsevier
  £ 410       46 %   £ 395       47 %     +4 %     +10 %   £ 396       51 %     0 %     +7 %
LexisNexis
    287       32       264       31       +9       +15       218       28       +21       +23  
Reed Business
    197       22       183       22       +8       +10       158       21       +16       +18  
                                                                                 
Subtotal
  £ 894       100 %   £ 842       100 %                   £ 772       100 %                
Corporate costs
    (45 )             (39 )                             (32 )                        
Unallocated net pension credit(4)
    39               34                               12                          
                                                                                 
Total
  £ 888             £ 837               +6 %     +12 %   £ 752               +11 %     +16 %
                                                                                 
 
                                                                                 
    Adjusted Operating Profit from continuing operations(3)(5)
 
    Year ended December 31,  
    2007     2006     % change     2005     % change  
                            actual
    constant
                actual
    constant
 
                            rates     rates(1)                 rates     rates(2)  
    (in millions, except percentages)  
 
Elsevier
    £477       42 %     £465       43 %     +3 %     +9 %     £449       45 %     +4 %     +10 %
LexisNexis
    406       35       380       35       +7       +14       338       34       +12       +13  
Reed Business
    260       23       241       22       +8       +10       214       21       +13       +14  
                                                                                 
Subtotal
    £1,143       100 %     £1,086       100 %                     £1,001       100 %                
Corporate costs
    (45 )             (39 )                             (32 )                        
Unallocated net pension credit(4)
    39               34                               12                          
                                                                                 
Total
    £1,137               £1,081               +5 %     +11 %     £981               +10 %     +14 %
                                                                                 


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Adjusted operating profit is derived from operating profit as follows:
 
                   
    2007   2006   2005
    (in millions)
 
Operating profit
    £888     £837     752
Adjustments:
                 
Amortisation of acquired intangible assets
    221     211     203
Acquisition integration costs
    20     23     20
Reclassification of tax in joint ventures
    8     10     6
                   
Adjusted operating profit
    £1,137     £1,081     £981
                   
 
 
(1) Represents percentage change in 2007 over 2006 at constant rates of exchange, which have been calculated using the average and hedge exchange rates for the 2006 financial year. These rates were used in the preparation of the 2006 combined financial statements.
 
(2) Represents percentage change in 2006 over 2005 at constant rates of exchange, which have been calculated using the average and hedge exchange rates for the 2005 financial year. These rates were used in the preparation of the 2005 combined financial statements.
 
(3) Adjusted operating profit represents operating profit 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, and is reconciled to operating profit above.
 
(4) The unallocated net pension credit of £39 million (2006: £34 million; 2005: £12 million) comprises the expected return on pension scheme assets of £196 million (2006: £178 million; 2005: £149 million) less interest on pension scheme liabilities of £157 million (2006: £144 million; 2005: £137 million).
 
(5) Following announcement in February 2007 of the planned sale of Harcourt Education, the division is presented as a discontinued operation and is excluded from the above analysis.
 
In the commentary below, percentage movements are at actual exchange rates unless otherwise stated. Percentage movements at constant exchange rates are calculated using the average and hedge exchange rates for the previous financial year. Percentage movements at both actual rates and constant rates are shown in tables on page 21. The effect of currency movements on the 2007 results is further described separately below (see “— Effect of Currency Translation” on pages 28 and 29). References to operating profit relate to operating profit including joint ventures. References to underlying performance are calculated to exclude the effects of acquisitions and disposals in the current and prior year and the impact of currency.
 
 
 
Revenue increased by 2% to £4,584 million.  At constant exchange rates, revenue was 6% higher, both including and excluding acquisitions and disposals.
 
Operating profits of £888 million were up 6%, or 12% at constant exchange rates, compared with £837 million in 2006. Operating profit is stated after amortisation of acquired intangible assets of £221 million (2006: £211 million), acquisition integration costs of £20 million (2006: £23 million) and includes tax charges in respect of joint ventures of £8 million (2006: £10 million). Excluding these items, operating profits would have been up 5% at £1,137 million (2006: £1,081 million), or up 11% at constant exchange rates, and up 10% on an underlying basis. The increase in operating profits at constant exchange rates principally reflects improved underlying performance.
 
Operating margin, including amortisation of acquired intangible assets and acquisition integration costs, was 19.4% (2006: 18.6%). Excluding amortisation of acquired intangible assets, acquisition integration costs and the equity share of taxes in joint ventures, the margin would have been 24.8%, up 0.8 percentage points compared to 2006, or up 1.0 percentage points on an underlying basis. The cycling out of biennial joint venture exhibitions, which contribute to profit but not to revenues, had a 0.1 percentage point adverse effect on overall margin growth. Currency translation mix and the effect of the science journal currency hedging programme reduced margin by 0.2 percentage points. (The net benefit of the Elsevier science journal hedging programme is lower in 2007 than in 2006 as the effect of the weaker US dollar is incorporated within the three year rolling hedging programme.) For further explanation of the effects of currency translation, see “— Effect of Currency Translation” on pages 28 and 29.
 
The amortisation charge for acquired intangible assets, including the share of amortisation for joint ventures, of £221 million was up £10 million on the prior year principally as a result of recent acquisitions, partly offset by currency translation effects.
 
Net finance costs, at £139 million, were £19 million lower than in the prior year due to currency translation effects and the benefit of proceeds from the disposal of Harcourt Education.
 
Profit before tax was £812 million, compared with £678 million in 2006, an increase of 20%, or 26% at constant exchange rates. The increase in profit before tax principally reflects the increased operating profits and gains on disposals.


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The tax credit of £82 million compares with a charge of £86 million in the prior year. The current year credit includes the benefit of £223 million in respect of previously unrecognised deferred tax assets and capital losses arising in continuing operations, which are realisable as a result of the gain on disposal of Harcourt Education. The reported tax credit also reflects movements on deferred tax balances arising on unrealised exchange differences on long term interaffiliate lending. These deferred tax movements are recognised in the income statement but are not expected to crystallise in the foreseeable future.
 
Net profit from discontinued operations comprises the post-tax profit of Harcourt Education of £78 million, compared with £33 million in 2006, the pre-tax gain on the disposal of the Harcourt US Schools business and those Harcourt International businesses completed in the year of £611 million, less taxes on the completed disposals of £380 million (before taking account of the tax credits arising in continuing operations described above).
 
The profit attributable to shareholders of £1,200 million was up 93%, or 105% at constant exchange rates, compared to £623 million in 2006, reflecting the operating performance of the business and the gain arising on the disposal of Harcourt Education businesses.
 
 
Revenue and adjusted operating profits were down 1% and up 3% respectively compared to 2006. At constant exchange rates, revenue and adjusted operating profits were up 4% and 9% respectively, or 6% and 10% on an underlying basis. The adjusted operating margin was 1.1 percentage points higher in 2007 than in 2006, driven by revenue growth and cost efficiency, particularly in production and procurement.
 
The Science & Technology business saw underlying revenue growth of 6%, or 2% at constant currencies after acquisitions and disposals, reflecting journal subscription renewals at 97% and growing online sales with increasing market penetration. This was driven by ScienceDirect, which saw widening distribution especially in small academic and emerging markets, and from the further launch of electronic books.
 
In Health Sciences, revenue growth at constant currencies was 6%, both before and after the impact of acquisitions and disposals, driven by growth in the nursing and allied health professional sector, and expanding online solutions in response to a growing need within the healthcare industry for technology enabled information solutions to improve the quality and effectiveness of diagnosis, treatment and care. Growth was partly held back by a flat performance in pharmaceutical advertising markets, with share gains compensating for weaker markets.
 
In March 2007, Elsevier acquired the full rights to the Beilstein chemical compounds database, previously operated under licence, which is now being integrated with other resources to deliver content and innovative online solutions. In October 2007, Elsevier sold the MDL software services business which no longer fitted with Elsevier’s strategy.
 
Operating profit of Elsevier, including amortisation of acquired intangible assets and acquisition integration costs, increased by £15 million to £410 million (a 10% increase at constant exchange rates), reflecting the 9% increase in adjusted operating profit described above.
 
 
Revenue and adjusted operating profits were up 2% and 7% respectively compared to 2006. At constant exchange rates, revenue and adjusted operating profits were up by 8% and 14% respectively, or 7% and 12% on an underlying basis. The adjusted operating margin was 1.3 percentage points higher reflecting the revenue growth and actions to control costs.
 
In US Legal Markets, subscription renewals and additional online information and solutions sales, partly held back by fewer large sized discovery cases, drove underlying revenue growth of 5%. New Total Solutions products were introduced throughout the year in the core areas of litigation, client development, practice management, and research. The growth in the Total Solutions markets is being driven through acquisition and organic investment. Acquisitions included Juris and Image Capture Engineering. These businesses are being integrated within Total Litigator to service the majority of electronic discovery needs and are steadily migrating to a subscription model.
 
In US Corporate and Public Markets underlying revenue growth was 6%, driven by demand in risk management and in processing higher volumes for the US patent and trademark office, partly held back by slower growth in the news and business information business. The Risk Information and Analytics business again saw double-digit revenue growth and further margin expansion driven by market growth combined with our technology and content.
 
The LexisNexis International business outside the US delivered underlying revenue growth of 8% at constant rates, or 10% including acquisitions, and margins improved. Underlying revenue growth has now been at or around this level for each of the last four years, driven by the growing penetration of online information services across our markets and new publishing. Growth was seen in the UK, France and Southern Africa in particular as well as in emerging markets such as India, Korea, China and Taiwan.
 
Operating profit of LexisNexis, including amortisation of acquired intangible assets and acquisition integration costs, increased by £23 million to £287 million. This reflects the increase in adjusted operating profit described above.


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Revenue and adjusted operating profits were up 5% and 8% respectively compared to 2006. At constant exchange rates, revenue and adjusted operating profits were up 7% and 10%, or 6% and 8% on an underlying basis. The overall adjusted operating margin was up 0.5 percentage points, with the cycling out of contribution from biennial joint venture exhibitions reducing margin growth by 0.2 percentage points.
 
At Reed Exhibitions, revenues were 13% higher at constant currencies, or 12% on an underlying basis. Growth was seen across the show portfolio, notably at the Mipim international property show in Cannes and the JCK Jewellery show in Las Vegas. Adjusted operating profits were up 11% at constant currencies, or 8% excluding acquisitions and disposals, held back by the cycling out of the contribution from biennial joint venture shows. Excluding the cycling of shows, underlying revenue growth and adjusted operating profit growth were 10% and 11% respectively. The defence sector part of the business is to be divested.
 
The Reed Business Information magazine and information businesses saw revenues 4% ahead at constant currencies, or 3% before acquisitions and disposals. Continued growth in online services of 20% on an underlying basis compensated for a 2% decline in print as the business migrates online. Online revenues now contribute 30% of RBI’s revenues. Adjusted operating profits were up 10% at constant currencies through continued actions to improve cost efficiency.
 
In the UK, underlying revenues were up 5% reflecting growth in online sales, up 19% and which now represent 46% of total RBI UK revenue. Totaljobs, the UK recruitment site, continued its growth with revenues up 35%. In the Netherlands and International, underlying revenue growth was 4% with growth in online products. In the US, RBI underlying revenue was flat, with online revenues growing, offset by the decline in print including discontinued titles. Advertising revenues grew across community sites, up 31%. This reflects increased web traffic as these sites increasingly become a starting point on the web for the communities they serve with their mix of professional content, community interaction and online tools proving attractive for both users and advertisers.
 
The growth of online sales in RBI was helped by a number of acquisitions, including BuyerZone, an online service for matching vendors and buyers in procurement tendering, acquired in January 2007, and DoubleTrade, an online tendering service, acquired in April 2007.
 
Operating profit of Reed Business, including amortisation of acquired intangible assets and acquisition integration costs, increased by £14 million to £197 million. This principally reflects the increase in adjusted operating profit.
 
 
 
Revenue from continuing operations increased by 6% to £4,509 million. At constant exchange rates, revenue was 7% higher, or 6% higher on an underlying basis.
 
Operating profits from continuing operations of £837 million were up 11%, or 16% at constant exchange rates, compared with £752 million in 2005. Operating profit is stated after amortisation of acquired intangible assets of £211 million (2005: £203 million), acquisition integration costs of £23 million (2005: £20 million) and includes tax charges in respect of joint ventures of £10 million (2005: £6 million). Excluding these items, operating profits would have been up 10% at £1,081 million (2005: £981 million), or up 14% at constant exchange rates, and up 13% on an underlying basis. The increase in operating profits at constant exchange rates principally reflects improved operating performance and the contribution from acquisitions.
 
Operating margin in continuing operations, including amortisation of acquired intangible assets and acquisition integration costs, was 18.6% (2005: 17.6%). Excluding amortisation of acquired intangible assets, acquisition integration costs and the equity share of taxes in joint ventures, the margin would have been 24.0%, up 1.0 percentage points compared to 2005, or up 1.5 percentage points on an underlying basis. The increase in the reported margin was held back by the inclusion of lower margin acquisitions and currency effects, most particularly the year on year movement in hedge rates for Elsevier journal subscriptions. For further explanation of the effects of currency translation, see “— Effect of Currency Translation” on pages 28 and 29.
 
The amortisation charge for acquired intangible assets of £211 million was up £8 million on 2005, principally as a result of recent acquisitions.
 
Net finance costs, at £158 million, were £18 million higher than in 2005 due to higher short term interest rates, the financing costs of acquisitions and the share repurchase programme, partly offset by the benefit of free cash flow.
 
Profit before tax from continuing operations was £678 million, compared with £614 million in 2005, an increase of 10%, or 16% at constant exchange rates. The increase in profit before tax principally reflects the increased operating profits, partially offset by increased net finance costs.
 
The tax expense from continuing operations was £86 million in 2006, compared with £219 million in 2005, a decrease of £133 million. The effective tax rate on earnings for 2006 was 13% (2005: 36%), reflecting the favourable settlement of tax on prior year disposals and movements in deferred tax balances arising on unrealised exchange differences on long term inter-


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affiliate lending. These deferred tax movements are recognised in the income statement under IFRS but are not expected to crystallise in the foreseeable future.
 
Net profit from discontinued operations comprising the post-tax profit of Harcourt Education, was £33 million, compared to £69 million in 2005.
 
The profit attributable to shareholders of £623 million was up 35%, or 42% at constant exchange rates, compared to £462 million in 2005, reflecting the operating performance of the business and the reduction in tax expense referred to above.
 
 
Revenue and adjusted operating profits were up 6% and 4% respectively compared to 2005. At constant exchange rates, revenue and adjusted operating profits were up 8% and 10% respectively, or 5% and 8% on an underlying basis. Excluding the effects of acquisitions, disposals and currency, the operating margin was 0.9 percentage points higher in 2006 than in 2005, driven by revenue growth, stabilising investment levels and further supply chain efficiency.
 
The Science & Technology business saw underlying revenue growth of 5% at constant exchange rates reflecting a journal subscription renewal rate of 97%, widening distribution through an expanded sales force, and growth in online databases. ScienceDirect usage continues to grow at over 20% per annum and e-only contracts now account for 45% of journal subscription revenues. The Scopus abstract and indexing database has been well received in the market and is seeing conversion of trials into firm contracts.
 
In Health Sciences, revenue growth was 13% at constant exchange rates, or 6% on an underlying basis, reflecting growth in the nursing and allied health professional sectors and in new society journal publishing. Online revenues are growing, up 37% in total, as the medical community increasingly adopts online information services to drive productivity and enhance outcomes. The year saw increasing penetration of the ScienceDirect and MDConsult products and further launches made and planned of electronic reference materials, medical education resources, and specialist information services and workflow tools.
 
The integration of the MediMedia MAP businesses acquired in August 2005 is now complete with revenue growth initiatives building momentum and improving margins. The acquisition in May of the Gold Standard drug information database and related products is accelerating our market strategies in electronic health information services to enhance the efficacy of clinical diagnosis and treatment. In December, the Endeavor software business was sold following a reappraisal of its position within Elsevier’s overall market strategies.
 
Operating profit of Elsevier, including amortisation of acquired intangible assets and acquisition integration costs, decreased by £1 million to £395 million (a 7% increase at constant exchange rates). This decrease reflects the 4% increase in adjusted operating profit described above offset by currency effects, higher amortisation of acquired intangible assets and higher acquisition integration costs in respect of MediMedia MAP and other recent acquisitions.
 
 
Revenue and adjusted operating profits were up 7% and 12% respectively compared to 2005. At constant exchange rates, revenue and adjusted operating profits were up by 8% and 13% respectively, or 7% and 13% on an underlying basis. This 7% organic revenue growth compares with 6% in 2005 and 4% in 2004 and reflects the momentum in the business. The adjusted operating margin was 1.1 percentage points higher reflecting the revenue growth and tight cost control.
 
In US Legal Markets, subscription renewals and additional online information and solutions sales to both large and small firms drove underlying revenue growth of 6%. The Total Solutions strategy launched in the year has gained traction in the market, focused on the distinctive needs of lawyers across four major areas of their workflow: litigation, client development, research and practice management. An integrated solutions product was also launched for the risk management market. The product portfolio was expanded through organic development and selective acquisition: Casesoft (litigation case analysis) and Dataflight (online repository and tools for evidence management).
 
In Corporate and Public Markets underlying revenue growth was 8% reflecting improvement in online news and business information, higher patent volumes and demand in risk management. The Seisint business acquired in 2004 saw continued revenue growth and LexisNexis’ existing risk management business has now been fully migrated to the Seisint technology platform.
 
The LexisNexis International business outside the US saw underlying revenue growth of 8% driven by the growing demand for LexisNexis’ online information services across its markets, notably in the UK, France, Germany, Canada and South Africa, and new publishing. The Total Solutions strategy is also being rolled out in these international markets behind increasing online penetration. In the UK this was accelerated with the acquisition of Visualfiles (case management and compliance tools).
 
Operating profit of LexisNexis, including amortisation of acquired intangible assets and acquisition integration costs, increased by £46 million to £264 million. This reflects the increase in adjusted operating profit described above and a reduction in acquisition integration costs following the completion of the integration of Seisint.


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Revenue and adjusted operating profits were up 4% and 13% respectively compared to 2005. At constant exchange rates, revenue and adjusted operating profits were up 5% and 14%, with acquisitions and disposals having no overall effect on these growth rates. Adjusted operating margins increased by 1.3 percentage points to 17.0% reflecting the growth in the exhibitions business and tight cost control.
 
At Reed Exhibitions, revenues were 12% higher, or 10% on an underlying basis. Growth was seen in key shows across the principal geographies in the US, Europe and Asia Pacific, notably in Japan and in the international Midem entertainment and property shows held in Cannes. Whilst much of business-to-business marketing is moving online, the demand for exhibitions remains as exhibitors and buyers place great value on physical meetings and events to balance other information sources and connections. Underlying profit growth was 16% including 6% from share of joint ventures cycling in. The net effect of other biennial shows cycling in and out is broadly neutral. The Sinopharm exhibitions acquired in a joint venture in China in 2005 are performing ahead of plan and new shows are to be launched in 2007.
 
The Reed Business Information magazine and information businesses saw continued underlying revenue growth in online services of over 20%, more than compensating for the 3% decline in print as the business migrates online. Overall RBI revenues were up 2% on an underlying basis. With 24% of revenues now from online services, the overall growth trajectory is encouraging. Adjusted operating profits were up 12% through continued action on costs as resources are rebalanced to the digital opportunity.
 
In the US, RBI underlying revenues were 2% lower. Online revenues are growing, particularly from advertising in community sites and new services, and are close to offsetting the print decline seen across most sectors. In the UK, RBI underlying revenues were up 6% reflecting the growth in online recruitment (up 39%) and online subscription services (up 17%). Online revenues now account for 41% of RBI UK revenues with growth and new launches set to increase this further. Print revenues benefited from innovative publishing and design. In continental Europe underlying revenues were up 3%, with again growth in new online services and some further recovery in advertising markets. Revenues in Asia grew 6%.
 
As part of a repositioning of the portfolio, the US manufacturing product news tabloid business was sold during the year as well as a number of other titles and North American manufacturing shows. In January 2007 RBI acquired BuyerZone, a fast growing online service for matching vendors and buyers in procurement tendering that can be leveraged across RBI’s categories.
 
Operating profit of Reed Business, including amortisation of acquired intangible assets and acquisition integration costs, increased by £25 million to £183 million. This principally reflects the increase in adjusted operating profit.
 
Critical Accounting Policies
 
 
The accounting policies of the Reed Elsevier combined businesses under IFRS are described in note 2 to the combined financial statements. The most critical accounting policies and estimates used in determining the financial condition and results of the combined businesses, and those requiring the most subjective or complex judgments, relate to the valuation of goodwill and acquired intangible assets, pensions, share based remuneration, financial instruments, taxation and deferred taxation. These critical accounting policies and estimates are discussed further below.
 
Revenue recognition policies, while an area of management focus, are generally straightforward in application as the timing of product or service delivery and customer acceptance for the various revenue types can be readily determined. Allowances for product returns are deducted from revenue based on historical return rates. Where sales consist of two or more independent components, revenue is recognised on each component as it is completed by performance, based on attribution of relative value. Sales commissions are recognised as an expense on sale, other than in respect of certain subscription products, where sales commissions may be expensed over the period of the subscription.
 
Pre-publication costs incurred in the creation of content prior to production and publication are deferred and expensed over their estimated useful lives based on sales profiles. Such costs typically comprise direct internal labour costs and externally commissioned editorial and other fees. Estimated useful lives generally do not exceed five years. Annual reviews are carried out to assess the recoverability of carrying amounts.
 
Development spend encompasses investment in new product and other initiatives, ranging from the building of new online delivery platforms, to launch costs of new services, to building new infrastructure applications. Launch costs and other operating expenses of new products and services are expensed as incurred. The costs of building product applications and infrastructure are capitalised as internally developed intangible assets and amortised over their estimated useful lives. Impairment reviews are carried out annually.
 
The Audit Committees of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc have reviewed the development and selection of critical accounting estimates, and the disclosure of critical accounting policies in this annual report.


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We target acquisitions and alliances that accelerate our strategic development and meet our financial criteria. We have spent £797 million on acquisitions in the last three years, including the £188 million acquisition in 2005 of MediMedia MAP, a leading medical publisher in France, Spain, Italy and the United States.
 
Publishing businesses generally have relatively modest requirements for physical property, plant and equipment. The principal assets acquired through acquisitions are intangible assets, such as market related assets (e.g. trademarks, imprints, brands), customer based assets (e.g. subscription bases, customer lists, customer relationships), editorial content, software and systems (e.g. application infrastructure, product delivery platforms, in-process research and development), contract based assets (e.g. other publishing rights, exhibition rights, supply contracts) and goodwill. The total cost of acquired intangible assets other than goodwill as at December 31, 2007 was £3.7 billion, on which accumulated amortisation of £1.9 billion had been charged. The total carrying value of acquired goodwill, which is not amortised, as at December 31, 2007 was £2.5 billion.
 
Reed Elsevier’s accounting policy is that, on acquisition of a subsidiary or business, the purchase consideration is allocated between the net tangible and intangible assets other than goodwill on a fair value basis, with any excess purchase consideration representing goodwill. The valuation of identifiable intangible assets represents the estimated economic value in use, using standard valuation methodologies, including as appropriate, discounted cash flow, relief from royalty and comparable market transactions. Acquired intangible assets with indefinite lives are not amortised, while those with definite lives are amortised systematically over their estimated useful lives, subject to annual impairment review. Capitalised goodwill is not amortised and is subject to annual impairment review. Appropriate amortisation periods are selected based on assessments of the longevity of the brands and imprints, the market positions of the acquired assets and the technological and competitive risks that they face. Certain intangible assets, more particularly in relation to acquired science and medical publishing businesses, have been determined to have indefinite lives. The longevity of these assets is evidenced by their long established and well regarded brands and imprints, and their characteristically stable market positions.
 
At each balance sheet date, or earlier if indicators are present, reviews are carried out of the carrying amounts of acquired intangible assets and goodwill to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, estimates are made of the cash flows of the cash generating unit to which the asset belongs. Intangible assets with an indefinite useful life are tested for impairment at least annually and whenever there is an indication that the asset may be impaired.
 
The recoverable amount is the higher of fair value, less costs to sell, and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a discount rate appropriate to the specific asset or cash generating unit. The pre-tax discount rates used are 10-12%, including a risk premium appropriate to the unit being reviewed. Estimated future cashflows are based on latest budgets and forecasts for the next five years, with a 3% long term growth rate assumed thereafter.
 
If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash generating unit is reduced to its recoverable amount. Impairment losses are recognised immediately in the income statement.
 
 
We operate a number of pension schemes around the world, the most significant of which are defined benefit plans. Pension costs are accounted for in accordance with IAS19 — Employee Benefits. Net pension obligations in respect of defined benefit schemes are included in the balance sheet at the present value of scheme liabilities, less the fair value of scheme assets. Where assets exceed liabilities, any net pension asset is limited to the extent that it is recoverable through reductions in future contributions. The expense of defined benefit pension schemes and other post-retirement benefits is determined using the projected unit credit method and charged to the income statement as an operating expense, based on actuarial assumptions reflecting market conditions at the beginning of the financial year. Actuarial gains and losses are recognised in full in the statement of recognised income and expense in the period in which they occur. For defined contribution schemes, the charge to income represents contributions payable.
 
Accounting for these pension schemes involves judgement about uncertain events, including the life expectancy of the members, salary and pension increases, inflation, the rate of return on scheme assets and the rate at which the future pension payments are discounted. We use estimates for all of these factors in determining the pension cost and obligations recorded in our combined financial statements. Although we believe the estimates are appropriate, differences arising from actual experience or future changes in assumptions may materially affect future pensions charges. In particular, a decline in the market value of pension scheme assets, absent any change in their estimated rate of return, and/or a reduction to discount rates would result in an increase to future pension costs. These estimates and the sensitivity to them of pension costs and obligations are described in further detail in note 8 to the combined financial statements.


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The share based remuneration charge is determined based on the fair value of the award at the date of grant, and is spread over the vesting period on a straight line basis, taking account of the number of shares that are expected to vest. The number of awards that will ultimately vest is dependent on the extent to which any performance conditions are met. These conditions are regularly monitored to ensure that appropriate assumptions are used.
 
The fair value of awards is determined at the date of grant by use of a binomial or Monte Carlo simulation model as appropriate, which require assumptions to be made regarding share price volatility, dividend yield, risk free rate of return and expected option lives. The number of awards that are expected to vest requires assumptions to be made regarding forfeiture rates and the extent to which performance conditions will be met. We use estimates for all of these factors in determining the share based remuneration charge and although we believe the estimates used are appropriate, differences arising from the number of awards that ultimately vest and changes to the assumptions used to determine the fair value of future grants may materially affect future charges to net income.
 
 
The main treasury risks faced by Reed Elsevier include interest rate risk and foreign currency risk. Reed Elsevier’s treasury policies to manage the exposures to fluctuations in interest rates and exchange rates, which are set out on pages 31 and 32, include the use of interest rate swaps, forward interest rate agreements, interest rate options and foreign exchange forward contracts. All such derivative financial instruments are required to be carried at fair value on the balance sheet. Changes in fair value are accounted for through the income statement or equity depending on the derivative’s designation and effectiveness as a hedging instrument.
 
Derivative instruments used by Reed Elsevier as fair value hedges are designated as qualifying hedge instruments. Fair value movements in these instruments are recorded in net income and are offset, to the extent that the hedge is effective, by fair value movements to the carrying value of the hedged item, which are also recognised in net income. In addition certain interest rate swaps and forward exchange rate contracts have been designated as qualifying cash flow hedges. Accordingly the fair value of these instruments is recorded in the balance sheet and to the extent that the hedges are effective, fair value movements are recorded in equity until the hedged transaction affects net income. Other than in relation to these interest rate swaps and forward exchange contracts, other derivative instruments, which act as economic hedges, have not been designated as qualifying hedge instruments and accordingly a charge or credit to net income is recorded for changes in the fair value of those instruments. The fair values of the instruments used are determined by reference to quoted market rates.
 
 
Reed Elsevier operates in over 100 locations worldwide and seeks to organise its affairs in a tax efficient manner, taking account of the jurisdictions in which it operates. A number of acquisitions and disposals have been made in recent years giving rise to complex tax issues requiring management to use its judgment to make various tax determinations. Although we are confident that tax returns have been appropriately compiled, there are risks that further tax may be payable on certain transactions or that the deductibility of certain expenditure for tax purposes may be disallowed. Reed Elsevier’s policy is to make provision for tax uncertainties where it is considered probable that tax payments may arise.
 
Deferred taxation is provided for nearly all differences between the balance sheet amounts of assets and liabilities and their tax bases. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that they are considered recoverable based on forecasts of available taxable profits in jurisdictions where such assets have arisen. This assessment of the recoverability of deferred tax assets is judgmental. Forecasts are made of taxable profits, taking into account any unresolved tax risks.
 
 
The combined financial statements are expressed in sterling and are therefore subject to the impact of movements in exchange rates on the translation of the financial information of individual businesses whose operational currencies are other than sterling. The principal exposures in relation to the results reported in sterling are to the US dollar and the euro, reflecting Reed Elsevier’s business exposure to the US and the Euro Zone, its most important markets outside the United Kingdom.
 
The currency profile of Reed Elsevier’s revenue, operating profit and profit before tax from continuing operations for 2007, taking account of the currencies of the interest on its borrowings and cash over that period, is set forth below.


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    US Dollars   Sterling   Euro   Other   Total
 
Revenue
    46%     19%     26%     9%     100%
Operating profit
    39%     20%     33%     8%     100%
Profit before tax
    34%     21%     34%     11%     100%
                               
 
Currency differences decreased Reed Elsevier’s revenue from continuing operations by £205 million in 2007 compared to 2006. Excluding amortisation of acquired intangible assets, currency differences would have decreased operating profits from continuing operations by £61 million in 2007 compared to 2006. Acquired intangible assets are predominantly denominated in US dollars and, after charging amortisation, currency differences decreased operating profits from continuing operations by £49 million in 2007 compared to 2006. Borrowings are predominantly denominated in US dollars and, after charging net finance costs, currency differences decreased profit before tax from continuing operations by £41 million in 2007 compared to 2006. The currency effects described above include the effect of the year on year movement in hedge rates in Elsevier journal subscriptions, the net benefit of which is lower in 2007 than in 2006 as the effect of the weaker US dollar is systematically incorporated within the three year rolling hedging programme.
 
To help protect Reed Elsevier PLC’s and Reed Elsevier NV’s shareholders’ equity from the effect of currency movements, Reed Elsevier will, if deemed appropriate, hedge foreign exchange translation exposures by borrowing in those currencies where significant translation exposure exists or by selling forward surplus cash flow into one of the shareholders’ currencies. Hedging of foreign exchange translation exposure is undertaken only by the regional centralised treasury departments and under policies agreed by the boards of Reed Elsevier PLC and Reed Elsevier NV. Borrowing in the operational currency of individual businesses provides a structural hedge for the assets in those markets and for the income realised from those assets. The currencies of Reed Elsevier’s borrowings, therefore, reflect two key objectives, namely to minimise funding costs and to hedge currencies where it has significant business exposure.
 
Individual businesses within Reed Elsevier Group plc and ERF are subject to foreign exchange transaction exposures caused by the effect of exchange rate movements on their revenue and operating costs, to the extent that such revenue and costs are not denominated in their operating currencies. Individual businesses are required to hedge their exposures at market rates with the centralised treasury department within ERF. Hedging of foreign exchange transaction exposure is the only hedging activity undertaken by the individual businesses. For further details see note 20 to the combined financial statements.
 
 
IFRS8 — Operating Segments (effective for the 2009 financial year). IFRS8 sets out requirements for disclosure of information about an entity’s operating segments, its products and services, the geographical areas in which it operates, and its major customers. IFRS8 replaces IAS14 — Segment Reporting. Adoption of this standard is not expected to change significantly the disclosure of information in respect of Reed Elsevier’s operating segments.
 
Amendment to IAS23 — Borrowing Costs (effective for the 2009 financial year). The amendment removes the option to immediately recognise as an expense borrowing costs relating to assets requiring a substantial period of time to get ready for use or sale and requires such costs to be capitalised. Adoption of this standard will change our accounting policy on borrowing costs but is not expected to significantly impact the presentation or disclosure of borrowing costs in the combined financial statements.
 
Amendment to IAS1 — Presentation of Financial Statements (effective for the 2009 financial year). The amendment introduces changes to the way in which movements in equity must be disclosed and requires an entity to separately disclose each component of other comprehensive income not recognised in profit or loss. The amendment also requires disclosure of the amount of income tax relating to each component of other comprehensive income as well as several other minor disclosure amendments. Other than described above this amendment is not expected to significantly change the presentation of the combined financial statements.
 
IFRIC14 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for the 2008 financial year). The interpretation clarifies how to assess the limit in IAS19 Employee Benefits on the amount of a defined benefit pension surplus that can be recognised as an asset. Adoption of this interpretation is not expected to significantly impact the measurement, presentation or disclosure of employee benefits in the combined financial statements.
 
Amendments to IFRS3 — Business Combinations (effective for the 2010 financial year). The amendments introduce changes that will require acquisition related costs (including professional fees previously capitalised) to be expensed and adjustments to contingent consideration to be recognised in income and will allow the full goodwill method to be used when accounting for non-controlling interests.
 
Amendments to IAS27 — Consolidated and Separate Financial Statements (effective for the 2010 financial year). The amendments introduce changes to the accounting for partial disposals of subsidiaries, associates and joint ventures. Adoption of these amendments is not expected to significantly impact the measurement, presentation or disclosure of future disposals.
 
Additionally, a number of interpretations have been issued which are not expected to have any significant impact on Reed Elsevier’s accounting policies and reporting.


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LIQUIDITY AND CAPITAL RESOURCES — REED ELSEVIER
 
 
Reed Elsevier’s net cash generated from continuing operations in 2007 amounted to £1,218 million (2006: £1,213 million; 2005: £1,081 million). Included in these net cash inflows are cash outflows relating to acquisition integration costs charged to operating profit of £19 million (2006: £22 million; 2005: £23 million). Reed Elsevier generates significant cash inflows as its principal businesses do not generally require major fixed or working capital investments. A substantial proportion of revenue is received through subscription and similar advanced receipts, principally for scientific and medical journals and exhibition fees. At December 31, 2007 subscriptions and other revenues in advance totalled £966 million (2006: £969 million; 2005: £979 million).
 
Reed Elsevier’s cash outflow on the purchase of property, plant and equipment in 2007 was £65 million (2006: £68 million; 2005: £77 million), while proceeds from the sale of property, plant and equipment amounted to £4 million (2006: £2 million; 2005: £7 million). The cash outflow on internally developed intangible assets in 2007 was £80 million (2006: £99 million; 2005: £96 million), principally relating to investment in software and systems development.
 
During 2007, Reed Elsevier paid a total of £319 million (2006: £171 million; 2005: £307 million) for acquisitions after taking account of net cash acquired of £11 million (2006: £7 million; 2005: £8 million) and of which £26 million (2006: £22 million; 2005: £14 million) is deferred to future years. In addition, £24 million (2006: £1 million; 2005: £15 million) was paid in respect of investments in joint ventures and £10 million (2006: £13 million; 2005: £9 million) of deferred payments were made in respect of acquisitions made in prior years. These payments were financed by net cash inflow from operating activities, available cash resources and commercial paper borrowings. Proceeds from sale of equity investments and businesses were £82 million (2006: £48 million; 2005: £21 million).
 
During 2007, Reed Elsevier paid dividends totalling £416 million to the shareholders of the parent companies (2006: £371 million; 2005: £336 million). In addition, £199 million was spent in buying back Reed Elsevier PLC and Reed Elsevier NV ordinary shares under the share repurchase programme announced in February 2006. A further £74 million (2006: £68 million; 2005: £27 million) was paid by the Reed Elsevier Group plc Employee Benefit Trust to purchase Reed Elsevier PLC and Reed Elsevier NV shares to meet commitments under the Reed Elsevier share option and conditional share schemes.
 
Net borrowings at December 31, 2007 were £492 million (2006: £2,314 million; 2005: £2,694 million), comprising gross borrowings of £3,129 million, less £170 million of gains on related derivative financial instruments and cash and cash equivalents of £2,467 million. The decrease of £1,822 million from the prior year end principally reflects the net cash proceeds received from the disposal of Harcourt Education businesses of £1,933 million, which were included in the special distribution of £2,013 million to shareholders of the parent companies in January 2008. The benefit from free cash flow and proceeds from share issuances, were offset by dividends paid, share repurchases and acquisition spend.
 
The directors of Reed Elsevier PLC and Reed Elsevier NV, having made appropriate enquiries, consider that adequate resources exist for the combined businesses to continue in operational existence for the foreseeable future.
 
 
The contractual obligations of Reed Elsevier relating to debt finance and operating leases at December 31, 2007 analysed by when payments are due, are summarised below.
 
                               
        Less than
          After
    Total   1 year   1-3 years   3-5 years   5 years
    (in millions)
 
Short term debt(1)(2)
    £753     £753     £—     £—     £—
Long term debt (including finance leases)(2)
    3,415     503     436     871     1,605
Operating leases
    698     104     176     143     275
                               
Total
    £4,866     £1,360     £612     £1,014     £1,880
                               
 
(1) Short term debt is supported by committed facilities and by centrally managed cash and cash equivalents, and primarily comprises commercial paper.
 
(2) Short and long term debt obligations comprise undiscounted principal and interest cash flows.
 
Information on retirement benefit obligations is set out in note 8 to the combined financial statements.


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At December 31, 2007 Reed Elsevier had outstanding guarantees in respect of property leases. The maximum amount guaranteed as at December 31, 2007 is £32 million for certain property leases up to 2016, of which an amount of £4 million is held as a provision. These guarantees, which would crystallise in the event that existing lessees default on payment of their lease commitments, are unrelated to the ongoing business.
 
Save as disclosed above and under contractual obligations, Reed Elsevier has no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on the combined businesses’ financial condition, results of operations, liquidity, capital expenditure or capital resources.
 
 
The boards of Reed Elsevier PLC and Reed Elsevier NV have requested that Reed Elsevier Group plc and Elsevier Reed Finance BV have due regard to the best interests of Reed Elsevier PLC and Reed Elsevier NV shareholders in the formulation of treasury policies.
 
Financial instruments are used to finance the Reed Elsevier businesses and to hedge transactions. Reed Elsevier’s businesses do not enter into speculative transactions. The main treasury risks faced by Reed Elsevier are liquidity risk, interest rate risk and foreign currency risk. The boards of the parent companies agree overall policy guidelines for managing each of these risks and the boards of Reed Elsevier Group plc and Elsevier Finance SA agree policies (in conformity with parent company guidelines) for their respective business and treasury centres. These policies are summarised below.
 
 
Reed Elsevier maintains a range of borrowing facilities and debt programmes to fund its requirements, at short notice and at competitive rates. The significance of Reed Elsevier Group plc’s US operations means that the majority of debt is denominated in US dollars and is raised in the US debt markets. A mixture of short term and long term debt is utilised and Reed Elsevier maintains a maturity profile to facilitate refinancing. Reed Elsevier’s policy is that no more than $1.0 billion of term debt issues should mature in any 12-month period. In addition, minimum levels of borrowings with maturities over three and five years are specified, depending on the level of net debt.
 
From time to time, Reed Elsevier may repurchase outstanding debt in the open market depending on market conditions. No such purchases were made in 2007.
 
During August and September 2007, following the turbulence in the credit markets, Reed Elsevier faced a moderate increase in the credit margin at which its commercial paper was priced together with increased uncertainty in investor demand. This pricing escalation and uncertainty was mitigated by drawing down under existing bank back up facilities with a fixed pricing structure for an amount of up to $670 million in aggregate. Commercial paper issuance continued throughout this period in moderately lower volumes at good terms. The back up facility borrowings were repaid in October and November.
 
At December 31, 2007 the fair value of cash and cash equivalents was £2,467 million, and given concerns over counterparty credit risk, these funds were all held on deposit with banks and of which £2,250 million was held with banks rated AA or higher by Moody’s, Standard and Poor’s, or Fitch.
 
After taking account of the maturity of committed bank facilities that back short term borrowing and after utilising available cash resources (excluding £1,933 million of cash received from the part disposal of Harcourt Education, which was included in the special distribution paid of £2,013 million to shareholders of the parent companies in January 2008) at December 31, 2007 no borrowings mature in the next two years, 27% of borrowings mature in the third year, 29% in the fourth and fifth years, 31% in the sixth to tenth years, and 13% beyond the tenth year.
 
At December 31, 2007 Reed Elsevier had access to $3.0 billion (2006: $3.0 billion) of committed bank facilities, of which $85 million was drawn. These facilities principally provide back up for short term debt as well as security of funding for future acquisition spend in the event that commercial paper markets are not available. All these committed facilities expire within two to three years (2006: two to three years).
 
The $4.1 billion acquisition of ChoicePoint Inc, announced by Reed Elsevier on February 21, 2008 will be financed initially from new bank facilities of up to $4.35 billion which three major banks have committed to underwrite and arrange. This initial funding will be refinanced later through the issuance of term debt.
 
 
Reed Elsevier’s interest rate exposure management policy is aimed at reducing the exposure of the combined businesses to changes in interest rates. The proportion of interest expense that is fixed on net debt is determined by reference to the level of interest cover. Reed Elsevier uses fixed rate term debt, interest rate swaps, forward rate agreements and a range of interest rate options to manage the exposure. Interest rate derivatives are used only to hedge an underlying risk and no net market positions are held.


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At December 31, 2007 after taking account of interest rate and currency derivatives, $3.3 billion of Reed Elsevier’s net debt was denominated in US dollars and net interest expense was fixed or capped on approximately $2.3 billion of forecast US dollar net debt for the next 12 months. This fixed or capped net debt reduces to approximately $1.3 billion by the end of the third year and reduces further thereafter with all but $0.1 billion of fixed rate term debt (not swapped back to floating rate) having matured by the end of 2012.
 
At December 31, 2007 fixed rate US dollar term debt (not swapped back to floating rate) amounted to $1.2 billion (2006: $1.3 billion) and had a weighted average life remaining of 8.1 years (2006: 8.3 years) and a weighted average interest coupon of 5.9% (2006: 6.0%). Interest rate derivatives in place at December 31, 2007 which fix or cap the interest cost on an additional $1.1 billion (2006: $1.5 billion) of variable rate US dollar debt, have a weighted average maturity of 1.1 years (2006: 1.4 years) and a weighted average interest rate of 4.8% (2006: 4.5%).
 
 
Translation exposures arise on the earnings and net assets of business operations in countries other than those of each parent company. These exposures are hedged, to a significant extent, by a policy of denominating borrowings in currencies where significant translation exposures exist, most notably US dollars.
 
Currency exposures on transactions denominated in a foreign currency are required to be hedged using forward contracts. In addition, recurring transactions and future investment exposures may be hedged, within defined limits, in advance of becoming contractual. The precise policy differs according to the specific circumstances of the individual businesses. Expected future net cash flows may be covered for sales expected for up to the next 12 months (50 months for Elsevier science and medical subscription businesses up to limits staggered by duration). Cover takes the form of foreign exchange forward contracts.
 
As at December 31, 2007 the amount of outstanding foreign exchange cover designated against future transactions was $1.4 billion (2006: $1.2 billion).
 
 
The capital structure is managed to support Reed Elsevier’s objective of maximising long-term shareholder value through ready access to debt and capital markets, cost effective borrowing and flexibility to fund business and acquisition opportunities whilst maintaining appropriate leverage to optimise the cost of capital.
 
Over the long term Reed Elsevier targets cash flow conversion (the proportion of adjusted operating profits converted into operating cash flow) and credit metrics to reflect this aim and that are consistent with a solid investment grade credit rating. Levels of net debt should not exceed those consistent with such a rating other than for relatively short periods of time, for instance following an acquisition. The principal metrics utilised are free cash flow (after interest, tax and dividends) to net debt, net debt to EBITDA (earnings before interest, taxation, depreciation and amortisation) and EBITDA to net interest. Cash flow conversion of 90% or higher and a net debt to EBITDA target, over the long term, in the range of 2x to 3x are consistent with the rating target.
 
Reed Elsevier’s use of cash reflects these objectives through a progressive dividend policy, an annual share repurchase programme and selective acquisitions, whilst retaining the balance sheet strength to maintain access to the most cost effective sources of borrowing and to support Reed Elsevier’s strategic ambition in evolving publishing and information markets.
 
The balance of long term debt, short term debt and committed bank facilities is managed to provide security of funding, taking into account the cash generation of the business and the uncertain size and timing of acquisition spend.
 
There were no changes in Reed Elsevier’s approach to capital management during the year.


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The following discussion is based on the financial statements of Reed Elsevier PLC and Reed Elsevier NV for the three years ended December 31, 2007. The results of Reed Elsevier PLC reflect its shareholders’ 52.9% economic interest in the Reed Elsevier combined businesses. The results of Reed Elsevier NV reflect its shareholders’ 50% economic interest in the Reed Elsevier combined businesses. The respective economic interests of the Reed Elsevier PLC and Reed Elsevier NV shareholders take account of Reed Elsevier PLC’s 5.8% interest in Reed Elsevier NV. Both parent companies equity account for their respective share in the Reed Elsevier combined businesses.
 
 
The earnings per share of Reed Elsevier PLC and Reed Elsevier NV were 49.7p and €1.10 respectively in 2007, compared to 25.6p and €0.59 in 2006. The earnings per share reflect the interests of the respective shareholders of Reed Elsevier PLC and Reed Elsevier NV in the results of the continuing and discontinued operations of the combined businesses.
 
Dividends to Reed Elsevier PLC and Reed Elsevier NV shareholders are, other than in special circumstances, equalised at the gross level, including the benefit of the UK attributable tax credit of 10% received by certain Reed Elsevier PLC shareholders. The exchange rate used for each dividend calculation — as defined in the Reed Elsevier merger agreement — is the spot euro/sterling exchange rate, averaged over a period of five business days commencing with the tenth business day before the announcement of the proposed dividend.
 
Dividends declared in the year, in amounts per ordinary share, comprise: a 2006 final dividend of 11.8p and 2007 interim dividend of 4.5p giving a total of 16.3p (2006: 14.8p) for Reed Elsevier PLC; and a 2006 final dividend of €0.304 and 2007 interim dividend of €0.114 giving a total of €0.418 (2006: €0.369) for Reed Elsevier NV.
 
The board of Reed Elsevier PLC has proposed a 2007 final dividend of 13.6p, giving a total dividend of 18.1p in respect of the financial year, up 14% on 2006. The boards of Reed Elsevier NV, in accordance with the dividend equalisation arrangements, have proposed a 2007 final dividend of €0.311, which results in a total dividend of €0.425 in respect of the financial year, up 5% on 2006. The difference in dividend growth rates reflects the movement in the euro:sterling exchange rate between dividend announcement dates.
 
Shares repurchased in the year under the annual share repurchase plan announced in February 2006 totalled 15.2 million ordinary shares of Reed Elsevier PLC and 11.9 million ordinary shares of Reed Elsevier NV. Taking into account the associated financing cost, these share repurchases are estimated to have added 0.2% to earnings per share in 2007.
 
On January 18, 2008 a special distribution was paid to shareholders in the equalisation ration from the estimated net proceeds of the sale of the Harcourt Education division. The distribution was 82.0p per share for Reed Elsevier PLC and €1.767 per share for Reed Elsevier NV and amounted to £2,013 million in aggregate.
 
The special distribution was accompanied by a consolidation of the ordinary share capital of Reed Elsevier PLC and Reed Elsevier NV on the basis of 58 new ordinary shares for every 67 existing ordinary shares. This represents a 13.4% consolidation of ordinary share capital, being the aggregate special distribution expressed as a percentage of the combined market capitalisation of Reed Elsevier PLC and Reed Elsevier NV (excluding the 5.8% indirect equity interest in Reed Elsevier NV held by Reed Elsevier PLC) as at the date of the announcement of the special distribution.
 
 
The earnings per share of Reed Elsevier PLC and Reed Elsevier NV were 25.6p and €0.59 respectively in 2006, compared to 18.6p and €0.43 in 2005. The earnings per share reflect the interests of the respective shareholders of Reed Elsevier PLC and Reed Elsevier NV in the results of the continuing and discontinued operations of the combined businesses.
 
Dividends to Reed Elsevier PLC and Reed Elsevier NV shareholders are, other than in special circumstances, equalised at the gross level, including the benefit of the UK attributable tax credit of 10% received by certain Reed Elsevier PLC shareholders. The exchange rate used for each dividend calculation — as defined in the Reed Elsevier merger agreement — is the spot euro/sterling exchange rate, averaged over a period of five business days commencing with the tenth business day before the announcement of the proposed dividend.
 
Dividends declared in the year, in amounts per ordinary share, comprise: a 2005 final dividend of 10.7p and 2006 interim dividend of 4.1p giving a total of 14.8p (2005: 13.3p) for Reed Elsevier PLC; and a 2005 final dividend of €0.267 and 2006 interim dividend of €0.102 giving a total of €0.369 (2005: €0.332) for Reed Elsevier NV.
 
The board of Reed Elsevier PLC proposed a 2006 final dividend of 11.8p, giving a total dividend of 15.9p in respect of the financial year, up 10% on 2005. The boards of Reed Elsevier NV, in accordance with the dividend equalisation arrangements, proposed a 2006 final dividend of €0.304, which results in a total dividend of €0.406 in respect of the financial year, up 13% on 2005. The difference in dividend growth rates reflects the movement in the euro:sterling exchange rate between dividend announcement dates.
 
Shares repurchased in the year under the annual share repurchase plan announced in February 2006 totalled 20.6 million ordinary shares of Reed Elsevier PLC and 13.4 million ordinary shares of Reed Elsevier NV. Taking into account the associated financing cost, these share repurchases are estimated to have added 0.5% to earnings per share in 2006.


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Trends, uncertainties and events which can affect the revenue, operating profit and liquidity and capital resources of the Reed Elsevier combined businesses include the usage, penetration and customer renewal of our print and electronic products, the migration of print and CD products to online services, investment in new products and services, cost control and the impact of our cost reduction programmes on operational efficiency, the levels of academic library funding, the impact of economic conditions on corporate budgets and the level of advertising demand and regulatory and legislative developments.
 
Trends, uncertainties and events which could have a material impact on Reed Elsevier’s revenue, operating profit and liquidity and capital resources are discussed in further detail in “Item 3: Key Information — Risk Factors”; “Item 4: Information on Reed Elsevier”; and “Item 5: Operating and Financial Review and Prospects — Operating Results Reed Elsevier — Liquidity and Capital Resources — Reed Elsevier; Operating Results — Reed Elsevier PLC and Reed Elsevier NV”.


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The directors of each of Reed Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc and Elsevier Reed Finance BV at February 20, 2008 were:
 
                 
            Reed Elsevier
  Elsevier Reed
Name (Age)
  Reed Elsevier PLC   Reed Elsevier NV   Group plc   Finance BV
 
Gerard van de Aast (50)
  Executive Director   Member of the   Executive Director  
        Executive Board        
Mark Armour (53)
  Executive Director   Member of the   Executive Director and   Member of the
    and Chief Financial   Executive Board and   Chief Financial Officer   Supervisory Board
    Officer   Chief Financial        
        Officer        
Jacques Billy (37)
        Member of the
Management Board
Dien de Boer-Kruyt (63)
    Member of the     Member of the
        Supervisory Board(4)       Supervisory Board
Rudolf van den Brink (60)
        Chairman of the
Supervisory Board
Sir Crispin Davis (58)
  Executive Director   Chairman of the   Executive Director and  
    and Chief Executive   Executive Board and   Chief Executive Officer    
    Officer(3)   Chief Executive        
        Officer(3)        
Mark Elliott (58)
  Non-executive   Member of the   Non-executive  
    Director(3)(4)   Supervisory   Director(2)    
        Board(3)(4)        
Erik Engstrom (44)
  Executive Director   Member of the   Executive Director  
        Executive Board        
Jan Hommen (64)
  Non-executive   Chairman of the   Non-executive  
    Chairman(3)(4)   Supervisory   Chairman(2)    
        Board(3)(4)        
Lisa Hook (50)
  Non-executive Director(1)(4)   Member of the Supervisory
Board(1)(4)
  Non-executive Director(1)  
Gerben de Jong (63)
        Member of the
Management Board
Robert Polet (52)
  Non-executive   Member of the   Non-executive  
    Director(4)   Supervisory   Director(2)    
        Board(4)        
Andrew Prozes (62)
  Executive Director   Member of the   Executive Director  
        Executive Board        
David Reid (61)
  Non-executive   Member of the   Non-executive  
    Director(1)(3)(4)(5)   Supervisory   Director(1)(5)    
        Board(1)(3)(4)(5)        
Lord Sharman (64)
  Non-executive   Member of the   Non-executive  
    Director(1)(3)(4)   Supervisory   Director(1)    
        Board(1)(3)(4)        
Rolf Stomberg (67)
  Non-executive   Member of the   Non-executive  
    Director(3)(4)   Supervisory   Director(2)    
        Board(3)(4)        
 
 
(1) Member of the Audit Committees of the boards of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc.
 
(2) Member of the Remuneration Committee of the board of Reed Elsevier Group plc.
 
(3) Member of the joint Nominations Committee of the boards of Reed Elsevier PLC and Reed Elsevier NV.
 
(4) Member of the joint Corporate Governance Committee of the boards of Reed Elsevier PLC and Reed Elsevier NV.
 
(5) Senior independent non-executive director, as defined by The Combined Code: Principles of Good Governance and Code of Best Practice in the United Kingdom.
 
A person described as a non-executive director of Reed Elsevier PLC or Reed Elsevier Group plc or a member of the Supervisory Board of Reed Elsevier NV is a director not employed by such company in an executive capacity.


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Gerard van de Aast is Chief Executive Officer of the Reed Business division. Appointed a director of Reed Elsevier Group plc and Reed Elsevier PLC in December 2000 and director of Reed Elsevier NV in April 2001. Member of the Supervisory Board of Océ NV. Prior to joining Reed Elsevier was Vice President and General Manager of Compaq’s Enterprise business in Europe, Middle East and Africa.
 
Mark Armour was appointed Chief Financial Officer of Reed Elsevier Group plc and Reed Elsevier PLC in 1996, and of Reed Elsevier NV in April 1999. Appointed a member of the Supervisory Board of Elsevier Reed Finance BV in December 1998. Prior to joining Reed Elsevier as Deputy Chief Financial Officer in 1995, was a partner in Price Waterhouse.
 
Jacques Billy was appointed a member of the Management Board of Elsevier Reed Finance BV in February 2002. He is Managing Director of Elsevier Finance SA, having joined that company as Finance Manager in 1999.
 
Dien de Boer-Kruyt was appointed a member of the Supervisory Board of Reed Elsevier NV and of Elsevier Reed Finance BV in 2000. A member of the Supervisory Boards of Sara Lee International (a subsidiary of Sara Lee Corporation), Imtech NV and Allianz Nederland Group NV. Member of the Supervisory Board of the National Registry of non-executive directors and director of the leadership programmes Call and Ravel, for leaders in business, government and universities.
 
Rudolf van den Brink was appointed Chairman of the Supervisory Board of Elsevier Reed Finance BV in January 2006. A former member of the Managing Board of ABN AMRO Bank NV and of the Advisory Board of Deloitte & Touche. A member of the supervisory boards of Akzo Nobel NV, Van der Moolen Holding NV and Samas-Groep NV.
 
Sir Crispin Davis was appointed Chief Executive Officer of Reed Elsevier Group plc, Reed Elsevier PLC and Reed Elsevier NV in September 1999. Knighted in 2004 for his services to the information industry. Non-executive director of GlaxoSmithKline plc. Prior to joining Reed Elsevier, was Chief Executive Officer of Aegis Group plc. From 1990 to 1993 was a member of the main board at Guinness plc, and Group Managing Director of United Distillers. Spent over 20 years at Procter and Gamble where he held senior positions in the UK and Germany, before heading up the North American Food Business.
 
Mark Elliott was appointed a non-executive director of Reed Elsevier Group plc, Reed Elsevier PLC and a member of the Supervisory Board of Reed Elsevier NV in April 2003. General Manager IBM Global Solutions. Held a number of positions with IBM, including Managing Director of IBM Europe, Middle East and Africa. Served on the board of IBAX, a hospital software company jointly owned by IBM and Baxter Healthcare, and as chairman of the Dean’s Advisory council of the Kelly School of Business, Indiana University. Non-executive director of Group 4 Securicor plc.
 
Erik Engstrom is Chief Executive Officer of the Elsevier division. He joined Reed Elsevier in August 2004, when he was also appointed a director of Reed Elsevier Group plc and Reed Elsevier PLC. Appointed to the board of Reed Elsevier NV in April 2005. Prior to joining Reed Elsevier, was a partner at General Atlantic Partners. Before that was president and chief operating officer of Random House. Began his career as a consultant with McKinsey. Served as a non-executive director of Eniro AB.
 
Jan Hommen was appointed non-executive Chairman of Reed Elsevier PLC and Reed Elsevier Group plc, and Chairman of the Supervisory Board of Reed Elsevier NV in April 2005. Chairman of the Supervisory Board of ING Group NV, TNT NV, Academisch Ziekenhuis Maastricht and TiasNimbas Business School of Tilburg University. A member of the Supervisory Board of and Campina BV. Was vice-chairman of the board of management and chief financial officer of Royal Philips Electronics NV until his retirement in 2005.
 
Lisa Hook was appointed a non-executive director of Reed Elsevier Group plc, Reed Elsevier PLC and a member of the Supervisory Board of Reed Elsevier NV in April 2006. President and Chief Operating Officer of NeuStar Inc. Before that was President and Chief Executive Officer of Sun Rocket, Inc. Was President of AOL Broadband, Premium and Developer Services. Prior to joining AOL, was a founding partner at Brera Capital Partners LLC. Previously was Chief Operating Officer of Time Warner Telecom. Has served as Senior Advisor to the Federal Communications Commission Chairman and as Senior Counsel to Viacom Cable.
 
Gerben de Jong was appointed a member of the Management Board of Elsevier Reed Finance BV in December 2007. Previously held senior finance positions in Royal Philips Electronics NV Group.
 
Robert Polet was appointed a non-executive director of Reed Elsevier Group plc, Reed Elsevier PLC and a member of the Supervisory Board of Reed Elsevier NV in April 2007. President and Chief Executive Officer of Gucci Group. Before that spent 26 years at Unilever working in a variety of marketing and senior executive positions throughout the world including President of Unilever’s Worldwide Ice Cream and Frozen Foods division.
 
Andrew Prozes is Chief Executive Officer of the LexisNexis division. Appointed a director of Reed Elsevier Group plc and Reed Elsevier PLC in July 2000 and director of Reed Elsevier NV in April 2001. Non-executive director of Cott Corporation. Prior to joining Reed Elsevier was an Executive Vice President with the West Group, part of the Thomson Corporation, and prior to that was Group President of Southam Inc.
 
David Reid was appointed a non-executive director of Reed Elsevier Group plc, Reed Elsevier PLC and a member of the Supervisory Board of Reed Elsevier NV in April 2003. Non-executive Chairman of Tesco plc, having previously been executive deputy chairman until December 2003, and finance director from 1985 to 1997. Chairman of Kwik-Fit and previously a non-executive director of De Vere plc, Legal & General plc and Westbury plc.


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Lord Sharman was appointed a non-executive director of Reed Elsevier Group plc and Reed Elsevier PLC in January 2002, and a member of the Supervisory Board of Reed Elsevier NV in April 2002. Non-executive chairman of Aviva plc and Aegis Group plc, and a non-executive director of BG Group. Member of the House of Lords since 1999. Joined KPMG in 1966 where he was elected UK Senior Partner in 1994 and also joined both the International and Executive Committees of KPMG. Between 1997 and 1999 he was Chairman of KPMG Worldwide.
 
Rolf Stomberg was appointed a non-executive director of Reed Elsevier Group plc and Reed Elsevier PLC in January 1999 and a member of the Supervisory Board of Reed Elsevier NV in April 1999. Chairman of the Supervisory Board of Lanxess AG and Francotype AG. Non-executive director of Smith & Nephew plc, AOA Severstal, TNT NV, Deutsche BP AG, HOYER GmbH and Biesterfeld AG. Formerly a director of The British Petroleum Company plc where he spent 27 years, latterly as Chief Executive of BP Oil International.
 
 
The executive officers of Reed Elsevier Group plc, other than directors, at February 20, 2008 were:
 
Nick Baker:  Chief Strategy Officer. A member of the Reed Elsevier management committee. He has been with Reed Elsevier since 1986 and within Corporate Strategy since 1997.
 
Stephen Cowden:  General Counsel and Company Secretary of Reed Elsevier PLC and Reed Elsevier Group plc. A UK lawyer. Joined Reed Elsevier in 2000 as General Counsel, and was appointed Company Secretary of Reed Elsevier Group plc and Reed Elsevier PLC in 2001. Prior to joining Reed Elsevier, was Group Company Secretary of Glaxo Wellcome plc.
 
Erik Ekker:  Legal Director Continental Europe and Company Secretary Reed Elsevier NV and Company Secretary of Elsevier Reed Finance BV. A Dutch lawyer. Has been Legal Director (Continental Europe) of Reed Elsevier Group plc since 1993. Joined Reed Elsevier NV in 1977 as Legal Counsel.
 
Ian Fraser:  Group HR Director. A member of the Reed Elsevier management committee. Joined Reed Elsevier in 2005. Prior to joining Reed Elsevier, he was Human Resources Director at BHP Billiton plc and, before that, held senior positions in human resources at Charter plc and Woolworths plc.
 
Mark Popolano:  Chief Technology Officer. A member of the Reed Elsevier management committee. Joined Reed Elsevier in March 2007. Previously was Corporate Senior Vice President and Global Chief Information Officer of AIG Inc.
 
 
 
The Remuneration Committee (“The Committee”) is responsible for:
 
  •   setting the remuneration in all its forms, and the terms of the service contracts and all other terms and conditions of employment of directors of Reed Elsevier Group plc appointed to any executive office of employment;
 
  •   advising the Chief Executive Officer on the remuneration of members of the Management Committee (other than executive directors) of Reed Elsevier Group plc and of the Company Secretary;
 
  •   providing advice to the Chief Executive Officer, as required, on major policy issues affecting the remuneration of executives at a senior level below the board; and
 
  •   establishing and amending the rules of all share based incentive plans for approval by shareholders.
 
A copy of the terms of reference of the Committee can be found on the Reed Elsevier website www.reedelsevier.com. The information on our website is not incorporated by reference into this report.
 
Throughout 2007, the Committee consisted of independent non-executive directors as defined by the Combined Code and the Chairman of Reed Elsevier. On July 4, 2007 Mark Elliott took over from Rolf Stomberg as Chairman of the Committee. The other members of the Committee are Jan Hommen and Robert Polet. The Company Secretary, Steve Cowden, also attends the meetings in his capacity as secretary to the Committee. At the invitation of the Committee Chairman, the Chief Executive Officer attends the meetings of the Committee except when his own remuneration is under consideration.
 
Towers Perrin acted as advisors to the Committee throughout 2007 and provided market data and data analysis. During the year, the Committee also received advice from Kepler Associates relating to the review of the remuneration policy and the benchmarking approach.


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Executive directors
 
 
The context for Reed Elsevier’s remuneration policy and practices is set by the needs of a group of global business divisions, each of which operates internationally by line of business. Furthermore, Reed Elsevier’s market listings in London and Amsterdam combined with the majority of its employees being based in the US provides a particular set of challenges in the design and operation of remuneration policy.
 
 
Reed Elsevier’s guiding remuneration philosophy for senior executives is based on the following precepts:
 
  •   Performance-related compensation; this underpins Reed Elsevier’s demanding performance standards.
 
  •   Creation of shareholder value; this is at the heart of our corporate strategy and is vital to meeting our investors’ goals.
 
  •   Competitive remuneration opportunity; this helps Reed Elsevier attract and retain the best executive talent from anywhere in the world.
 
  •   Balanced mix of remuneration; this includes salary, incentive opportunities and benefits.
 
  •   Aligning the interests of executive directors with shareholders; this is the foundation for remuneration decisions.
 
 
In line with this guiding philosophy our remuneration policy is described below.
 
  •   Reed Elsevier aims to provide a total remuneration package that is able to attract and retain the best executive talent from anywhere in the world, at an appropriate level of cost. 
 
  •   The Committee considers environmental, social and governance matters in making its decisions on remuneration policy, practice and setting performance targets.
 
  •   Total remuneration of senior executives will be competitive with that of executives in similar positions in comparable companies, including global sector peers and companies of similar scale and international complexity.
 
  •   Competitiveness will be assessed in terms of total remuneration.
 
  •   The intention is to provide total remuneration that reflects sustained individual and business performance; i.e. median performance will be rewarded by total remuneration that is positioned around the median of relevant market data and upper quartile performance by upper quartile total remuneration.
 
 
The Committee believes that the main driver of long term shareholder value is sustained growth in profitability. The primary measure of profitability that is used throughout the business is growth in adjusted earnings per share at constant currencies (“Adjusted EPS”). This performance measure has therefore been adopted as the key driver of performance in our longer term incentives.
 
In our Annual Incentive Plan, we reward operational excellence by focusing on the financial measures of revenue growth, profitability and cash generation. In addition, a significant portion of the annual bonus is dependent on performance against a set of key business objectives that focus on the delivery of our strategic priorities. Performance against these strategic priorities creates the essential platform for growth in longer term profitability.
 
In 2006, we introduced a further performance measure into our Long Term Incentive Plan of total shareholder return relative to a focused industry peer group. This measure is designed to reflect more directly the returns that we deliver to shareholders via a combination of share price appreciation and dividends. Together with significant shareholding requirements as a condition of vesting, this performance measure increases alignment of interest between our senior executives and our shareholders.
 
 
Around two thirds of each executive director’s remuneration package is linked to performance. The fixed pay element is 31% (salary 19%; pension and other benefits 12%) and the variable pay element is 69% (long term incentives 52%; annual incentives 17%).


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During the year, the Committee undertook a review of the benchmarking methodology applied in assessing the competitiveness of the executive directors’ total remuneration. The market competitiveness of total remuneration (i.e. salary, short and long term incentives and benefits) will be assessed against a range of relevant comparator groups as follows:
 
  •   Global peers in the media sector.
 
  •   UK listed companies of similar size and international scope (excluding those in the financial services sector).
 
  •   US listed companies of similar size and international scope (excluding those in the financial services sector).
 
  •   Companies listed in the Netherlands of similar size and international scope.
 
The competitiveness of our remuneration packages is assessed by the Committee as part of the annual review cycle for pay and performance, in line with the process set out below.
 
  •   First, the overall competitiveness of the remuneration packages is assessed in terms of total remuneration.
 
  •   The Committee then considers market data and benchmarks for the different elements of the package including salary, total annual cash and total remuneration.
 
  •   The appropriate positioning of an individual’s total remuneration against the market is determined based on the Committee’s judgement of individual performance and potential.
 
  •   The aim is to target total remuneration normally between the median and upper quartile of the relevant market for median / upper quartile performers respectively.
 
  •   If it is determined that a competitive gap exists in total remuneration terms, the Committee believes that this should be addressed via a review of performance linked compensation elements in the first instance.
 
  •   Benefits, including medical and retirement benefits, are positioned to reflect local country practice.
 
 
The main elements of the reward package for executive directors are summarised below:
 
             
Element   Purpose   Performance period   Performance measure
 
Salary
  Positions the role and individual within the relevant market for executive talent   Not applicable   Reflects the sustained value of the individual in terms of skills, experience and contribution compared with the market
             
Annual Incentive Plan (AIP)  
Provides focus on the delivery of the financial targets set out in the annual budget

Motivates the achievement of strategic annual goals and milestones (“KPOs”) that create a platform for future performance
  One year   Award subject to the achievement of annual targets for:
• Revenue — 30%
• Profit — 30%
• Cash Flow Conversion Rate — 10%
• Key Performance Objectives — 30%
             
Bonus Investment Plan (BIP)  
Encourages personal investment in and ongoing holding of Reed Elsevier shares to develop greater alignment with shareholders

Supports the retention of executives
  Three years  
Matching shares vest after three years subject to continued employment and the achievement of an Adjusted EPS growth hurdle

There is no retesting of the performance condition


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Element   Purpose   Performance period   Performance measure
 
Executive Share Option Scheme (ESOS)   Provides focus on longer term share price growth

Rewards sustained delivery and quality of earnings growth
  Three years  
On grant — Adjusted EPS growth and individual performance over three-year period prior to grant

On vesting — Adjusted EPS growth over the three-year performance period post grant

There is no retesting of the performance condition
             
Long Term Incentive Plan (LTIP)   Drives value creation via longer term earnings, share price and dividend growth

Motivates and rewards the delivery of a total return to shareholders
  Three years   Adjusted EPS growth over the three-year performance period

Relative Total Shareholder Return (“TSR”) against a selected group of comparator companies over the three-year performance period

There is no retesting of the performance conditions
             
Retirement benefits
  Positioned to ensure broad competitiveness with local country practice   Not applicable   Specific to individual
 
 
Salary reflects the role and the sustained value of the individual in terms of skills, experience and contribution compared with the relevant market. Salaries are reviewed annually in the context of the competitiveness of total remuneration. Any increases typically take effect on January 1.
 
During 2007 Erik Engstrom’s total remuneration package was altered to parallel UK remuneration arrangements. His base salary was translated from US dollars to Sterling using a conversion rate of £1.00: $1.90 which reflected the average £:$ exchange rate during his period of employment.
 
Following the successful sale of Harcourt Education, Patrick Tierney retired on January 30, 2008. His salary was not increased from January 1, 2008.
 
The annual salary increases made to executive directors with effect from January 1, 2008 were in a range of 4-6% with an average of 4.4% for those executive directors who received an increase. This was slightly below UK and US norms.
 
It is important to emphasise that Reed Elsevier uses the same factors: relevant pay market, skills, experience and contribution, to determine the levels of increase across all employee populations globally. However, Reed Elsevier operates across many diverse countries in terms of their remuneration structures and practices. The levels of pay increase awarded to different employee groups in different geographies reflect this diversity and range of practices.
 
 
The Annual Incentive Plan provides focus on the delivery of the financial targets set out in the annual budget. It further motivates the achievement of strategic annual goals and milestones that create a platform for future performance.
 
 
For 2008, directors have a target bonus opportunity of 100% of salary (for 2007 this was 90%). The target bonus opportunity for the financial measures is payable for the achievement of highly stretching financial targets, set in line with the

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annual budget for the relevant business. The 100% target bonus opportunity is weighted as follows across the performance measures set out below:
 
         
— Revenue
    30 %
— Profit*
    30 %
— Cash Flow Conversion Rate
    10 %
— Key Performance Objectives (KPOs)
    30 %
 
*The Profit measure for the CEO and CFO is adjusted profit after tax for the Reed Elsevier combined businesses. The profit measure for Divisional CEOs is the adjusted operating profit for their respective division.
 
The four elements are measured separately, such that there could be a payout on one element and not on others. The KPOs are individual to each executive director. Each director is typically set around six KPOs to reflect critical business priorities for which they are accountable. Against each objective, a number of measurable ‘milestone targets’ are set for the year. All financial targets and KPOs are approved by the Committee at the beginning of the year.
 
For 2008, payment against each financial performance measure will only commence if a threshold of 97.5% of the target is achieved (unchanged from 2007). A maximum bonus of 150% of salary can be earned (unchanged from 2007) for substantial out-performance against the demanding annual budget targets and for the achievement of agreed KPOs to an exceptional standard.
 
 
The annual bonuses paid to directors were based on performance against targets set for revenue growth, profit growth, the achievement of the targeted cash flow conversion rate, and performance against key strategic objectives. The Harcourt Education sale was treated as a non-recurring item and its positive impact was excluded from the financial results for the purposes of the AIP.
 
The 2007 financial results saw 6% revenue growth (at constant currencies), underlying margin improvement of 100 basis points, and adjusted operating profits up 10% at constant currencies. The quality of earnings was underpinned by cash flow with 97% of adjusted operating profits converting into cash and higher returns on invested capital. Overall, earnings at constant currency grew 12%, Reed Elsevier’s highest growth for ten years. There was above market revenue growth in Elsevier, LexisNexis and Reed Business and margin progress in all three businesses.
 
In addition the directors were generally assessed as having delivered well against their KPOs with some exceptional performances noted. Individual KPOs were largely focused against execution and delivery of Reed Elsevier’s key strategic priorities: development of workflow solutions, improving cost efficiency, and strengthening and refocusing of the Reed Elsevier portfolio. Overall, this resulted in bonus payments above target.
 
 
The Bonus Investment Plan encourages personal investment and ongoing shareholding in Reed Elsevier shares to develop greater alignment with shareholders.
 
 
Executive directors and other designated key senior executives may invest up to half of their cash bonus received under the AIP in shares of Reed Elsevier PLC or Reed Elsevier NV. Subject to continued employment and their retaining these investment shares during a three-year performance period, participants will be awarded an equivalent number of matching shares.
 
The vesting of the matching shares is subject to the achievement of a performance condition. For the 2008 awards this has been increased to at least 8% (from 6% in 2007) per annum compound growth in the average of Reed Elsevier PLC and Reed Elsevier NV Adjusted EPS over the three-year performance period. In the event of a change of control, the vesting of the matching shares is subject to the discretion of the Committee.
 
 
The Executive Share Option Scheme is designed to provide focus on longer term share price growth and reward the sustained delivery and quality of earnings growth.
 
 
Annual grants of options are made over shares in Reed Elsevier PLC and Reed Elsevier NV at the market price on the date of grant. The maximum size of the total grant to all participants, is determined by the compound annual growth in Adjusted EPS


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over the three years prior to grant. The Target Grant Pool for all participants is defined with reference to share usage during the base year as follows:
 
         
Adjusted EPS Growth
   
per annum
  Target Grant Pool
 
Less than 8%
    50 %
8% or more
    75 %
10% or more
    100 %
12% or more
    125 %
14% or more
    150 %
 
ESOS options granted in 2005, 2006 and 2007 were subject to a pre-grant performance condition relating to the target grant pool of 6% to 12% Adjusted EPS growth per annum respectively.
 
ESOS grants made to executive directors are subject to an annual individual maximum of three times salary. The awards to individual directors are subject to the following three performance criteria:
 
         
Test 1
  On grant   The size of the Target Grant Pool determined as above.
Test 2
  On grant   Individual performance over the three-year period prior to grant.
Test 3
  On vesting   Compound Adjusted EPS growth during the three years following grant of at least 8% per annum (increased from 6% p.a.). There is no retesting of the performance condition.
 
ESOS options granted in 2005, 2006 and 2007 are subject to a post-grant performance hurdle of 6% per annum compound Adjusted EPS growth over three years.
 
Options are exercisable (except for defined categories of approved leavers) between three and ten years from the date of grant. In the event of a change of control, the performance test applied under the ESOS for executive directors will be based on an assessment by the Committee of progress against the targets at the time the change of control occurs.
 
 
The Long Term Incentive rewards the creation of value via the delivery of sustained earnings growth and superior returns for shareholders.
 
 
The LTIP works as follows:
 
  •   Award of a target number of shares
 
  •   Performance is measured over a three-year performance period
 
  •   Vesting depends on compound growth in adjusted EPS at constant currencies
 
  •   Relative TSR performance can increase or decrease the target award
 
  •   Final pay out in shares is determined by performance achieved
 
Executive directors are eligible to receive an annual award of performance shares with a target value of around 135% of salary.
 
The vesting of the award is subject to performance against two measures: Adjusted EPS growth and relative TSR performance over the same three-year performance period.
 
 
The combination of the two performance measures is shown in the following table, which sets out the potential payment as a percentage of the initial target award:
 
LTIP Performance Schedule
 
                                 
    TSR Ranking  
                62.5th
    Upper quartile
 
Adjusted EPS Growth (constant currencies) p.a.
  Below median     Median     percentile     and above  
Below 10%
    0 %     0 %     0 %     0 %
10%
    28 %     35 %     42 %     49 %
12%
    80 %     100 %     120 %     140 %
14% and above
    108 %     135 %     162 %     189 %


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The EPS performance condition for LTIP awards granted in 2006 and 2007 ranges from 8% to 12% p.a. Adjusted EPS growth.
 
The Committee considers the above performance conditions to be tougher than normal UK practice because the TSR element can enhance the reward to participants if, but only if, the Adjusted EPS test has first been achieved, as explained below.
 
     
EPS measure
  The target award may be increased or decreased by relative TSR performance over three years
     
No payout is made under the LTIP unless Reed Elsevier achieves a compound annual level of Adjusted EPS growth of at least 10% per annum. This is irrespective of the associated TSR performance.   TSR is measured against a group of global media peers.
• If TSR performance is below median, this will reduce the target award.
• The maximum uplift to the target award will be applied if TSR performance places Reed Elsevier in the upper quartile of the comparator group.
     
Maximum vesting (under the EPS component) is achieved for compound growth of 14% per annum or higher.   For awards made in 2007, the comparator group comprised: The Thomson Corporation, United Business Media, McGraw Hill, Fair Isaac, Reuters Group, John Wiley & Sons, Pearson, DMGT, Wolters Kluwer, Lagardere, ChoicePoint, Dun & Bradstreet, EMAP, WPP, Informa, Taylor Nelson, Dow Jones.
 
The Committee has full discretion to reduce or cancel awards granted to participants based on its assessment as to whether the EPS and TSR performance fairly reflects the progress of the business having regard to underlying revenue growth, cash generation, return on capital and any significant changes in currency and inflation, as well as individual performance.
 
Notional dividends accrue on the award during the vesting period (i.e. to the extent that the underlying shares vest, notional dividends are paid out as a cash bonus at the end of the three-year performance period).
 
For the purposes of determining Reed Elsevier’s TSR performance over the performance period, the averaging period applied is six months prior to the start of the financial year in which the award is made and the final six months of the third financial year of the performance period. The TSR of Reed Elsevier and each of the comparator companies will be calculated in the currency of its primary listing, which the Committee considers to be the fairest test of management’s relative performance. Reed Elsevier’s TSR will be taken as a simple average of the TSR of Reed Elsevier PLC and Reed Elsevier NV.
 
For awards made in 2006, VNU was also a member of the peer group. It has been removed for awards made in 2007 as it has become a private company.
 
In addition to achieving appropriate levels of performance against the two measures, the ultimate vesting of the LTIP award is subject to the executive meeting a shareholding requirement. In the event of a change of control, the performance test applied under the LTIP will be based on an assessment by the Committee of progress against the EPS and TSR targets at the time the change of control occurs (subject to any rollover that may apply).
 
 
In January 2008 a special distribution was paid on ordinary shares in Reed Elsevier PLC and Reed Elsevier NV.
 
The special distribution was not attributed to any unvested share-based awards nor to any vested share options that had been granted under the incentive plans. None of these awards was therefore adjusted as a result of the consolidation of share capital in January 2008.
 
 
UK-based executive directors are eligible to participate in the HMRC approved all-employee UK Savings-Related Share Option Scheme. US-based directors are eligible to participate in the all-employee US-based Employee Stock Investment Plan (EMSIP). Under the EMSIP, employees are able to purchase Reed Elsevier PLC and Reed Elsevier NV securities at the prevailing market price, with commissions and charges being met by Reed Elsevier.
 
The estimated dilution over a ten-year period from outstanding awards over Reed Elsevier PLC shares under all share-based plans was 6.8% of the Reed Elsevier PLC share capital at December 31, 2007. This estimate was made before the share consolidation which took place in January 2008.
 
 
The Committee reviews policy retirement benefit provisions in the context of the total remuneration for each executive director, bearing in mind his age and service and against the background of evolving legislation and practice in Reed Elsevier’s major countries of operation. Base salary is the only pensionable element of remuneration.


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The UK-based executive directors are provided with conventional UK defined benefit pension arrangements targeting two thirds (Sir Crispin Davis 45%) of salary at a normal retirement age of 60.
 
The targeted pension is provided through a combination of:
 
  •  the main UK Reed Elsevier Pension Scheme for salary restricted to a cap, determined annually on the same basis as the pre-April 2006 Inland Revenue earnings cap; and
 
  •  Reed Elsevier’s unfunded unapproved pension arrangement for salary above the cap.
 
 
The two US-based directors, Andrew Prozes and Patrick Tierney, are covered by a mix of defined benefit and defined contribution arrangements. In accordance with US legislation, they have no defined retirement age. Patrick Tierney retired on January 30, 2008 and became fully vested in his pension.
 
During 2007, the Committee reviewed Andrew Prozes’ pension provision in the context of relevant market data and determined that he will receive an enhancement to his annual pension of $44,651 for each completed year of service between July 1, 2007 and February 1, 2011 applied on a pro-rata basis.
 
Prior to 2007 Reed Elsevier paid an annual contribution of 19.5% of salary to Erik Engstrom’s personal pension plan. This arrangement ended on October 31, 2007 and with effect from November 1, 2007 he was provided with similar defined benefit pension arrangements as those set out above for UK-based executive directors, targeting two thirds of salary at a normal retirement age of 60.
 
 
Participants in the LTIP are required to build up a significant personal shareholding in Reed Elsevier PLC and/or Reed Elsevier NV.
 
The shareholding requirements were increased in 2006, when the new LTIP cycle for 2006-08 was launched. The new higher requirements must be met prior to any payout under that cycle in March 2009. The shareholding requirement for the Reed Elsevier Chief Executive Officer was increased to three times salary (previously two times) and for other executive directors to two times salary (previously one and a half times).
 
These shareholding requirements are a condition of vesting under the LTIP. The executive directors that participated in the 2004 LTIP grant met and exceeded their shareholding requirements in respect of the 2007 vesting of this award.
 
 
Executive directors are employed under service contracts that provide for a maximum of one year’s notice. The contracts neither specify a pre-determined level of severance payment nor contain specific provisions in respect of change in control.
 
The Committee believes that as a general rule, notice periods should be twelve months and that the directors should, subject to practice within their base country, be required to mitigate their damages in the event of termination. The Committee will, however, note local market conditions so as to ensure that the terms offered are appropriate to attract and retain top executives operating in global businesses.
 
The service contracts for executive directors (and for approximately 100 other senior executives) contain the following provisions:
 
  •   non-compete provisions which prevent them from working with specified competitors, from recruiting Reed Elsevier employees and from soliciting Reed Elsevier customers for a period of 12 months after leaving employment;
 
  •   in the event of their resigning, they will immediately lose all rights to any awards under the LTIP, ESOS and BIP granted from 2004 onwards including any vested but unexercised options; and
 
  •   in the event that they were to join a specified competitor within 12 months of termination, any gains made in the six months prior to termination on the exercise of an LTIP, ESOS and BIP award made from 2004 onwards shall be repayable.


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Each of the executive directors has a service contract, as summarised below:
 
                 
        Expiry date
       
        (subject to
       
    Contract Date   notice period)   Notice period   Subject to:
G J A van de Aast(i)
  November 15, 2000   July 17, 2017   12 months   English law
M H Armour(i)
  October 7, 1996   July 29, 2014   12 months   English law
Sir Crispin Davis(i)
  July 19, 1999   March 19, 2009   12 months   English law
E Engstrom(i)
  June 25, 2004   June 14, 2025   12 months   English law
A Prozes(ii)
  July 5, 2000   Indefinite   12 months salary   New York law
            payable for termination    
            without cause    
P Tierney(ii)
  November 19, 2002   Retired on
January 30,
2008
    New York law
 
(i) Employed by Reed Elsevier Group plc
 
(ii) Employed by Reed Elsevier Inc.
 
The committee reviewed Erik Engstrom’s contract and remuneration arrangements during 2007 and altered his terms of employment to parallel UK remuneration arrangements. This change was made to reflect the current circumstances of his role.
 
At the request of the Board, Patrick Tierney agreed to defer his planned retirement in early 2007 in order to manage and oversee the sale of Harcourt Education for maximum value. In order to secure that deferred retirement, the Committee put special retention and incentive arrangements in place which: i) rewarded his continuing commitment to Reed Elsevier and ii) incentivised him to optimise the Harcourt Education sale proceeds. Such payments are established practice in the US, and increasingly in Europe.
 
The successful completion of the Harcourt Education sale on January 30, 2008 resulted in aggregate sale proceeds of $4.95 billion and a special distribution of $4 billion was paid to shareholders. The Committee consequently awarded Patrick Tierney a sale bonus of $2,917,150 calculated by reference to the excess of the above sale proceeds over a pre-determined target figure. Furthermore, the Committee recognised his outstanding management contribution to the Harcourt Education performance in meeting its financial targets during the extended sale period, and awarded Patrick Tierney a payment of $1,500,000 under the terms of his retention bonus.
 
Patrick Tierney’s service contract terminated on January 30, 2008 following his retirement from Reed Elsevier. Any outstanding awards under the ESOS, BIP and LTIP have been treated in accordance with the standard retirement rules under those plans. Patrick Tierney’s shareholding requirements in respect of his share-based awards terminated upon his retirement. For the avoidance of doubt, no severance payment has applied and he did not receive an increase in base salary from January 1, 2008. With effect from the date of retirement, he became fully vested in the pension arrangements that have been set out in the current and prior remuneration reports.
 
 
The Committee believes that the experience gained by allowing executive directors to serve as non-executive directors on the boards of other organisations is of benefit to Reed Elsevier. Accordingly, executive directors may, subject to the approval of the Chairman and the Chief Executive Officer, serve as non-executive directors on the boards of up to two non-associated companies (of which only one may be to the board of a major company) and they may retain remuneration arising from such appointments.
 
  •   Gerard van de Aast became a non-executive director of OCE NV on May 1, 2006 and received a fee of €37,216 (£25,490) during 2007 (€23,342 (£15,879) during 2006).
 
  •   Sir Crispin Davis is a non-executive director of GlaxoSmithKline plc and received a fee of £70,000 during 2007 (£70,000 during 2006).
 
  •   Andrew Prozes is a non-executive director of the Cott Corporation and received a fee of $62,270 (£31,135) during 2007 ($56,000 (£30,435) during 2006).
 
Non-executive directors
 
 
Reed Elsevier seeks to recruit non-executive directors with the experience to contribute to the board of a dual-listed global business and with a balance of personal skills that will make a major contribution to the boards and their committee structures. With the exception of Dien de Boer-Kruyt, who serves only on the supervisory board of Reed Elsevier NV, non-executive


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directors, including the Chairman, are appointed to the boards of Reed Elsevier Group plc, Reed Elsevier PLC and the supervisory board of Reed Elsevier NV. Non-executive directors’ fees reflect the directors’ membership of the three Reed Elsevier boards.
 
The primary source for comparative market data is the practice of FTSE50 companies, although reference is also made to AEX and US listed companies.
 
Non-executive directors, including the Chairman, serve under letters of appointment, do not have contracts of service and are not entitled to notice of, or payments following, retirement from the board.
 
 
Non-executive directors receive one annual fee in respect of their memberships of the boards of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc. The fee paid to Dien de Boer-Kruyt, who serves only on the supervisory board of Reed Elsevier NV, reflects her time commitment to that company and to other companies within the Reed Elsevier combined businesses. Non-executive directors are reimbursed for expenses incurred in attending meetings. They do not receive any performance related bonuses, pension provision, share options or other forms of benefit. Fees may be reviewed annually, although in practice they have changed on a less frequent basis.
 
During 2007, a review was conducted of the non-executive director fees in the context of relevant market data. This was the first time that non-executive directors’ fees had been reviewed since 2003. The fee for the Chairman, which was last reviewed in 2005, was also included in this review. The review indicated that fees paid by Reed Elsevier were no longer competitive with those paid by companies of a comparable size and international scope. New fee levels were made effective from January 1, 2008. The Chairman indicated that his fee should remain unchanged and will therefore remain at €350,000 per annum.
 
In 2007 the Reed Elsevier Group plc board had a charity donation matching programme for non-executive directors. Under the policy, where a non-executive director donates all or part of their fees to a registered charity, Reed Elsevier may, at its sole discretion, make a matching donation to any charity, provided the charity’s objectives are judged to be appropriate and are not political or religious in nature. David Reid, Strauss Zelnick, Cees van Lede, Mark Elliott and Jan Hommen each donated a proportion of their fees in respect of 2007 to charity and, in accordance with the programme, matching charitable donations were made of £45,000, £44,325, £13,699, £22,500 and £6,849 respectively. This programme will not be operating in 2008.
 
 
The emoluments of the directors of Reed Elsevier PLC and Reed Elsevier NV (including any entitlement to fees or emoluments from either Reed Elsevier Group plc or Elsevier Reed Finance BV) were as follows:
 
 
                 
    2007     2006  
    (In thousands)  
 
Salaries and fees
    £4,566       £4,502  
Benefits
    117       126  
Annual performance-related bonuses
    4,073       3,273  
Pension contributions
    131       139  
Pension in respect of former director
    203       221  
                 
Total
    £9,090       £8,261  
                 
 
No compensation payments have been made for loss of office or termination in 2006 and 2007. No loans, advances or guarantees have been provided on behalf of any director.
 
Details of long-term share based incentives which vested and were exercised by the directors over shares in Reed Elsevier PLC and Reed Elsevier NV during the year are shown on pages 52 to 55. The aggregate notional pre-tax gain made by the directors from such incentives during the year was £15,031,942 (2006: £1,408,072).


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    2007     2006  
    Salary     Benefits     Bonus     Total     Total  
 
G J A van de Aast
    £552,825       £17,535       £594,563       £1,164,923       £1,061,603  
M H Armour
    589,838       19,843       666,222       1,275,903       1,072,305  
Sir Crispin Davis
    1,135,680       28,137       1,267,419       2,431,236       2,040,008  
E Engstrom
    578,328       18,359       592,004       1,188,691       1,153,480  
A Prozes
    584,220       23,184       525,798       1,133,202       1,193,922  
P Tierney (until February 1, 2008)
    535,600       9,714       427,329       972,643       805,462  
                                         
Total
    £3,976,491       £116,772       £4,073,335       £8,166,598       £7,326,780  
                                         
 
Benefits principally comprise the provision of a company car or car allowance, health and disability insurance.
 
Messrs. Prozes and Tierney, together with certain other senior US-based executives and managers, participate in a bonus deferral plan that affords participants the ability to defer payment of all or part of the annual incentive bonuses otherwise payable to them, provided that such deferral is elected before the amount of such bonus is determined. Deferral can be for a stated term or until termination of employment. The deferred funds are credited with income based on the performance of specified reference investment funds or indices. Deferred funds may be drawn at any time subject to a 10% forfeiture, or without forfeiture in the event of severe financial hardship resulting from illness or accident to the participant or a beneficiary, loss of principal residence due to casualty or other circumstances beyond the control of the participant determined to constitute severe financial hardship by the Remuneration Committee that administers the plan.
 
Sir Crispin Davis was the highest paid director in 2007. His aggregate notional pre-tax gain on the exercise of share based incentives during the year was £3,560,951 (2006: £252,260).
 
(c) Pensions in more detail
 
Pension Benefits
 
The target pension for Sir Crispin Davis at normal retirement age of 60 is 45% of salary in the 12 months prior to retirement. Gerard van de Aast and Mark Armour are provided with pension benefits at an accrual rate of 1/30th of salary for each year of pensionable service, payable at normal retirement age of 60. Prior to November 1, 2007 Erik Engstrom was not a member of any company pension scheme and Reed Elsevier made a contribution to Erik Engstrom’s designated retirement account of £93,160, equivalent to 19.5% of his salary for the period January 1, 2007 to October 31, 2007. From November 1, 2007 contributions to Erik Engstrom’s designated retirement account ceased and he became a member of the Reed Elsevier pension scheme. Since November 1, 2007 Erik Engstrom has accrued pension benefits at an accrual rate of 1/30th of salary for each year of pensionable service after November 1, 2007 payable at normal retirement age of 60.
 
On July 17, 2007 Andrew Prozes, a US-based director, vested in an annual pension of $300,000. His basic pension continues to accrue at a rate of $42,857 per annum for each completed year of service between July 17, 2007 and February 1, 2011. In addition, a lifetime benefit is payable to his surviving spouse equal to 50% of his vested and accrued pension at the time of death. The pension will be reduced by the value of any other retirement benefits payable by Reed Elsevier or any former employer (other than those attributable to employee contributions). In addition, Andrew Prozes will be entitled to receive an enhancement to his annual pension unless he resigns or his employment is terminated by Reed Elsevier for cause prior to February 1, 2011. Any such enhancement will be equal to $3,721 times the number of completed calendar months between July 1, 2007 and the date of termination or, if earlier, February 1, 2011. For these purposes, his termination date shall be deemed to be 12 months after he ceases employment.
 
Patrick Tierney completed five years of service in November 2007. Following his retirement on January 30, 2008 he became entitled to draw his pension of $440,000 p.a.
 
The pension arrangements for all directors include life assurance cover whilst in employment, an entitlement to a pension in the event of ill health or disability and a spouse’s and/or dependents’ pension on death.


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The increase in the transfer value of the directors’ pensions, after deduction of contributions, is shown below:
 
                                                                         
                                                    Transfer
 
                                                    value
 
                                                    of increase
 
                                              Increase in
    in accrued
 
                            Increase in
                accrued
    annual
 
                Transfer
    Transfer
    transfer
          Increase in
    annual
    pension
 
                value
    value
    value during
    Accrued
    accrued
    pension
    during the
 
                of accrued
    of accrued
    the period
    annual
    annual
    during
    period (net
 
                pension
    pension
    (net of
    pension
    pension
    the period
    of inflation
 
    Age
    Directors’
    December 31,
    December 31,
    directors’
    December 31,
    during
    (net of
    and directors’
 
    December 31,
    contributions
    2006
    2007
    contributions)
    2007
    the period
    inflation)
    contributions)
 
    2007     £     £     £     £     £     £     £     £  
 
G J A van de Aast
    50       5,587       1,074,289       1,379,993       300,117       130,558       28,342       23,844       246,445  
M H Armour
    53       5,587       2,866,803       3,466,035       593,645       253,922       30,824       21,023       281,381  
Sir Crispin Davis
    58       5,587       7,361,487       9,416,905       2,049,831       446,087       72,218       55,768       1,171,671  
E Engstrom
    44       940             28,306       27,366       3,362       3,362       3,362       27,366  
A Prozes(i)
    61                   2,310,864       2,310,864       170,092       170,092       170,092       2,310,864  
P Tierney
    62             2,089,880       2,502,228       412,348       190,933       22,000       22,000       285,385  
 
(i) The transfer value of Andrew Prozes’ pension reflects his entitlement to an annual pension of $300,000 which, having completed seven years of service, vested on July 17, 2007. No contractual entitlement to the pension existed prior to the vesting date. In addition, the transfer value also reflects the pro-rata increase in his pension entitlement since July 2007 up to December 31, 2007 as set out above. The latter is subject to reduction in certain circumstances of termination.
 
Transfer values have been calculated in accordance with the guidance note “GN11” published by the UK Institute of Actuaries and Faculty of Actuaries. The transfer value in respect of individual directors represents a liability in respect of directors’ pension entitlement, and is not an amount paid or payable by the director.
 
 
                 
    2007     2006  
 
G J de Boer-Kruyt
    £23,151       £22,993  
M W Elliott
    48,500       45,000  
J Hommen
    239,726       238,095  
L Hook (from April 19, 2006)
    45,000       30,000  
C J A van Lede (until April 18, 2007)
    11,130       44,218  
R Polet (from April 17, 2007)
    31,785        
D E Reid
    45,000       45,000  
Lord Sharman
    52,000       52,000  
R W H Stomberg
    48,630       52,381  
S Zelnick (until December 7, 2007)
    45,000       45,000  
                 
Total
    £589,922       £574,687  
                 
 
 
The aggregate compensation paid to all executive officers (other than directors) of Reed Elsevier Group plc (five persons) as a group, for services in such capacities for the year ended December 31, 2007 was £2,823,898 which included contributions made to the pension plans in respect of such officers of £49,015.


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BOARD PRACTICES
 
 
The boards of directors of Reed Elsevier PLC and Reed Elsevier NV manage their respective shareholdings in Reed Elsevier Group plc and Elsevier Reed Finance BV. The boards of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc are harmonised. Subject to shareholders of Reed Elsevier PLC and Reed Elsevier NV re-electing retiring directors at their respective Annual General Meetings in 2008, all the directors of Reed Elsevier Group plc will also be directors of Reed Elsevier PLC and of Reed Elsevier NV. For a complete description of the board membership positions and executive officer positions within Reed Elsevier, see “— Directors” on page •. Details of the Audit Committees of Reed Elsevier Group plc, Reed Elsevier PLC and Reed Elsevier NV are given under “Item 15: Controls and Procedures” and details of the Remuneration Committee are given under “— Compensation” on page 37.
 
 
The Reed Elsevier Group plc board currently consists of five executive directors and seven independent non-executive directors. A person may only be appointed or proposed or recommended for appointment to the board if that person has been nominated for that appointment by the joint Nominations Committee of Reed Elsevier PLC and Reed Elsevier NV. Persons nominated by the joint Nominations Committee will be required to be approved by the Reed Elsevier Group plc board, prior to appointment to the Reed Elsevier Group plc board.
 
Decisions of the board of directors of Reed Elsevier Group plc require a simple majority, and the quorum required for meetings of the board of Reed Elsevier Group plc is any two directors.
 
The Reed Elsevier Group plc board has established the following committees:
 
  —  Audit — comprising three independent non-executive directors
 
  —  Remuneration — comprising four independent non-executive directors
 
Arrangements established at the time of the merger of Reed Elsevier PLC’s and Reed Elsevier NV’s businesses provide that, if any person (together with persons acting in concert with him) acquires shares, or control of the voting rights attaching to shares, carrying more than 50% of the votes ordinarily exercisable at a general meeting of Reed Elsevier PLC or Reed Elsevier NV and has not made a comparable takeover offer for the other party, the other party may by notice suspend or modify the operation of certain provisions of the merger arrangements, such as (i) the right of the party in which control has been acquired (the “Acquired Party”) to appoint or remove directors of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc and (ii) the Standstill Obligations (defined below) in relation to the Acquired Party. Such a notice will cease to apply if the person acquiring control makes a comparable offer for all the equity securities of the other within a specified period or if the person (and persons acting in concert with him) ceases to have control of the other.
 
In the event of a change of control of one parent company and not the other (where there has been no comparable offer for the other), the parent company which has not suffered the change in control will effectively have the sole right to remove and appoint directors of Reed Elsevier Group plc. Also, a director removed from the board of a parent company which has suffered a change in control will not have to resign from the board of the other parent company or Reed Elsevier Group plc.
 
The Articles of Association of Reed Elsevier Group plc contain certain restrictions on the transfer of shares in Reed Elsevier Group plc. In addition, pursuant to arrangements established at the time of the merger, neither Reed Elsevier PLC nor Reed Elsevier NV may acquire or dispose of any interest in the share capital of the other or otherwise take any action to acquire the other without the prior approval of the other (the “Standstill Obligations”). The Panel on Takeovers and Mergers in the United Kingdom (the “Panel”) has stated that in the event of a change of statutory control of either Reed Elsevier PLC or Reed Elsevier NV, the person or persons acquiring such control will be required to make an offer to acquire the share capital of Reed Elsevier Group plc (but not Elsevier Reed Finance BV) held by the other, in accordance with the requirements of the City Code on Take-overs and Mergers in the United Kingdom. This requirement would not apply if the person acquiring statutory control of either Reed Elsevier PLC or Reed Elsevier NV made an offer for the other on terms which are considered by the Panel to be appropriate.
 
 
The Reed Elsevier PLC board currently consists of five executive directors and seven independent non-executive directors. A person may only be appointed or proposed or recommended for appointment to the board if that person has been nominated for that appointment by the joint Nominations Committee of Reed Elsevier PLC and Reed Elsevier NV. Persons nominated by the joint Nominations Committee will be required to be approved by the Reed Elsevier PLC board, prior to the appointment to the Reed Elsevier PLC board. A copy of the terms of reference of the Nominations Committee is available on request and can be viewed on the Reed Elsevier website, www.reedelsevier.com. The information on our website is not incorporated by reference into this report. The joint Nominations Committee comprises five non-executive directors, all of whom are independent, plus the Chief Executive Officer.


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Notwithstanding the provisions outlined above in relation to the appointment to the board, Reed Elsevier PLC shareholders retain their rights under Reed Elsevier PLC’s Articles of Association to appoint directors to the Reed Elsevier PLC board by ordinary resolution. Reed Elsevier PLC shareholders may also, by ordinary resolution, remove a director from the board of Reed Elsevier PLC, and in such circumstances that director will also be required to be removed or resign from the boards of Reed Elsevier NV and Reed Elsevier Group plc (except in circumstances where there has been a change of control of Reed Elsevier PLC and not Reed Elsevier NV).
 
The Reed Elsevier PLC board has also established the following committees:
 
  —  Audit — comprising three independent non-executive directors; and
 
  —  Corporate Governance — a joint committee of Reed Elsevier PLC and Reed Elsevier NV, comprising all non-executive directors and members of the supervisory board of each company, all of whom are independent.
 
Each director on the Reed Elsevier PLC board is required to retire by rotation at least every three years, and are able then to make themselves available for re-election by shareholders at the Annual General Meeting.
 
REED ELSEVIER NV
 
Reed Elsevier NV has a two-tier board structure currently comprising five executive directors (the “executive board”) and eight independent non-executive directors (the “Supervisory Board” and, together with the executive board, the “combined board”). A person may only be appointed or proposed or recommended for appointment to the boards if that person has been nominated for that appointment by the joint Nominations Committee of Reed Elsevier PLC and Reed Elsevier NV. Persons nominated by the joint Nominations Committee will be required to be approved by the Reed Elsevier NV combined board prior to appointment to the Reed Elsevier NV executive or supervisory board and by Reed Elsevier NV shareholders. The joint Nominations Committee comprises five members of the Supervisory Board, all of whom are independent, plus the Chief Executive Officer.
 
Notwithstanding the provisions outlined above in relation to the appointment to the board, Reed Elsevier NV shareholders retain their rights under Reed Elsevier NV’s Articles of Association to appoint directors to the Reed Elsevier NV boards by ordinary resolution if such appointment has been proposed by the Reed Elsevier NV combined board and, if such appointment has not, by an ordinary resolution of shareholders requiring a majority of at least two-thirds of the votes cast if less than one half of Reed Elsevier NV’s issued share capital is represented.
 
Reed Elsevier NV shareholders may also, by ordinary resolution, remove a director from the board of Reed Elsevier NV, and in such circumstances that director will also be required to be removed or resign from the boards of Reed Elsevier PLC and Reed Elsevier Group plc (except in circumstances where there has been a change of control of Reed Elsevier NV and not Reed Elsevier PLC).
 
The Reed Elsevier NV supervisory board has also established the following committees:
 
  —  Audit — comprising three independent members of the Reed Elsevier NV Supervisory Board; and
 
  —  Corporate Governance — a joint committee of Reed Elsevier NV and Reed Elsevier PLC, comprising all members of the Supervisory Board and non-executive directors of each company, all of whom are independent.
 
Each director on the Reed Elsevier NV executive and supervisory boards is required to retire by rotation at least every three years, and is able then to make themselves available for re-election by shareholders at the Annual General Meeting.
 
 
Elsevier Reed Finance BV has a two-tier board structure comprising a management board, consisting of two members, and a supervisory board, consisting of three non-executive directors. The members of the management board and of the supervisory board are appointed by the shareholders of Elsevier Reed Finance BV. The Articles of Association of Elsevier Reed Finance BV provide that certain material resolutions of the management board will require the approval of the supervisory board. At a meeting of the supervisory board valid resolutions can be taken with a simple majority if the majority of the members are present or represented. Pursuant to the Articles of Association of Elsevier Reed Finance BV, there are specific provisions governing the appointment and dismissal of managing directors and members of the supervisory board during periods when a notice of suspension as mentioned in the governing agreement between Reed Elsevier PLC and Reed Elsevier NV is in force. These provisions intend to neutralise the influence of a party which has acquired control over either Reed Elsevier PLC or Reed Elsevier NV without having also acquired control in the other.
 
 
The average number of employees in continuing operations in the year ended December 31, 2007, was 31,600 (2006: 31,500; 2005: 30,700). Approximately 5,400 were located in the UK (2006: 5,300; 2005: 5,200); 15,600 in North America (2006: 15,600; 2005: 15,700); 2,400 in the Netherlands (2006: 2,500; 2005: 2,500); 4,600 in the rest of Europe (2006: 4,600; 2005: 4,300); and 3,600 in the rest of the world (2006: 3,500; 2005: 3,000). The average number of employees in the business


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segments in the year ended December 31, 2007 was 7,200 in Elsevier (2006: 7,300; 2005: 7,100); 13,400 in LexisNexis (2006: 13,700; 2005: 13,200); 10,700 in Reed Business (2006: 10,300; 2005: 10,200); and 300 in corporate/shared functions (2006: 200; 2005: 200). At December 31, 2007 the number of employees was approximately 31,500, which comprised 7,100 in Elsevier; 13,300 in LexisNexis; 10,800 in Reed Business; and 300 in corporate/shared functions.
 
The average number of employees employed by discontinued operations in the year ended December 31, 2007 was 4,300 (2006: 5,300; 2005: 5,400). At December 31, 2007 the number of employees employed by discontinued operations was 1,300.
 
The board of Reed Elsevier Group plc is fully committed to the concept of employee involvement and participation, and encourages each of its businesses to formulate its own tailor-made approach with the co-operation of employees. Reed Elsevier is an equal opportunity employer, and recruits and promotes employees on the basis of suitability for the job. Appropriate training and development opportunities are available to all employees. A code of ethics and business conduct applicable to employees within Reed Elsevier has been adopted throughout its businesses.


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SHARE OWNERSHIP
 
 
 
The following table sets forth the details of options and restricted shares held by directors over Reed Elsevier PLC ordinary shares as at December 31, 2007 under share option schemes which are described below under “Reed Elsevier — Share option schemes”.
 
Over shares in Reed Elsevier PLC
 
                                                                         
                                  Market
                   
                                  price at
                   
          2004-2006
    Granted
          Exercised
    exercise
                   
    January 1,
    performance
    during
    Option
    during
    date
    December 31,
    Exercisable
    Exercisable
 
    2007     adjustment     the year     price (pence)     the year     (pence)     2007     from     until  
 
Gerard van de Aast — ESOS
    50,940                       638.00                       50,940       December 1, 2003       December 1, 2010  
      49,317                       659.00                       49,317       February 23, 2004       February 23, 2011  
      58,000                       600.00                       58,000       February 22, 2005       February 22, 2012  
      124,956                       487.25                       124,956       February 19, 2007       February 19, 2014  
      120,900                       533.50                       120,900       February 17, 2008       February 17, 2015  
      127,662                       530.50                       127,662       March 13, 2009       March 13, 2016  
                      122,536       644.50                       122,536       February 15, 2010       February 15, 2017  
                  — BIP
    31,217                       Nil       31,217       605.00                   &nb