20-F 1 u49641e20vf.htm FORM 20-F e20vf
Table of Contents

As filed with the Securities and Exchange Commission on March 16, 2006
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
     
(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, 2005
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
Commission file number: 1-3334
     
REED ELSEVIER PLC
(Exact name of Registrant as specified in its charter)
  REED ELSEVIER NV
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organisation)
  The Netherlands
(Jurisdiction of incorporation or organisation)
1-3 Strand
London WC2N 5JR
England
(Address of principal executive offices)
  Radarweg 29
1043 NX Amsterdam
The Netherlands
(Address of principal executive offices)
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
(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
(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, 2005:
           
Reed Elsevier PLC: Number of outstanding shares
 
Ordinary shares of 12.5p each
    1,277,013,440  
Reed Elsevier NV:
       
 
Ordinary shares of 0.06 each
    741,805,230  
 
R-shares of 0.60 each (held by a subsidiary of Reed Elsevier PLC)
    4,679,249  
 
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 financial statement item the registrants have elected to follow:
Item 17         o                   Item 18         þ
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

TABLE OF CONTENTS
               
        Page
         
 GENERAL     1  
 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS     2  
 PART I        
 
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     10  
     INFORMATION ON REED ELSEVIER     13  
       History and development     13  
       Business overview     15  
       Organisational structure     23  
       Property, plants and equipment     24  
     OPERATING AND FINANCIAL REVIEW AND PROSPECTS     25  
       Operating results — Reed Elsevier     25  
       Liquidity and capital resources — Reed Elsevier     35  
       Operating results — Reed Elsevier PLC and Reed Elsevier NV     38  
       Trend information     39  
     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     40  
       Directors     40  
       Senior management     42  
       Compensation     42  
       Board practices     50  
       Employees     52  
       Share ownership     53  
     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     62  
       Major shareholders     62  
       Related party transactions     62  
     FINANCIAL INFORMATION     63  
     THE OFFER AND LISTING     64  
       Trading markets     64  
     ADDITIONAL INFORMATION     66  
       Memorandum and articles of association     66  
       Material contracts     67  
       Exchange controls     67  
       Taxation     67  
       Documents on display     69  
     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     70  
 
ITEM 12:
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     N/A  


Table of Contents

               
        Page
         
PART II
 
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     72  
     AUDIT COMMITTEE FINANCIAL EXPERT     74  
     CODES OF ETHICS     74  
     PRINCIPAL ACCOUNTANT FEES AND SERVICES     74  
 
           
     FINANCIAL STATEMENTS*     75  
     FINANCIAL STATEMENTS     F-1  
     EXHIBITS     F-86  
* The registrants have responded to Item 18 in lieu of responding to this Item.


Table of Contents

THIS PAGE INTENTIONALLY BLANK


Table of Contents

GENERAL
     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.

1


Table of Contents

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
     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;
 
  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 schools, academic institutions and states;
 
  disruption to our business or markets arising from natural disasters, international security or public health concerns and acts of terrorism or war; 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-86 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.

2


Table of Contents

PART I
ITEM 3: KEY INFORMATION
SELECTED FINANCIAL DATA
REED ELSEVIER
     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 interest 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.
     Following a regulation adopted by the European Parliament, the combined financial statements have for the first time been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union (“EU”). As permitted for first-time application of IFRS, only two years of IFRS information are presented in this report. An explanation of the changes in accounting policies on adoption of IFRS, and reconciliations of net income and equity for the 2004 financial year from previously applied UK GAAP (“previous UK GAAP”) to IFRS are included in note 34 to the combined financial statements.
Combined Income Statement Data
                                                 
    As at December 31,  
       
    2005(2)     2005     2004     2003     2002     2001  
                                     
    (in millions)
Amounts in accordance with IFRS:(1)
                                               
Revenue(3)
    $8,937       £5,166       £4,812                          
Operating profit(3)
    1,451       839       766                          
Net finance costs
    (242 )     (140 )     (132 )                        
Disposals and other non operating items(4)
    3       2       (3 )             n/ a          
Profit before tax
    1,213       701       631                          
Taxation
    (410 )     (237 )     (170 )                        
Minority interests
    (3 )     (2 )     (2 )                        
Profit attributable to parent companies’ shareholders
    799       462       459                          
Amounts in accordance with US GAAP:
                                               
Operating income(5)(6)
    $1,294       £748       £804       £940       £746       £306  
Taxes
    (405 )     (234 )     (252 )     (202 )     (150 )     (183 )
Net income/(loss)(5)(6)
    647       374       418       568       389       (19 )
Combined Balance Sheet Data
                                                 
    As at December 31,  
       
    2005(2)     2005     2004     2003     2002     2001  
                                     
    (in millions)
Amounts in accordance with IFRS:(1)
                                               
Total assets
    $15,790       £9,127       £7,952                          
Long term obligations less current portion
    (3,917 )     (2,264 )     (1,706 )                        
Net borrowings(7)
    (4,661 )     (2,694 )     (2,532 )             n/ a          
Minority interests
    (26 )     (15 )     (13 )                        
Combined shareholders’ equity
    3,408       1,970       1,664                          
Amounts in accordance with US GAAP:
                                               
Total assets(5)
    $18,373       £10,620       £9,462       £9,889       £10,279       £11,172  
Long term obligations less current portion
    (5,455 )     (3,153 )     (2,749 )     (2,994 )     (3,294 )     (3,659 )
Combined shareholders’ funds/ Net assets(5)
    6,510       3,763       3,431       3,462       3,436       3,502  
 
(1) The combined financial statements are prepared in accordance with accounting policies that are in conformity with IFRS, as issued by the IASB and adopted by the EU. IFRS differs in certain significant respects from US GAAP. The principal differences between IFRS and US GAAP relevant to Reed Elsevier are set out in note 35 to the combined financial statements.

3


Table of Contents

(2) Noon buying rates as at December 31, 2005 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 9. At December 31, 2005, the noon buying rate was $1.73 per £1.00.
 
(3) All revenue and operating profit is derived from continuing operations. Operating profit under IFRS is stated after charging £276 million in respect of amortisation of acquired intangible assets (2004: £255 million); £21 million in respect of acquisition integration costs (2004: £38 million); and £6 million in respect of taxation in joint ventures (2004: £7 million).
 
(4) Disposals and other non operating items comprise a £1 million loss on disposal of businesses and other assets (2004: £3 million loss) and a £3 million gain relating to the revaluation of held for trading investments (2004: £ nil).
 
(5) Operating income, taxes, net income and combined shareholders’ funds under US GAAP have been restated for 2004, 2003, 2002 and 2001 to reflect the adoption of SFAS 123(R) — Share-Based Payment, using the modified retrospective approach, which requires an expense to be recorded based on the fair value of the award at the date of grant, and related deferred tax effects. Operating income under US GAAP is lower than previously reported by £39 million in 2004; £43 million in 2003; £36 million in 2002; and £22 million in 2001. Net income under US GAAP is lower than previously reported by £31 million in 2004; £22 million in 2003; £29 million in 2002; and £14 million in 2001. Total assets, net assets and combined shareholders’ funds under US GAAP are higher than previously reported by £58 million in 2004; £52 million in 2003; £28 million in 2002; and £21 million in 2001. Further details are included in note 35 to the combined financial statements.
 
(6) Net income under US GAAP reflects the adoption in 2002 of SFAS 141 — Business Combinations and SFAS 142 — Goodwill and other Intangible Assets, under which goodwill and intangible assets with indefinite lives ceased to be amortised. Net income under US GAAP in 2001 was not restated on the adoption of SFAS 141 and 142.
 
(7) Net borrowings comprise gross borrowings of £3,164 million (2004: £2,757 million), less related derivative financial instrument assets of £174 million (2004: £ nil), and cash and cash equivalents of £296 million (2004: £225 million).

4


Table of Contents

REED ELSEVIER PLC
     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.
     Following a regulation adopted by the European Parliament, the Reed Elsevier PLC consolidated financial statements have for the first time been prepared in accordance with IFRS, as issued by the IASB and adopted by the EU. As permitted for first-time application of IFRS, only two years of IFRS information has been presented in this report. Reconciliations of net income and equity for the 2004 financial year from previous UK GAAP to IFRS are included in note 20 to the Reed Elsevier PLC consolidated financial statements.
                                                 
    As at December 31,  
       
    2005(2)     2005     2004     2003     2002     2001  
                                     
    (in millions, except per share amounts)
Amounts in accordance with IFRS:(1)
                                               
Profit before tax
    $419       £242       £240                          
Taxation
    (12 )     (7 )     (5 )                        
Profit attributable to ordinary shareholders
    407       235       235                          
Basic earnings per Reed Elsevier PLC ordinary share
    32.2¢       18.6 p     18.6 p                        
Diluted earnings per Reed Elsevier PLC ordinary share
    31.8¢       18.4 p     18.5 p             n/ a          
Dividends per Reed Elsevier PLC ordinary share(3)
    23.0¢       13.3 p     12.1 p                        
Total assets
    $1,886       £1,090       £929                          
Long term obligations
    (62 )     (36 )     (36 )                        
Total equity/ Net assets
    1,803       1,042       880                          
Weighted average number of shares
    1,266.2       1,266.2       1,264.6                          
Amounts in accordance with US GAAP:
                                               
Net income/(loss)(4)(5)
    $325       £188       £213       £294       £199       £(15 )
Basic earnings/(loss) per Reed Elsevier PLC ordinary share(4)
    25.6¢       14.8 p     16.8 p     23.3 p     15.7 p     (1.2 p)
Diluted earnings/(loss) per Reed Elsevier PLC ordinary share(4)
    25.4¢       14.7 p     16.7 p     23.3 p     15.6 p     (1.1 p)
Total assets(4)
    $3,526       £2,038       £1,864       £1,876       £1,864       £1,898  
Long term obligations
    (62 )     (36 )     (36 )     (36 )     (36 )     (36 )
Shareholders’ funds/ Net assets(4)
    3,443       1,990       1,815       1,831       1,817       1,852  
 
(1) The consolidated financial statements of Reed Elsevier PLC are prepared in accordance with accounting policies that are in conformity with IFRS, as issued by the IASB and adopted by the EU. IFRS differs in certain significant respects from US GAAP. The principal differences between IFRS and US GAAP relevant to Reed Elsevier PLC are set out in note 22 to the Reed Elsevier PLC consolidated financial statements.
 
(2) Noon buying rates as at December 31, 2005 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 9. At December 31, 2005 the noon buying rate was $1.73 per £1.00.
 
(3) 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 2004 final dividend of 9.6p and 2005 interim dividend of 3.7p giving a total of 13.3p (2004: 12.1p). The directors of Reed Elsevier PLC have proposed a 2005 final dividend of 10.7p (2004: 9.6p), giving a total dividend for the year of 14.4p (2004: 13.0p).
 
Dividends per Reed Elsevier PLC ordinary share for the year ended December 31, 2004, translated into cents at the noon buying rate on December 31, 2004, were 23.4 cents. See “— Exchange Rates” on page 9.
(4) Net income and shareholders’ funds under US GAAP have been restated for 2004, 2003, 2002 and 2001 to reflect the adoption of SFAS 123(R) — Share-Based Payment, using the modified retrospective approach, which requires an expense to be recorded

5


Table of Contents

based on the fair value of the award at the date of grant, and related deferred tax effects. Net income, basic earnings per ordinary share and diluted earnings per ordinary share under US GAAP are lower than previously stated by £16 million, 1.3p and 1.3p respectively in 2004; £12 million, 0.9p and 0.9p respectively in 2003; £15 million, 1.2p and 1.2p respectively in 2002; and £7 million, 0.6p and 0.5p respectively in 2001. Total assets, net assets and shareholders’ funds under US GAAP are higher than previously stated by £32 million in 2004; £26 million in 2003; £15 million in 2002; and £11 million in 2001.
 
(5) Net income under US GAAP reflects the adoption by the combined businesses in 2002 of SFAS 141 — Business Combinations and SFAS 142 — Goodwill and other Intangible Assets, under which goodwill and intangible assets with indefinite lives ceased to be amortised. Net income under US GAAP in 2001 was not restated on the adoption of SFAS 141 and 142.

6


Table of Contents

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.
     Following a regulation adopted by the European Parliament, the Reed Elsevier NV consolidated financial statements have for the first time been prepared in accordance with IFRS as issued by the IASB and adopted by EU. As permitted for first-time application of IFRS, only two years of IFRS information has been presented in this report. Reconciliations of net income and equity for the 2004 financial year from previous UK GAAP to IFRS are included in note 19 to the Reed Elsevier NV consolidated financial statements.
                                                 
    As at December 31,
     
    2005(2)     2005     2004     2003     2002     2001  
                                     
    (in millions, except per share amounts)
Amounts in accordance with IFRS:(1)
                                               
Profit before tax
    $399       338       338                          
Taxation
                                         
Profit attributable to ordinary shareholders
    399       338       338                          
Basic earnings per Reed Elsevier NV ordinary share
    50.7¢       0.43       0.43                          
Diluted earnings per Reed Elsevier NV ordinary share
    50.7¢       0.43       0.43               n/ a          
Dividends per Reed Elsevier NV ordinary share(3)
    39.2¢       0.332       0.310                          
Total assets
    $1,782       1,510       1,245                          
Total equity/ Net assets
    1,697       1,438       1,173                          
Weighted average number of shares
    783.3       783.3       783.3                          
Amounts in accordance with US GAAP:
                                               
Net income(4)(5)
    $339       287       320       423       322       (3 )
Basic earnings per Reed Elsevier NV ordinary share (4)
    43.7¢       0.37       0.41       0.54       0.41       0.00  
Diluted earnings per Reed Elsevier NV ordinary share(4)
    42.5¢       0.36       0.41       0.54       0.41       0.00  
Total assets(4)
    $3,326       2,819       2,491       2,533       2,704       2,947  
Long term obligations
                      (7 )     (6 )     (5 )
Shareholders’ funds/ Net assets(4)
    3,241       2,747       2,419       2,456       2,628       2,871  
 
(1) The consolidated financial statements of Reed Elsevier NV are prepared in accordance with accounting policies that are in conformity with IFRS, as issued by the IASB and adopted by the EU. IFRS differs in certain significant respects from US GAAP. The principal differences between IFRS and US GAAP relevant to Reed Elsevier NV are set out in note 21 to the Reed Elsevier NV consolidated financial statements.
 
(2) Noon buying rates as at December 31, 2005 have been used to provide a convenience translation into US dollars, see “— Exchange Rates” on page 9. At December 31, 2005 the Noon Buying Rate was $1.18 per 1.00.
 
(3) Dividends declared in the year comprise, in amounts per ordinary share, a 2004 final dividend of 0.240 and 2005 interim dividend of 0.092 giving a total of 0.332 (2004: 0.310). The directors of Reed Elsevier NV have proposed a 2005 final dividend of 0.267 (2004: 0.240), giving a total dividend for the year of 0.359 (2004: 0.330).
Dividends per Reed Elsevier NV ordinary share for the year ended December 31, 2004, translated into cents at the noon buying rate on December 31, 2004, were 42.5 cents. See “— Exchange Rates” on page 9.

7


Table of Contents

(4) Net income and shareholders’ funds under US GAAP have been restated for 2004, 2003, 2002 and 2001 to reflect the adoption of SFAS 123(R) — Share-Based Payment, using the modified retrospective approach, which requires an expense to be recorded based on the fair value of the award at the date of grant, and related deferred tax effects. Net income, basic earnings per ordinary share and diluted earnings per ordinary share under US GAAP are lower than previously stated by 22 million, 0.03 and 0.02 respectively in 2004; 16 million, 0.02 and 0.02 respectively in 2003; 23 million, 0.03 and 0.03 respectively in 2002; and 11 million, 0.01 and 0.01 respectively in 2001. Total assets, net assets and shareholders’ funds under US GAAP are higher than previously stated by 43 million in 2004; 35 million in 2003; 22 million in 2002; and 17 million in 2001.
 
(5) Net income under US GAAP reflects the adoption by the combined businesses in 2002 of SFAS 141 — Business Combinations and SFAS 142 — Goodwill and other Intangible Assets, under which goodwill and intangible assets with indefinite lives ceased to be amortised. Net income under US GAAP in 2001 was not restated on the adoption of SFAS 141 and 142.

8


Table of Contents

EXCHANGE RATES
     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 15, 2006 was £1.00 = $1.74 and 1.00 = $1.19.
US dollars per £1.00 — Noon Buying Rates
                                 
    Period
     
Year ended December 31,   End   Average(1)   High   Low
                 
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  
2002
    1.61       1.50       1.61       1.41  
2001
    1.45       1.44       1.50       1.37  
                 
Month   High   Low
         
February 2006 (through February 15, 2006)
    1.78       1.73  
January 2006
    1.79       1.73  
December 2005
    1.77       1.72  
November 2005
    1.78       1.71  
October 2005
    1.79       1.75  
September 2005
    1.84       1.76  
August 2005
    1.81       1.77  
US dollars per 1.00 — Noon Buying Rates
                                 
    Period
     
Year ended December 31,   End   Average(1)   High   Low
                 
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  
2002
    1.05       0.95       1.05       0.86  
2001
    0.89       0.90       0.95       0.84  
                 
Month   High   Low
         
February 2006 (through February 15, 2006)
    1.21       1.19  
January 2006
    1.23       1.18  
December 2005
    1.20       1.17  
November 2005
    1.21       1.17  
October 2005
    1.21       1.19  
September 2005
    1.25       1.20  
August 2005
    1.24       1.21  
 
(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.

9


Table of Contents

RISK FACTORS
     The key 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.
We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.
     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.
Fluctuations in exchange rates may affect our reported results.
     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.
Changes in tax laws or their application may adversely affect our reported results.
     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.
Changes in regulation on information collection and use could adversely affect our revenues and our costs.
     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.
Breaches of our data security systems or other unauthorised access to our databases could adversely affect our business and operations.
     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 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.

10


Table of Contents

Changes in government funding of, or spending by, schools, academic institutions and states may adversely affect demand for the products and services of our education and science and medical businesses.
     The customers of our Harcourt Education business in the United States include state boards of education and local school districts, which rely on various sources of governmental funding, primarily from state and local governments, to purchase products and services offered by our education 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 or delays in governmental funding for schools, decreases in budgets of academic institutions or changes in the spending patterns of schools or academic institutions could adversely affect our businesses.
Our intellectual property rights may not be adequately protected under current laws in some jurisdictions, which may adversely affect our results and our ability to grow.
     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 may be unable to implement and execute our strategic and business plans if we cannot maintain high quality management.
     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 cannot assure you whether our substantial investment in electronic product and platform initiatives will produce satisfactory, long term returns.
     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 may be adversely affected if their electronic delivery platforms, networks or distribution systems experience a significant failure or interruption.
     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.
Our scientific, technical and medical primary journals could be adversely affected by changes in the market.
     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, it could adversely affect our revenue from Elsevier’s paid subscription publications.

11


Table of Contents

A significant portion of our revenue is derived from advertising and exhibitions and spending by companies on advertising and other marketing activities has historically been cyclical.
     Approximately 13% of our revenue in 2005 was derived from advertising and 9% from exhibitions. The Reed Business segment in particular is highly dependent on advertising and exhibitions revenue. In 2005, 37% of Reed Business segment revenue was derived from advertising and 35% 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.

12


Table of Contents

ITEM 4: INFORMATION ON REED ELSEVIER
HISTORY AND DEVELOPMENT
Corporate structure
     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.
Equalisation arrangements
     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, except in exceptional 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 certain of the Dutch subsidiaries 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.
Material acquisitions and disposals
     Total acquisition expenditure in the two years ended December 31, 2005 was £954 million, after taking into account borrowings and cash acquired. During 2005 a number of acquisitions were made for a total consideration amounting to £307 million. The most significant acquisition was of 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. There were no significant disposals in 2005. During 2004 a number of acquisitions were made for a total consideration amounting to £647 million. The most significant acquisitions were of Seisint Inc., a risk management business, for £414 million and Saxon Publishers, a supplemental educational publishing business, for £117 million. There were no significant disposals in 2004.
Capital expenditure
     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 £205 million in 2005 (2004: £203 million). Further information on capital expenditure is given in notes 15 and 17 to the combined financial statements.

13


Table of Contents

Principal Executive Offices
     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.

14


Table of Contents

BUSINESS OVERVIEW
     We are one of the world’s leading publishers and information providers. Our activities include science and medical, legal, education and business publishing. Our principal operations are in North America and Europe. For the year ended December 31, 2005, we had total revenue of approximately £5.2 billion and an average of approximately 36,100 employees. As at December 31, 2005, we had approximately 36,500 employees. In 2005, North America represented our largest single geographic market, based on revenue by destination, contributing 58% of our total revenue.
     Revenue is derived principally from subscriptions, circulation sales, advertising sales and exhibition fees. In 2005, 38% of Reed Elsevier’s revenue was derived from subscriptions; 33% from circulation sales; 13% from advertising sales; 9% from exhibition fees; and 7% from other sources. An increasing proportion of revenue is derived from electronic information products, principally internet based, and in 2005, 35% of our revenue was derived from such sources, including 65% of LexisNexis revenue, 45% of Elsevier revenue and 13% 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; educational testing contracts — over the term of the contract on percentage completed against delivery milestones. 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.
     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 new Health Sciences publishing arises in the second half of the year. In Harcourt Education, the US Schools and Assessment businesses have a significant cash outflow in the first half of each year as product is produced and expenses incurred ahead of the main sales period in June through September, and after which there is substantial cash inflow. 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, education 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.
     Our businesses provide products and services that are organised to serve four business sectors: Elsevier serves the science and medical sector; LexisNexis, the legal and other professional sectors; Harcourt Education, the education sector; and Reed Business, the business to business sector.
                                 
    Revenue
    Year ended December 31,
     
    2005   2004
         
    (in millions, except percentages)
Elsevier
    £1,436       28 %     £1,363       28 %
LexisNexis
    1,466       28       1,292       27  
Harcourt Education
    901       18       868       18  
Reed Business
    1,363       26       1,289       27  
                         
Total
    £5,166       100 %     £4,812       100 %
                         

15


Table of Contents

ELSEVIER
                   
    Year ended December 31,
     
    2005   2004
         
    (in millions)
Revenue
               
Elsevier
               
 
Science & Technology
    £785       £779  
 
Health Sciences
    651       584  
             
      £1,436       £1,363  
             
     Elsevier comprises worldwide scientific, technical and medical publishing and communications businesses. Elsevier is headquartered in Amsterdam and its principal operations are located in Amsterdam, London, Oxford, New York, Philadelphia, St. Louis, San Francisco, 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 production, information technology, fulfilment and distribution services.
Science & Technology
     The Science & Technology division contributed 55% of the total Elsevier revenue in 2005. Of this revenue, 77% came from journals (both print and electronic), 9% from books and the rest mainly from databases and software. Approximately 39% of Science & Technology revenue in 2005 was derived from North America, 35% from Europe and the remaining 26% from the rest of the world.
     Through a number of imprints, including Elsevier, Academic 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, Biochimica et Biophysica Acta, Journal of Molecular Biology, Molecular Therapy and Developmental Biology in the life sciences; Tetrahedron and Journal of Chromatography in chemistry; Physics Letters, Solid State Communications, Journal of Computational Physics and Journal of Sound and Vibration in physics; Journal of Financial Economics in economics; and Artificial Intelligence in the computer sciences field.
     Science & Technology’s flagship electronic product, ScienceDirect, is a full text online scientific research service. ScienceDirect now holds over 7 million scientific research articles and an expanding portfolio of books that can be searched, accessed and linked. In April 2005, handbooks were launched on ScienceDirect, which together with existing product programmes expanded currently available book content to 7 handbooks comprising a total of 170 volumes, 49 major reference works and 145 book series. 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.
     Following its launch in November 2004, Elsevier has continued to develop its major new electronic product, Scopus, which provides scientists with a comprehensive database and intuitive tool to navigate their way quickly through the world’s accumulated scientific research. In December 2005, the product suite was extended with the customer launch of Citation Tracker. The Scopus database now has nearly 30 million abstracts of scientific research articles from 15,000 peer reviewed publications, 13 million patents, and it references over 180 million web pages. The navigational service was developed in close collaboration with 20 library partners around the world.
     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 2, covering the engineering disciplines; and Geobase, focusing on geoscience and related areas.
     Elsevier offers software solutions provided by its two software businesses, MDL Information Systems (“MDL”) and Endeavor Information Systems (“Endeavor”). MDL provides research tools and software solutions to the life sciences industry and, through Endeavor, Elsevier provides integrated collection management solutions for libraries.
     Competition within the science and technology publishing fields is generally on a journal by journal basis. Competing leading journals are typically published by 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.
     Journals are generally sold to libraries, with subscription agents facilitating the administrative process. Electronic products, such as ScienceDirect, are sold through our dedicated sales force which has offices around the world including

16


Table of Contents

Amsterdam, New York, Rio de Janeiro, Singapore and Tokyo. Books are sold through book stores, both traditional and online, and wholesalers.
Health Sciences
     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. 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 45% of Elsevier revenue in 2005. Of this revenue, 46% came from journals and related activities, 47% from books and related activities, both delivered in print and electronic form, and the remainder mainly from the pharmaceutical communication business. Approximately 54% of Health Sciences revenue in 2005 was derived from North America, 28% from Europe and the remaining 18% 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 and European Journal of Cancer. Within its journal publishing program, 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 sectors. Elsevier’s medical textbooks include Gray’s Anatomy, Cecil Textbook of Medicine, Guyton’s Textbook of Physiology, Robbins & Cotran Pathologic Basis of Disease, and Rang’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 Language of Medicine, Merrill’s Atlas of Radiographic Positions & Radiologic Procedures, Ettinger’s Textbook of Veterinary Internal Medicine and Roberson’s Art and Science of Operative Dentistry. Elsevier’s local language book and journal titles include Encyclopédie Médico-Chirurgicale, the book series Les Conférences d’Enseignement in France, Medicina Interna in Spain and Sobotta’s Atlas der Anatomie des Menschen in Germany.
     As an extension of its medical reference works programme, Elsevier publishes electronic editions of a number of reference titles. These are online versions whose functionality includes continuous updates, search facilities and medical, literature and drug updates.
     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, practice guidelines, education programmes, expert commentaries and medical news for medical students, physicians and other healthcare professionals. 2005 saw the launch of iConsult, integrating Elsevier’s information into hospital information systems and Mosby’s NursingConsult, providing reference information specifically for the nursing market. Also in 2005, 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.
     In August 2005, Elsevier completed the acquisition of MediMedia MAP, which has its principal operations in France, Spain, Italy and the United States, as well as activities in Mexico and the United Kingdom. MediMedia publishes medical books and journals, reference information and medical illustrations principally for practitioners under a number of imprints and brands including Masson, Doyma and Netter. MediMedia extends Elsevier’s existing product offering and market reach in France, Spain, Italy and Mexico and adds significant new content assets.
     In July 2005, Elsevier acquired MC Strategies, a United States based business that expands Elsevier’s offering in online continuing education and training for healthcare professionals. Through its key product, WebInService, MC Strategies provides a wide range of web based training content to healthcare professionals.
     The medical publishing field is fragmented with competition generally on a title by title basis. In the United States, Elsevier faces regional competition from a number of information publishers and service providers, such as Wolters Kluwer’s Ovid, Adis Press, Springhouse and Lippincott Williams & Wilkins divisions, The Thomson Corporation, McGraw Hill, Pearson, John Wiley & Sons, Taylor & Francis, the American Medical Association and the Massachusetts Medical Society (New England Journal of Medicine).

17


Table of Contents

     Books are sold by book stores and wholesalers, and directly, generally through our dedicated sales force. 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 MDConsult, are generally sold directly through our dedicated sales force.
Shared services
     The shared service functions provide book and journal production, information technology, fulfilment and distribution services 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, MDConsult, learned society websites, on CD or in print.
     Printing is primarily sourced through a variety of unaffiliated printers located in the United Kingdom, the Netherlands, the United States, China, Hong Kong and South America. Distribution of hard copy journals is mainly outsourced. Book distribution in Europe and the United States is mostly handled in-house.
LEXISNEXIS
                   
    Year ended December 31,
     
    2005   2004
         
    (in millions)
Revenue
               
LexisNexis
               
 
North America
    £1,095       £949  
 
International
    371       343  
             
      £1,466       £1,292  
             
     LexisNexis provides legal, tax, regulatory, and business information to professional, business and government customers internationally and comprises LexisNexis North America and LexisNexis International. In 2005, LexisNexis North America contributed approximately 75% of the total LexisNexis revenue, with LexisNexis International accounting for 25%.
LexisNexis North America
     LexisNexis North America operates principally in the United States and comprises North American Legal Markets and US Corporate and Federal Markets. In 2005, approximately 63%, of LexisNexis North America’s revenue came from subscription sales, including online services, 18% from transactional sales, including online services, 8% from advertising, including directory listings, 3% from circulation sales and the remaining 8% from other sources.
     North American 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 in the United States and Canada. During 2005, we have selectively acquired a number of small businesses, including providers of law firm billing and client development tools 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 4.9 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 customized for the needs of legal researchers. Other brands and products include:
—      Matthew Bender, a publisher of legal analysis with leading titles such as Collier on Bankruptcy, Moore’s Federal Practice, and Nimmer on Copyright.
—      Michie, a publisher of more than 600 practice-enhancing titles, 400 custom legal publications and annotated codes for all 50 US states and Canada. In addition, Michie is the publisher of the United States Code Service and United States Supreme Court Reports, Lawyers’ Edition.
—      Applied Discovery, a leading provider of electronic discovery services to law firms and corporations in the United States.
—      Courtlink, providing online access to courts in the United States with advanced filing and searching and notification capabilities.

18


Table of Contents

—      Shepard’s, the publisher of Shepard’s Citations Service, a US legal citation service delivered online or in print. “Shepardizing”tm is a common process for US lawyers that involves checking the continuing authority of a case or statutory reference in light of subsequent legal changes.
—      Martindale-Hubbell, a publisher of biographical information on the legal profession in North America and internationally. The Martindale-Hubbell Law Directory, including the martindale.com databases, is typically utilized as a marketing vehicle by law firms, and provides access to the qualifications and credentials of over one million lawyers and law firms internationally. In addition, Martindale-Hubbell offers a suite of web services, in combination with professional listings, on its lawyers.com site, which is aimed at smaller law firms targeting consumers and small businesses.
     US Corporate and Federal 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 applications of US Corporate and Federal Markets are designed to assist customers in managing risk through fraud detection and prevention, identity verification, pre-employment screening and due diligence. The acquisition of Seisint Inc. completed in the second half of 2004, significantly expanded the risk management business. Seisint provides information products, including Accurint and Securint, that allow business, financial services, legal and government customers to quickly and easily extract valuable knowledge from a vast array of data.
     We announced on March 9, 2005 and April 12, 2005 that LexisNexis had identified a number of incidents of potentially fraudulent access to information about US individuals. The incidents arose primarily from the misappropriation by third parties of IDs and passwords from legitimate customers. The information concerned related to names and addresses and other personal identifying information such as social security and drivers’ license numbers. LexisNexis has notified all individuals whose information may have been accessed, and is offering free support services, including credit bureau reports, credit monitoring for one year, and fraud insurance to monitor and protect them from possible fraud associated with identity theft. LexisNexis also provides fraud consulting services or specialised assistance to any individual who becomes the victim of identity theft related to those incidents. We do not believe that such unauthorised access, the related notification and individual assistance measures, and additional and enhanced security measures taken by LexisNexis will have a material adverse effect on our financial position or results of operations. In April and June, 2005, two putative class actions relating to the incidents described above were filed. See Item 8: “Financial Information — Legal Proceedings” on page 63.
     In US legal markets, LexisNexis North America’s principal competitor is West (The Thomson Corporation). The principal competitors in corporate and government markets are West and Dialog (The Thomson Corporation), Factiva (a Reuters/ Dow Jones joint venture) and Choicepoint.
LexisNexis International
     The LexisNexis International division comprises LexisNexis Europe and Africa, headquartered in London; LexisNexis Asia Pacific, headquartered in Singapore; and LexisNexis Latin America, headquartered in Buenos Aires. In 2005, approximately 65% of LexisNexis International’s revenue was derived from subscriptions, 29% from circulation sales, 2% from advertising and 4% from other sources. In the same year, approximately 42% of revenue came from the UK, 32% from Continental Europe and 26% from the rest of the world.
     LexisNexis Europe and Africa includes LexisNexis Butterworths in the United Kingdom and South Africa, LexisNexis in France, Benelux and Poland; LexisNexis Deutschland in Germany; Verlag LexisNexis ARD Orac in Austria; and a minority interest in Giuffrè Editore in Italy.
     LexisNexis Butterworths in the United Kingdom is a professional publisher, providing legal, tax and business information 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’s principal publications are Halsburys 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 (a Reuters/ Dow Jones joint venture) 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 brands Infolib and Légisoft, LexisNexis also provides practice management, production 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).

19


Table of Contents

HARCOURT EDUCATION
                   
    Year ended December 31,
     
    2005   2004
         
    (in millions)
Revenue
               
Harcourt Education
               
 
US Schools and Assessment
    £806       £774  
 
International
    95       94  
             
      £901       £868  
             
     Harcourt Education comprises: the Harcourt Education US Schools and Assessment businesses, which provide print and multimedia teaching and assessment materials, principally for pre-kindergarten to 12th grade students in the United States; and Harcourt Education International, which provides educational content to students and teachers, principally in the United Kingdom, Australia, New Zealand and southern Africa.
     In 2005, the Harcourt Education US Schools and Assessment businesses contributed approximately 89% of the total revenue of Harcourt Education, with Harcourt Education International accounting for 11%. Approximately 85% of Harcourt Education revenue in 2005 was derived from North America, 9%, from Europe and the remaining 6% from the rest of the world.
Harcourt Education US Schools and Assessment
     Harcourt Education US Schools and Assessment businesses provide textbooks and related instructional materials to US schools, and comprise Harcourt School Publishers; Holt, Rinehart and Winston; Harcourt Achieve; Greenwood-Heinemann; and Harcourt Trade Publishers.
     Harcourt School Publishers, based in Orlando, Florida, is a publisher of print and technology-enabled instructional materials for students in pre-kindergarten to 6th grade. It publishes educational material covering seven principal disciplines: reading, mathematics, social studies, science, language arts, health and art. Its programmes include Trophies, Harcourt Language, Harcourt Math, Horizons, Harcourt Science and Your Health. Harcourt School Publishers also offers supplemental materials, interactive programmes and products to support its basal programmes directly to the teacher, parent, and the home-school market through its internet site.
     Holt, Rinehart and Winston, based in Austin, Texas, offers educational textbooks and related instructional materials, including print-based products, CDs, videos and internet-based support and reference materials to middle and secondary schools. It publishes educational material covering, in particular, literature and language arts, science, mathematics, world languages, social studies and health. Its programmes include Elements of Literature, Elements of Language, Holt Middle School Math, and Holt Science and Technology.
     Harcourt Achieve, based in Austin, Texas, is a publisher of supplemental pre-kindergarten to 12th grade and adult education materials, including skills-based programmes, remedial learning, test preparation, professional development materials and general equivalency diploma preparation. Harcourt Achieve provides materials for students with special educational needs and for whom English is a second language. Programmes within Harcourt Achieve include Saxon Math, Rigby Literacy, READS, Pair-It and Power Up!.
     Greenwood-Heinemann, headquartered in Westport, Connecticut, is a publisher of monograph and reference lists, teachers’ professional resources and educational materials for libraries and librarians.
     Harcourt Trade Publishers, based in San Diego, California, includes the Harvest imprint. Harcourt Trade authors have won the Nobel Prize for Literature three times in the last nine years and Harcourt Trade books have won several prestigious awards and recognitions, including the National Book Award, Edgar Award, Man Booker Prize, and numerous New York Times “Best Book of the Year” citations.
     The principal warehouse and distribution facilities of the Harcourt Education US Schools businesses are in Bellmawr, New Jersey; Lewisville, Texas; and Troy, Missouri. Printing and binding is sourced through unaffiliated printers.
     The major customers of Harcourt Education US Schools’ pre-kindergarten to 12th grade businesses are state boards of education and local district and school boards. In the United States, 20 states periodically purchase educational programmes through an adoption process. This process entails state education committees approving a short-list of education materials from which the school districts can purchase. We seek to keep our products on the approved list within each adoption state and market these products directly to the school districts. The 30 states without an adoption process, known as open territories, allow individual school districts to purchase any educational programmes. In the open territories, we actively market our products to individual school districts.

20


Table of Contents

     The principal competitors of the Harcourt Education US Schools businesses are Pearson, McGraw Hill and Houghton-Mifflin. In the international library market, the principal competitors are Scholastic/ Grollier, Wayland (WH Smith) and Watts (Lagardere).
     Harcourt Assessment, headquartered in San Antonio, Texas, is a provider of educational, clinical and performance measurement.
     In educational testing, Harcourt Assessment provides a range of educational achievement, aptitude and guidance testing services for measuring pre-kindergarten to 12th grade student progress. Principal products are norm-referenced, criterion-referenced and formative instructional assessments and include the Stanford Achievement Test Series.
     In clinical testing, Harcourt Assessment provides practising and research psychologists with psychological, speech and occupational therapy assessment tests for many aspects of human behaviour, intelligence and development. Products include the Wechsler Intelligence Scales, the Bayley Scales of Infant Development, the Beck Inventories, and Clinical Evaluation of Language Fundamentals.
     The principal competitors of Harcourt Assessment in educational testing are CTB (McGraw Hill), Riverside (Houghton-Mifflin) and NCS (Pearson). Competition in clinical testing is fragmented, with competitors including NCS and American Guidance Services (Pearson), Riverside (Houghton-Mifflin) and Pro-Ed.
Harcourt Education International
     Harcourt Education International comprises the UK Schools publishing business; Rigby-Heinemann in Australia; Heinemann in southern Africa and Reed Publishing in New Zealand. In 2005, approximately 53%, of revenue was derived from the United Kingdom, 3% from the United States, 13%, from Australia and the remaining 31% from the rest of the world.
     The UK Schools business is a provider of textbooks and related instructional materials to the UK primary and secondary schools market through the Heinemann, Ginn and Rigby imprints. Rigby-Heinemann is a publisher of primary and secondary school books in Australia. In southern Africa, Heinemann is a publisher of school books and, in New Zealand, Reed Publishing publishes both textbooks and consumer books for the local market.
     Printing and binding are performed by unaffiliated printers both in the country of origin and around the world. Harcourt Education International has its own warehouse and distribution facilities in its principal territories. Harcourt Education International’s principal UK competitors are Longman (Pearson), Oxford University Press, Nelson Thornes (Wolters Kluwer) and Cambridge University Press. In Australia, the principal commercial competitors include Thomson Nelson Learning, Macmillan, AWL (Pearson) and Jacaranda (John Wiley Inc).
REED BUSINESS
                   
    Year ended December 31,
     
    2005   2004
         
    (in millions)
Revenue
               
Reed Business Information
               
 
US
    £324       £323  
 
UK
    259       244  
 
Continental Europe
    270       268  
 
Asia Pacific
    39       33  
Reed Exhibitions
    471       421  
             
      £1,363       £1,289  
             
     Reed Business comprises Reed Business Information, the business magazine 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
     Reed Business Information contributed approximately 65% of Reed Business revenue in 2005. 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

21


Table of Contents

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 is sold by “paid circulation”.
     In 2005, approximately 56% of Reed Business Information revenue came from advertising, 24% from subscription sales, 7% from circulation sales, 3% from training and 10% from other sources. Approximately 39% of Reed Business Information revenue in 2005 came from the United States, 23%, from the United Kingdom, 33% from Continental Europe and 5% from the rest of the world.
     In 2005 three launches were made in China, adding to a growing portfolio of titles under joint arrangements with IDG and Chinese partners, with further launches in Singapore and Japan.
     Online revenue grew by more than 30% in 2005 to over £160 million reflecting increasing advertising and search demand in our webzines, recruitment sites, data services, and online search engines and directories.
     Reed Business Information US (“RBI US”) is a publisher of business information, with over 85 trade magazines. Amongst the RBI US titles are Variety, Broadcasting & Cable, Multichannel News, Publishers Weekly, EDN, Design News and Interior Design. RBI US also publishes product tabloids which provide information, primarily on new products, to managers and professionals in the industrial, processing, medical, scientific and high technology fields. 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.
     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 to business titles compete on an individual basis with the publications of a number of publishers, including Penton Media, Advanstar, VNU, Hanley Wood, McGraw Hill and CMP Media (United Business Media).
     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. Its online services include recruitment sites such as Totaljobs.com and CWjobs.co.uk, an industrial search engine, Kellysearch.com, and data services supplying information to the aerospace, human resources, property, banking and chemicals industries.
     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, VNU 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.
     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, transportation, 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 and Editions Prat in France and Detail in Germany. 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.
     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 VNU.
Reed Exhibitions
     Reed Exhibitions organises trade exhibitions and conferences internationally, with 460 events in 38 countries, attracting 90,000 exhibitors and 5.5 million visitors. The business contributed approximately 35% of the revenue of Reed Business in 2005. Over 74% 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 2005, approximately 25% of Reed Exhibitions’ revenue came from North America, 45% from Continental Europe, 11%

22


Table of Contents

from the United Kingdom and the remaining 19% 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/ defence; building and construction; electronics; energy; oil and gas; food and hospitality; jewellery; manufacturing; pharmaceuticals; property; publishing; sport and recreation; and travel.
     Reed Exhibitions’ principal events include JCK International Jewellery Shows, Professional Golfers Association (PGA) Merchandise Show and National Hardware Show in North America; DSEi and London Book Fair in the United Kingdom; Batimat, MIDEM, MIPTV, MIPcom, MIPIM, MIPIC, Salon Nautique and Maison et Objet in France; AIMEX and Australian Gift Fairs in Australia; International Jewellery Tokyo in Japan; Thai Metalex in South-East Asia; and the Travel series of international events.
     The exhibition industry has historically been extremely fragmented. The main US competitor is VNU. 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.
ELSEVIER REED FINANCE BV
     Elsevier Reed Finance BV, the Dutch resident 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 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, 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 exploitation of tangible and intangible property rights whilst ERSA is responsible for insurance activities relating to risk retention.
     At the end of 2005, 87% (2004: 89%) of ERF’s gross assets were held in US dollars and 12% (2004: 10%) in euros, including $8.1 billion (2004: $8.4 billion) and 0.9 billion (2004: 0.7 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 $0.7 billion backed by committed bank facilities. Term debt is derived from a Swiss domestic public bond issue, bilateral term loans and private placements. The committed bank facilities and certain other term debt agreements were renegotiated in 2005. Short term debt is primarily derived from euro and US commercial paper programmes.
     In 2005, EFSA renegotiated various banking and cash management arrangements in Continental Europe and Asia and continued to provide advice to Reed Elsevier Group plc companies regarding interest and foreign currency exposures, implementation of International Financial Reporting Standards, and electronic collections and payment solutions.
     The average balance of cash under management in 2005, on behalf of Reed Elsevier Group plc and its parent companies, was approximately $0.4 billion.
ORGANISATIONAL STRUCTURE
     A description of the corporate structure is included under “— History and Development” on page 13. A list of significant subsidiaries, associates, joint ventures and business units is included as an exhibit, see “Item 19: Exhibits” on page F-86.

23


Table of Contents

PROPERTY, PLANTS AND EQUIPMENT
     We own or lease over 400 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
               
Troy, Missouri
  Harcourt Education   Office and warehouse     575,000  
Miamisburg, Ohio
  LexisNexis   Office     403,638  
Bellmawr, New Jersey
  Harcourt Education   Office and warehouse     380,000  
Linn, Missouri
  Elsevier   Warehouse     206,659  
Albany, New York
  LexisNexis   Office     194,780  
Oakbrook, Illinois
  Reed Business   Office     181,659  
Colorado Springs, Colorado
  LexisNexis   Office     181,197  
Leased properties
               
San Antonio, Texas
  Harcourt Education   Office and warehouse     559,258  
New York, New York
  Reed Business and Elsevier   Office     451,800  
Lewisville, Texas
  Harcourt Education   Office and warehouse     434,898  
Amsterdam, Netherlands
  Reed Business and Elsevier   Office     429,308  
Orlando, Florida
  Harcourt Education   Office     372,468  
Miamisburg, Ohio
  LexisNexis and Elsevier   Office and data centre     213,802  
Austin, Texas
  Harcourt Education   Office     195,230  
Sutton, England
  Reed Business   Office     191,960  
Rushden, England
  Harcourt Education and Elsevier   Warehouse     186,000  
     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.

24


Table of Contents

ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS — REED ELSEVIER
     Following a regulation adopted by the European Parliament, the combined financial statements have for the first time been prepared in accordance with IFRS as issued by the IASB and adopted by the EU. As permitted for first-time application of IFRS, only two years of IFRS information are presented and so the following discussion is based on the combined financial statements of Reed Elsevier for the two years ended December 31, 2005. IFRS differs in certain significant respects from US GAAP, as set out in note 35 to the combined financial statements.
     In preparing the combined financial statements under IFRS for the first time, the following exemptions, as permitted by IFRS1 — First-Time Adoption of International Financial Reporting Standards, have been applied:
  (i) IFRS3 — Business Combinations has not been applied retrospectively to business combinations that occurred prior to the date of transition, January 1, 2004.
 
  (ii) Net defined benefit pension scheme surpluses and deficits have been recognised in full in accordance with IAS19 — Employee Benefits at the date of transition.
 
  (iii) Cumulative translation differences that are required by IAS21 — The Effects of Changes in Foreign Exchange Rates to be classified as a separate component of equity are deemed to be zero at the date of transition. The gain or loss on any subsequent disposals of foreign operations will exclude translation differences that arose before the date of transition to IFRS.
     IAS39 — Financial Instruments is applicable from the 2005 financial year with a transition date of January 1, 2005 and, accordingly, no restatement of prior period comparatives has been made in respect of IAS39.
     Further information explaining the transition to IFRS and the principal differences between previous UK GAAP and IFRS that are relevant to Reed Elsevier, and reconciliations of net income and equity for the 2004 financial year, are set out in note 34 to the combined financial statements.
     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
Year ended December 31,
                                 
    2005   2004
         
    (in millions, except percentages)
Subscriptions
    £1,932       38 %     £1,836       38 %
Circulation
    1,722       33       1,575       33  
Advertising
    668       13       640       13  
Exhibition fees
    479       9       429       9  
Other
    365       7       332       7  
                         
Total
    £5,166       100 %     £4,812       100 %
                         
Revenue by geographic market for continuing operations(1)
Year ended December 31,
                                 
    2005   2004
         
    (in millions, except percentages)
North America
    £2,974       57 %     £2,779       58 %
United Kingdom
    568       11       545       11  
The Netherlands
    202       4       202       4  
Rest of Europe
    804       16       725       15  
Rest of world
    618       12       561       12  
                         
Total
    £5,166       100 %     £4,812       100 %
                         
 
(1) Reed Elsevier’s geographic markets are North America, the United Kingdom, the Netherlands, the Rest of Europe (excluding the United Kingdom and the Netherlands) and the rest of the world (other than North America, the United Kingdom, the Netherlands and the Rest of Europe).

25


Table of Contents

     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 2005 represented 40% of Reed Elsevier’s total cost of sales and operating expenses before amortisation of acquired intangible assets (2004: 39%).
     The following tables show revenue, operating profit and adjusted operating profit for each of Reed Elsevier’s business segments in each of the two years ended December 31, 2005, together with the percentage change in 2005 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 SFAS 131 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
    Year ended December 31,
     
    2005   2004   % change
             
            actual   constant
                    rates   rates(1)
                         
    (in millions, except percentages)
Elsevier
    £1,436       28 %     £1,363       28 %     +5 %     +8 %
LexisNexis
    1,466       28       1,292       27       +13       +13  
Harcourt Education
    901       18       868       18       +4       +3  
Reed Business
    1,363       26       1,289       27       +6       +5  
                                     
Total
    £5,166       100 %     £4,812       100 %     +7 %     +7 %
                                     
                                                 
    Operating Profit
    Year ended December 31,
     
    2005   2004   % change
             
            actual   constant
                    rates   rates(1)
                         
    (in millions, except percentages)
Elsevier
    £396       46 %     £402       51 %     -1 %     +3 %
LexisNexis
    218       26       188       24       +16 %     +15 %
Harcourt Education
    87       10       67       9       +30 %     +29 %
Reed Business
    158       18       126       16       +25 %     +26 %
                                     
Subtotal
    £859       100 %     £783       100 %                
Corporate costs
    (32 )             (29 )                        
Unallocated net pension credit(3)
    12               12                          
                                     
Total
    £839               £766               +10 %     +12 %
                                     

26


Table of Contents

                                                 
    Adjusted Operating Profit(2)
    Year ended December 31,
     
    2005   2004   % change
             
            actual   constant
                    rates   rates(1)
                         
    (in millions, except percentages)
Elsevier
    £449       39 %     £445       41 %     +1 %     +5 %
LexisNexis
    338       29       287       27       +18 %     +17 %
Harcourt Education
    161       14       157       14       +3 %     +2 %
Reed Business
    214       18       194       18       +10 %     +9 %
                                     
Subtotal
    £1,162       100 %     £1,083       100 %                
Corporate costs
    (32 )             (29 )                        
Unallocated net pension credit(3)
    12               12                          
                                     
Total
    £1,142               £1,066               +7 %     +8 %
                                     
     Adjusted operating profit is derived from operating profit as follows:
                   
    2005   2004
         
    (in millions)
Operating profit
    £839       £766  
Adjustments:
               
 
Amortisation of acquired intangible assets
    276       255  
 
Acquisition integration costs
    21       38  
 
Reclassification of tax in joint ventures
    6       7  
             
Adjusted operating profit
    £1,142       £1,066  
             
 
(1) Represents percentage change in 2005 over 2004 at constant rates of exchange, which have been calculated using the average and hedged exchange rates for the 2004 financial year. These rates were used in the preparation of the 2004 combined financial statements.
 
(2) Adjusted operating profit represents operating profit before the amortisation of acquired intangible assets and acquisition integration costs, and grossed up to exclude the equity share of taxes in joint ventures, and is reconciled to operating profit above.
 
(3) The unallocated net pension credit of £12 million (2004: £12 million) comprises the expected return on pension scheme assets of £149 million (2004: £139 million) less interest on pension scheme liabilities of £137 million (2004: £127 million).
     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 hedged exchange rates for the previous financial year. Percentage movements at both actual rates and constant rates are shown in tables on pages 26 and 27. The effect of currency movements on the 2005 results is further described separately below (see “— Effect of Currency Translation”). References to operating profit relate to operating profit including joint ventures. References to underlying performance are calculated to exclude the effects of acquisitions, disposals and the impact of currency translation.
Results of Operations for the Year Ended December 31, 2005
Compared to the Year Ended December 31, 2004
General
     Revenue increased by 7% to £5,166 million. At constant exchange rates, revenue was also 7% higher, or 5% higher excluding acquisitions and disposals.
     Operating profits of £839 million were up 10%, or 12% at constant exchange rates, compared with £766 million in 2004. Operating profit is stated after amortisation of acquired intangible assets of £276 million (2004: £255 million), acquisition integration costs of £21 million (2004: £38 million) and includes tax charges in respect of joint ventures of £6 million (2004: £7 million). Excluding these items, operating profits would have been up 7% at £1,142 million (2004: £1,066 million), or up 8% at constant exchange rates, and up 6% on an underlying basis. The increase in operating profits principally reflects improved operating performance (described for each business segment below) and the contribution from acquisitions.
     Operating margin, including amortisation of acquired intangible assets and acquisition integration costs, was 16.2%. Excluding amortisation of acquired intangible assets, acquisition integration costs and the equity share of taxes in joint

27


Table of Contents

ventures, the margin would have been 22.1%, down 0.1 percentage points compared to 2004, reflecting 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 page 33.
     The amortisation charge for acquired intangible assets of £276 million was up £21 million on the prior year principally as a result of a full year’s amortisation for the Seisint and Saxon acquisitions made in 2004 and the MediMedia MAP acquisition from August 2005.
     Net finance costs, at £140 million, were £8 million higher than in the prior year and included a £8 million net credit on the mark-to-market of non-qualifying hedges and undesignated instruments under IAS39 — Financial Instruments which applies from January 1, 2005. The increase in costs reflects higher interest rates and the financing of current and prior year acquisitions.
     Profit before tax was £701 million, compared with £631 million in 2004, an increase of 11%, or 14% at constant exchange rates. The increase in profit before tax principally reflects the increased operating profits, partially offset by increased net finance costs.
     The effective tax rate on earnings was 34% (2004: 27%). The increase principally reflects movements in deferred tax balances, arising on unrealised exchange differences on long term inter-affiliate lending, that are recognised in the income statement under IFRS but are not expected to crystallise in the foreseeable future.
     The profit attributable to shareholders of £462 million was up 1%, or 3% at constant exchange rates, compared to £459 million in 2004, reflecting the operating performance of the business offset by the swing in non-cash deferred tax balances referred to above.
     In 2005, US GAAP net income was £374 million, compared with £418 million in 2004. The decrease in US GAAP net income in 2005 compared to 2004 primarily reflects the factors described above together with additional charges arising in 2005 under US GAAP related to accounting for pensions under SFAS 87 — Employers’ Accounting for Pensions, where amortisation of deferred actuarial losses and other deferred amounts was £78 million (2004: £17 million). Net income under US GAAP for 2004 has been restated to reflect the adoption of SFAS 123(R) — Share-Based Payment, which requires an expense to be recorded based on the fair value of the award at the date of grant, and related deferred tax effects. Net income under US GAAP for 2004 is accordingly £31 million lower than the amount previously reported.
Elsevier
     Revenue and adjusted operating profits were up 5% and 1% respectively compared to 2004. At constant exchange rates, revenue and adjusted operating profits were up 8% and 5% respectively, or 5% and 5% before acquisitions and disposals. Underlying operating margins were similar to the prior year despite the significant costs of the newly launched Scopus product ahead of revenues building and additional restructuring charges. Adjusted operating margins, at 31.3%, were 1.3 percentage points lower, reflecting the inclusion of lower margin acquisitions and currency effects, most particularly the year on year movement in hedge rates in journal subscriptions.
     The Science & Technology division saw underlying revenue growth of 5% at constant exchange rates. Subscription renewals were strong at 97%, slightly higher than in the prior year, and online growth was seen in widening distribution through ScienceDirect and in secondary databases including initial sales of Scopus. There has been continued take up of e-only contracts which now account for over 40% of journal subscriptions by value, up from 35% a year ago. ScienceDirect continues to see growth in usage, up over 20% year on year. The MDL software business saw only modest growth as a result of the extended sales cycle as pharmaceutical companies adopt the new platform.
     The Health Sciences division saw underlying revenue growth of 6% at constant exchange rates, primarily attributable to US book sales, particularly for the expanding nursing and allied healthcare sectors, journals and pharma communications. 2005 saw online revenue growth with new product and platform releases. Outside the US, growth was seen in Continental Europe and in Asia Pacific and Latin America with the UK held back by comparison with the prior year. Total revenue growth at constant currencies was 11% including MediMedia MAP and other smaller acquisitions.
     Operating profit of Elsevier, including amortisation of acquired intangible assets and acquisition integration costs, decreased by £6 million to £396 million. This reflects the 1% increase in adjusted operating profit described above offset by higher amortisation of acquired intangible assets.
LexisNexis
     LexisNexis’ results for 2005 reflect revenue growth resulting from continuing demand for online information and related productivity tools, and improvement in operating margins.
     Revenue and adjusted operating profits were up 13% and 18% respectively compared to 2004, including a full year contribution from Seisint and other recent acquisitions. At constant exchange rates, revenue and adjusted operating

28


Table of Contents

profits were up by 13% and 17% respectively, or 6% and 9% before acquisitions and disposals. Overall adjusted operating margins improved by 0.9 percentage points to 23.1%, reflecting revenue growth and firm cost management.
     In North America, LexisNexis saw revenue growth at constant exchange rates of 15%, or 6% before acquisitions and disposals. In North American Legal Markets, increased demand was seen from law firms for online information and workflow tools to deliver organic revenue growth of 5%. In Corporate and Federal Markets, organic revenue growth was 8% with continued recovery in online news and business, higher volumes for the US patent and trademark office and increased demand in risk management. Additionally, the Seisint business acquired in September 2004 achieved 20% pro-forma year on year sales growth with adjusted operating profits higher year on year despite higher security and other costs following the unauthorised access to its databases reported earlier in the year. Adjusted operating profits for LexisNexis North America were up 20%, or 11% underlying, with a 1.1 percentage point increase in adjusted operating margins due to the revenue growth and the gearing in the business.
     The International business outside North America saw growth in demand for online information and from new publishing, notably in Europe and Africa. At constant exchange rates, organic revenue growth was 7%, driven by a 16% increase in online revenues, with underlying adjusted operating profits up 5% after further investment in Germany, Asia Pacific and Latin America.
     Operating profit of LexisNexis, including amortisation of acquired intangible assets and acquisition integration costs, increased by £30 million to £218 million. This reflects the increase in adjusted operating profit described above partially offset by an increase in amortisation of acquired intangible assets arising from a full year charge in respect of the 2004 Seisint acquisition.
Harcourt Education
     Revenue and adjusted operating profits were up 4% and 3% respectively compared to 2004. At constant exchange rates, revenue and adjusted operating profits were up 3% and 2% respectively. Organic revenue growth at constant exchange rates, excluding acquisitions and disposals was 2%, with underlying profits flat. Adjusted operating margins were slightly lower by 0.2 percentage points to 17.9%, as the revenue shortfall was mostly mitigated by sales mix and firm cost management throughout the year.
     The Harcourt US Schools and Testing business saw underlying revenue and operating profits up 2% at constant currencies.
     The Harcourt US K-12 basal business saw revenue growth of 9% despite a lower than 75% implementation rate in relevant Texas adoptions due to funding delays. Harcourt won a leading market share in new state textbook adoptions in the core curriculum subjects in which we compete, coming no. 1 in Elementary and no. 2 in Secondary. Particular adoption successes were seen in Texas health and Florida social studies in Elementary and in literature and language arts and in Texas health and world languages in Secondary.
     The supplemental business saw revenue decline of 11% excluding acquisitions and disposals driven by reduced sales of the literacy backlist titles that are not aligned to the approaches prompted by the No Child Left Behind Act, and tighter budgets at the school level, partly caused by funds moving to large scale intervention programmes sold at the district level. Firm remedial action has been taken: a major repositioning of the frontlist publishing programmes to fit with NCLB orientation; a new product line under development to address the more comprehensive intervention need at a district level; and significant upgrading and re-staffing of the sales force.
     Harcourt Assessment saw underlying revenue decline 1% reflecting the failure to win a satisfactory share of significant state testing contracts, limited new clinical frontlist publishing and an unexpected cutback on schools spending on traditional catalog product. Again, significant action is being implemented to address the issues. Changes are being made at a senior management level, a major upgrade in sales management and in program servicing is underway, the clinical publishing frontlist is being strengthened, and a step change is targeted in margin through an extensive cost reduction and efficiency programme.
     The Harcourt Education International business saw underlying revenue 1% lower, reflecting a weak UK instructional materials market as schools held back spending in the face of considerable funding uncertainties surrounding government initiatives. Adjusted operating profits were down 10% underlying, due to the revenue decline and investment in new assessment product.
     Operating profit of Harcourt Education, including amortisation of acquired intangible assets and acquisition integration costs, increased by £20 million to £87 million. This reflects the increase in adjusted operating profit described above and the non recurrence of acquisition integration costs arising on the Saxon acquisition in 2004.
Reed Business
     Revenue and adjusted operating profits were up 6% and 10% respectively compared to 2004. At constant exchange rates, revenue and adjusted operating profits were up 5% and 9%. Organic revenue growth, excluding acquisitions and disposals, was 5%, up from 2% in 2004. Adjusted operating profits were up 10% at constant exchange rates excluding

29


Table of Contents

acquisitions and disposals. The exhibitions business grew underlying revenues 11% whilst the magazines and information publishing businesses saw underlying revenue growth of 2%, which compares with a flat performance in the prior year. Adjusted operating margins increased by 0.7 percentage points to 15.7% despite the net cycling out of contribution from biennial joint venture exhibitions.
     The Reed Business Information magazine and information publishing businesses saw continued growth in online services whilst print advertising remains variable by geography and sector, in part reflecting migration to growing online services. In the US, revenue increased 1% at constant exchange rates from continuing titles, i.e. excluding the manufacturing product news titles which are currently being sold, with adjusted operating profits up 20% through continuing cost actions. The Media division continued to perform well with other divisions broadly flat as print advertising migrates online. In the UK, organic revenue growth was 7% driven by growth in online recruitment and paid search. The property, science, aerospace and agriculture sectors performed well with weakness in the social care market. Adjusted operating profits were 15% ahead underlying due to revenue growth and firm cost control. In Continental Europe, underlying revenue and adjusted operating profits were 1% and 6% lower respectively, with a continuing depressed market environment in the Netherlands in particular. Focus on new online services, market share performance and yield management largely mitigated the weakness in the advertising market. Asia Pacific saw 8% underlying revenue growth with strong performances in Japan and Singapore.
     Reed Exhibitions saw underlying revenue growth of 11% whilst adjusted operating profits grew 7%, or 15% before the cycling out of the contribution from a number of biennial joint venture exhibitions. Growth was seen across the business, in the United States, Europe and Asia-Pacific geographies with increased demand, new launches and a turnaround in some underperforming sectors.
     Operating profit of Reed Business, including amortisation of acquired intangible assets and acquisition integration costs, increased by £32 million to £158 million. This principally reflects the increase in adjusted operating profit and lower amortisation of acquired intangible assets as some past acquisitions become fully amortised.
Critical Accounting Policies
Introduction
     The accounting policies of the Reed Elsevier combined businesses under IFRS are described in note 2 to the combined financial statements. IFRS differs from US GAAP in certain significant respects. The principal differences that affect net income and combined shareholders’ equity are explained in note 35 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.
Goodwill and intangible assets
     We target acquisitions and alliances that accelerate our strategic development and meet our financial criteria. We have spent £954 million on acquisitions in the last two years, including the £414 million acquisition in 2004 of Seisint Inc., a leading risk management business in the United States and the £188 million acquisition in 2005 of MediMedia MAP, a leading medical publisher in France, Spain, Italy and the United States.

30


Table of Contents

     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, 2005 was £4.6 billion, on which accumulated amortisation of £1.9 billion had been charged. The total carrying value of acquired goodwill, which is not amortised under IFRS, as at December 31, 2005 was £3.0 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. Under IFRS and US GAAP, 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, 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 discount rates used in the value in use calculations are the estimated pre-tax weighted average cost of capital of each cash generating unit and range from 10% - 12%. Estimated future cashflows are based on latest forecasts and estimates for the next five years and a long term nominal growth rate of 3% is 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.
Pensions and other retirement benefits
     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 and are assessed in accordance with the advice of qualified actuaries. 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.
     Under US GAAP, pensions are accounted for under SFAS 87 — Employers’ Accounting for Pensions. The objective of SFAS 87 is to recognise the cost of an employee’s pension benefits over that employee’s approximate service period, with actuarial gains and losses deferred in equity and recognised in net income over the average remaining service lives of employees. Plan assets are valued for US GAAP by reference to market-related values at the date of the financial statements. Liabilities are assessed using the rate of return obtainable on fixed or inflation-linked bonds. SFAS 87 also requires a liability to be recognised that is at least equal to the unfunded benefit obligation. Changes in the additional minimum pension liability are recognised directly in equity.
     Under both IFRS and US GAAP, accounting for these pension schemes involves judgment about uncertain events, including the life expectancy of the members, salary and pension increases, inflation, the 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. These best estimates of future developments are made in conjunction with independent actuaries and each scheme is subject to a periodic review by the independent actuaries. These estimates are described in further detail in note 6 to the combined financial statements. Although we

31


Table of Contents

believe the estimates are appropriate, differences arising from actual experience or future changes in assumptions may materially affect future pensions charges. In particular, a reduction in the realised long term rate of return on assets and/or a reduction to discount rates would result in an increase to future pension costs.
Share based remuneration
     Under both IFRS and US GAAP, 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.
     Under both IFRS and US GAAP, the fair value of awards is determined at the date of grant by use of a binomial model, which requires 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 these are made in conjunction with independent actuaries. 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.
Financial instruments
     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 36 and 37, include the use of interest rate swaps, forward interest rate agreements, interest rate options and foreign exchange forward contracts. Under both IFRS and US GAAP, 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 under both IFRS and US GAAP. 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 under both IFRS and US GAAP. 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 under both IFRS and US GAAP for changes in the fair value of those instruments. The fair values of the instruments used are determined by reference to quoted market rates.
Taxation and deferred tax
     Reed Elsevier operates in over 100 locations worldwide. A number of businesses have been sold over the last six years. At the same time, major acquisitions have been made to accelerate strategic development, notably the Harcourt STM and Education and Assessment businesses in 2001 and Seisint in 2004. In these circumstances, complex tax issues arise requiring management to use its judgment to make various tax determinations.
     The Reed Elsevier combined businesses seek to organise their affairs in a tax efficient manner, taking account of the jurisdictions in which they operate. Additionally, the tax payable on a number of disposals made in recent years has not been finally determined. 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 provide for such tax risks until a high degree of confidence exists that the tax treatment will be accepted by the tax authorities.
     Under IFRS, 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 over the near term 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.

32


Table of Contents

Effect of Currency Translation
     The combined financial statements on pages F-1 to F-54 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 for 2005, taking account of the currencies of the interest on its borrowings and cash over that period, is set forth below.
     Revenue, operating profit and profit before tax in each currency as a percentage of total revenue,
operating profit and profit before tax respectively
                                         
    US                
    Dollars   Sterling   Euro   Other   Total
                     
Revenue
    55%       17%       20%       8%       100%  
Operating profit
    43%       19%       31%       7%       100%  
Profit before tax
    34%       22%       35%       9%       100%  
                               
     Currency translation differences decreased Reed Elsevier’s revenue by £5 million in 2005 compared to 2004. Excluding amortisation of acquired intangible assets, currency translation differences would have decreased operating profits by £14 million in 2005 compared to 2004. Acquired intangible assets are predominantly denominated in US dollars and, after charging amortisation, currency translation differences decreased operating profits by £16 million in 2005 compared to 2004. Borrowings are predominantly denominated in US dollars and, after charging net finance costs, currency translation differences decreased profit before tax by £17 million in 2005 compared to 2004. The currency translation 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 2005 than in 2004 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 encouraged 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 18 to the combined financial statements.
Recently Issued Accounting Pronouncements
     In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections — A replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This statement requires retrospective application to prior periods’ financial statements of changes in accounting principles unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement applies to all voluntary changes in accounting principles and changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. SFAS 154 would not have had a material effect on the financial position, results of operations or cash flows of the combined businesses under US GAAP as at December 31, 2005.
     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an Amendment of APB Opinion No. 29”, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied prospectively. SFAS 153 would not have had a material effect on the financial position, results of operations or cash flows of the combined businesses under US GAAP as at December 31, 2005.
     On November 24, 2004, FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The statement amends the guidance in ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is required to be adopted in fiscal

33


Table of Contents

years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the combined financial statements.
     In August 2005, the IASB issued IFRS7 — Financial Instruments: Disclosures, which introduces new requirements to improve the information on financial instruments given in financial statements. The standard replaces some of the requirements in IAS32 — Financial Instruments: Disclosure and Presentation. IFRS7 is effective for fiscal years beginning on or after January 1, 2007. As a disclosure only standard, IFRS7 will not have an impact on the results of operations, or financial position of the combined businesses.

34


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES — REED ELSEVIER
Cash Flow
     Reed Elsevier’s net cash generated from operations in 2005 amounted to £1,223 million (2004: £1,154 million). Included in these net cash inflows are cash outflows relating to acquisition integration costs charged to operating profit of £28 million (2004: £30 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, 2005 subscriptions and other revenues in advance totalled £979 million (2004: £947 million).
     Reed Elsevier’s cash outflow on the purchase of property, plant and equipment in 2005 was £93 million (2004: £82 million), while proceeds from the sale of property, plant and equipment amounted to £8 million (2004: £4 million). The cash outflow on internally developed intangible assets in 2005 was £102 million (2004: £110 million), principally relating to investment in software and systems development.
     During 2005, Reed Elsevier paid a total of £307 million (2004: £647 million) for acquisitions, after taking account of net cash acquired of £8 million (2004: £17 million) and of which £14 million (2004: £7 million) is deferred to future years; £15 million (2004: £nil) in respect of investments in joint ventures; and £9 million (2004: £7 million) of deferred payments 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 £36 million (2004: £12 million).
     During 2005, Reed Elsevier paid dividends totalling £336 million to the shareholders of the parent companies (2004: £309 million).
     Net borrowings at December 31, 2005 were £2,694 million (2004: £2,532 million), comprising gross borrowings of £3,164 million, less £174 million of gains on related derivative financial instruments and cash and cash equivalents of £296 million. The increase of £162 million from the prior year end reflects foreign exchange translation effects following the significant strengthening of the US dollar between the beginning and end of the year. These translation effects increase net debt by £268 million, more than offsetting the benefit of free cash flow less dividend 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.
Contractual Obligations
     The contractual obligations of Reed Elsevier relating to debt finance and operating leases at December 31, 2005, 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)
    £536       £536       £—       £—       £—  
Long term debt (including finance leases)
    2,628       364       731       305       1,228  
Operating leases
    800       113       189       146       352  
                               
Total
    £3,964       £1,013       £920       £451       £1,580  
                               
 
(1) Short term debt is supported by committed facilities and by centrally managed cash and cash equivalents, and primarily comprises commercial paper.
     Interest payments are excluded from the above contractual obligations. Information on retirement benefit obligations is set out in note 6 to the combined financial statements.
Off-Balance Sheet Arrangements
     At December 31, 2005 Reed Elsevier had outstanding guarantees in respect of property lease guarantees given by Harcourt General, Inc. in favour of a former subsidiary. The maximum amount guaranteed as at December 31, 2005 is £73 million for certain property leases up to 2016, of which an amount of £27 million is held as provision against these lease guarantees. 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, 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.

35


Table of Contents

Treasury Policies
     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.
Liquidity
     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 $1,000 million of term debt issues should mature in any 12-month period. In addition, minimum levels of net debt with maturities over three and five years are specified, depending on the level of the total borrowings.
     During 2005, Reed Elsevier Capital Inc. issued $700 million of global bonds and Elsevier Finance SA drew down the proceeds of a $290 million term loan arranged in 2004. Also during 2005, Harcourt General Inc. public notes with a nominal value of $15 million were repurchased in the open market. Reed Elsevier may from time to time, continue to repurchase outstanding debt in the open market depending on market conditions.
     After taking account of the maturity of committed bank facilities that back short term borrowings, at December 31, 2005 and after utilising available cash resources, no borrowings mature in the next two years, 46% of borrowings mature in the third year, 11% in the fourth and fifth years, 29% in the sixth to tenth years, and 14% beyond the tenth year.
     In April 2005 Reed Elsevier renegotiated and amended the terms of its $3,000 million committed credit facility. At December 31, 2005, Reed Elsevier had access to $3,000 million (2004: $3,000 million) of committed bank facilities, of which $115 million was drawn. These facilities principally provide back up for short term debt but also security of funding for future acquisition spend in the event that commercial paper markets are not available. Of the total committed facilities, $nil expires within one year (2004: $750 million), $3,000 million within two to three years (2004: $nil), and $nil within three to four years (2004: $2,250 million).
Interest Rate Exposure Management
     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.
     At December 31, 2005, after taking account of interest rate and currency derivatives in a designated hedging relationship, $4,063 million of Reed Elsevier’s net debt was denominated in US dollars and net interest expense was fixed or capped on approximately $3,080 million of forecast US dollar net debt for the next 12 months. This fixed or capped net debt reduces to approximately $1,730 million by the end of the third year and reduces further thereafter with all designated interest rate derivatives which fix or cap expense and all but $113 million of fixed rate term debt (not swapped back to floating rate) having matured by the end of 2009 and 2012 respectively.
     At December 31, 2005, fixed rate US dollar term debt (not swapped back to floating rate) amounted to $1.9 billion (2004: $1.0 billion) and had a weighted average life remaining of 6.7 years (2004: 10.0 years) and a weighted average interest coupon of 6.0% (2004: 6.8%). Designated interest rate derivatives in place at December 31, 2005, which fix or cap the interest cost on an additional $0.7 billion (2004: $2.1 billion) of variable rate US dollar debt, have a weighted average maturity of 2.2 years (2004: 1.5 years) and a weighted average interest rate of 5.2% (2004: 4.4%). At December 31, 2005 there were undesignated derivatives in place which fix the interest cost on an average of $0.2 billion of debt in 2006.
Foreign Currency Exposure Management
     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.
     Current 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

36


Table of Contents

advance of becoming contractual. The precise policy differs according to the commercial situation 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, 2005, the amount of outstanding foreign exchange cover designated against future transactions was $1.1 billion.

37


Table of Contents

OPERATING RESULTS — REED ELSEVIER PLC AND REED ELSEVIER NV
     Following a regulation adopted by the European Parliament, the consolidated financial statements of Reed Elsevier PLC and Reed Elsevier NV have for the first time been prepared in accordance with IFRS as issued by the IASB and adopted by the EU. As permitted for first-time application of IFRS, only two years of IFRS information has been presented and so the following discussion is based on the consolidated financial statements of Reed Elsevier PLC and Reed Elsevier NV for the two years ended December 31, 2005. IFRS differs in certain significant respects from US GAAP as set out in note 22 to the Reed Elsevier PLC consolidated financial statements and note 21 to the Reed Elsevier NV consolidated financial statements.
     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.
Results of Operations for the Year Ended December 31, 2005
Compared to the Year Ended December 31, 2004
     The earnings per share of Reed Elsevier PLC and Reed Elsevier NV were 18.6p and 0.43 respectively in 2005, compared to 18.6p and 0.43 in 2004. The earnings per share reflect the interests of the respective shareholders of Reed Elsevier PLC and Reed Elsevier NV in the results of the combined businesses.
     Dividends to Reed Elsevier PLC and Reed Elsevier NV shareholders are 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 2004 final dividend of 9.6p and 2005 interim dividend of 3.7p giving a total of 13.3p (2004: 12.1p) for Reed Elsevier PLC; and a 2004 final dividend of 0.240 and 2005 interim dividend of 0.092 giving a total of 0.332 (2004: 0.310) for Reed Elsevier NV.
     The board of Reed Elsevier PLC has proposed a 2005 final dividend of 10.7p, giving a total dividend of 14.4p for the year, up 11% on 2004. The boards of Reed Elsevier NV, in accordance with the dividend equalisation arrangements, have proposed a 2005 final dividend of 0.267, which results in a total dividend of 0.359 for the year, up 9% on 2004. The difference in dividend growth rates reflects the movement in the euro:sterling exchange rate between dividend announcement dates.
     Following a review of the financial position and outlook of Reed Elsevier PLC and Reed Elsevier NV, the respective boards have approved the introduction of an annual share repurchase programme in 2006 to further improve capital efficiency. The boards expect, subject to prevailing market and business conditions, to spend approximately $350 million (£200 million) on share repurchases in 2006 and approximately $1 billion (£600 million) over three years. The repurchase of shares in Reed Elsevier PLC and Reed Elsevier NV will reflect the equalisation ratio.

38


Table of Contents

TREND INFORMATION
     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 and US state and federal funding for education, the impact of economic conditions on corporate budgets and the level of advertising demand.
     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”.

39


Table of Contents

ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS
     The directors of each of Reed Elsevier PLC, Reed Elsevier NV, Reed Elsevier Group plc and Elsevier Reed Finance BV at February 15, 2006 were:
                 
            Reed Elsevier   Elsevier Reed
Name (Age)   Reed Elsevier PLC   Reed Elsevier NV   Group plc   Finance BV
                 
Gerard van de Aast (48)
  Executive Director   Member of the Executive Board   Executive Director  
Mark Armour (51)
  Executive Director and Chief Financial Officer   Member of the Executive Board and Chief Financial Officer   Executive Director and Chief Financial Officer   Member of the Supervisory Board
Jacques Billy (35)
        Member of the Management Board
Willem Boellaard (75)
        Member of the Management Board
Dien de Boer-Kruyt (61)
    Member of the Supervisory Board (4)     Member of the Supervisory Board
Rudolf van den Brink (58)
        Chairman of the Supervisory Board
Sir Crispin Davis (56)
  Executive Director and Chief Executive Officer(3)   Chairman of the Executive Board and Chief Executive Officer(3)   Executive Director and Chief Executive Officer  
Mark Elliott (56)
  Non-executive
Director(4)
  Member of the Supervisory Board (4)   Non-executive Director (2)  
Erik Engstrom (42)
  Executive Director   Member of the Executive Board   Executive Director  
Jan Hommen (62)
  Non-executive Chairman(3)(4)   Chairman of the Supervisory Board (3)(4)   Non-executive Chairman  
Cees van Lede (63)
  Non-executive
Director(3)(4)
  Member of the Supervisory Board (3)(4)   Non-executive
Director(2)
 
Andrew Prozes (60)
  Executive Director   Member of the Executive Board   Executive Director  
David Reid (59)
  Non-executive
Director(1)(4)
  Member of the Supervisory Board (1)(4)   Non-executive
Director(1)
 
Lord Sharman (63)
  Non-executive
Director (1)(3)(4)
  Member of the Supervisory
Board(1)(3)(4)
  Non-executive
Director(1)
 
Rolf Stomberg (65)
  Non-executive
Director (3)(4)(5)
  Member of the Supervisory
Board(3)(4)(5)
  Non-executive
Director(2)(5)
 
Patrick Tierney (60)
  Executive Director   Member of the Executive Board   Executive Director  
Strauss Zelnick (48)
  Non-executive
Director(1)(4)
  Member of the Supervisory Board (1)(4)   Non-executive
Director(1)
 
 
(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.

40


Table of Contents

(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.
     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. 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.
     Willem Boellaard was appointed a member of the Management Board of Elsevier Reed Finance BV in December 1998. He joined Reed Elsevier PLC in 1990.
     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/DE, a subsidiary of Sara Lee Corporation, Imtech NV and Allianz Nederland Group NV.
     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 his early career with Procter and Gamble.
     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.
     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. Non-executive director of Eniro AB. Prior to joining Reed Elsevier, was general partner at General Atlantic Partners. Before that was president and chief operating officer of Random House. Began his career as a consultant with McKinsey.
     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 TNT NV and Academisch Ziekenhuis Maastricht, a member of the Supervisory Board of Koninklijke Ahold NV and ING NV. Is also Chairman of the Supervisory Board of TIAS, business school of the University of Tilburg. Was vice-chairman of the board of management and chief financial officer of Royal Philips Electronics NV until his retirement in 2005.
     Cees van Lede 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. Chairman of the Supervisory Board of Heineken NV and a member of the Supervisory Boards of Air Liquide SA, Akzo Nobel NV, Royal Philips Electronics NV and Air France-KLM, and a non-executive director of Sara Lee Corporation. Was chairman of the board of management of Akzo Nobel NV until his retirement in May 2003.
     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 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.

41


Table of Contents

     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, non-executive director of BG Group plc and a member of the Supervisory Board of ABN-AMRO NV. Member of the House of Lords since October 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 Management Consulting Group plc and a non-executive director of Smith & Nephew plc. Is also Chairman of Lanxess AG and serves on the boards of 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.
     Patrick Tierney is Chief Executive Officer of the Harcourt Education division. Joined Reed Elsevier in January 2003 and appointed a director of Reed Elsevier Group plc, Reed Elsevier PLC and Reed Elsevier NV in April 2003. Prior to joining Reed Elsevier was chief executive officer of Thomson Financial, part of the Thomson Corporation.
     Strauss Zelnick was appointed a non-executive director of Reed Elsevier PLC and Reed Elsevier Group plc, and a member of the Supervisory Board of Reed Elsevier NV in April 2005. Founder of ZelnickMedia Corporation in 2001. Chairman of Columbia Music Entertainment Inc, Direct Holdings Worldwide LLC and OTX Corporation. Prior to founding ZelnickMedia, was President and Chief Executive Officer of BMG Entertainment from 1998, and before that President and Chief Executive Officer of BMG Entertainment North America. He served as the Chief Executive Officer of Crystal Dynamics and as the President and Chief Operating Officer of 20th Century Fox.
SENIOR MANAGEMENT
     The executive officers of Reed Elsevier Group plc, other than directors, at February 15, 2006 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:  Director of Human Resources. 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.
     Keith McGarr:  Chief Technology Officer. A member of the Reed Elsevier management committee. Joined the company in 2000. Previously, Mr McGarr was with Federal Express Corporation where he was responsible for IT network-based and distributed services and the design of network architecture.
COMPENSATION
Remuneration Committee
     The Remuneration Committee is responsible for:
  —  recommending to the boards the remuneration (in all its forms) of the Chairman and the executive directors, including terms of service contracts and all other terms and conditions of employment;
 
  —  providing advice to the boards and to the Chief Executive Officer on major policy issues affecting the remuneration of executives at a senior level below the boards; and
 
  —  the operation of all share-based plans.
     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.
     The Committee has appointed Towers Perrin, an external consultancy which has wide experience of executive remuneration in multinational companies, to advise in developing its performance-related remuneration policy. Towers Perrin also provide actuarial and other Human Resources consultancy services directly to some Reed Elsevier companies.

42


Table of Contents

     The following individuals also provided material advice or services to the Committee during the year:
  —  Sir Crispin Davis (Chief Executive Officer);
 
  —  Ian Fraser (Global Director of Human Resources); and
 
  —  Philip Wills (Director, Compensation and Benefits).
     Throughout 2005, the Remuneration Committee (the “Committee”) consisted wholly of independent non-executive directors: Rolf Stomberg (Chairman), Mark Elliott and Cees van Lede. At the invitation of the Chairman, the Chief Executive Officer attends the meetings of the Committee except when his own remuneration is under consideration.
Executive Directors — Remuneration policy and objectives
     Our remuneration policy has been designed to meet the needs of a group of global business divisions, each of which operates internationally by line of business. In order to support this business structure, it is essential to have a remuneration policy which aids the attraction and retention of the best executive talent from anywhere in the world and underpins Reed Elsevier’s demanding performance standards.
     The challenges and demands created by the need for global market competitiveness as well as for internal consistency have led the Committee to apply a more global approach to the design and operation of its incentive plans.
     The Committee believes that in order to meet its remuneration objectives, the remuneration of executive directors should comprise a balance between fixed and variable (performance-related) pay elements with the greater proportion of potential reward being linked to performance. For superior performance, some 60% of total target remuneration is performance-related.
     The Committee constantly reviews remuneration policy to ensure that it is sufficiently flexible to take account both of future changes in Reed Elsevier’s business operations and environment and of key developments in remuneration practice. Consequently, the policy set out in this report has applied during 2005 and will apply in 2006 subject to any necessary changes. Any changes will be described in full in future reports.
Remuneration objectives
     The principal objectives of the policy are to attract and motivate executives of the highest calibre and experience needed to shape and execute strategy and deliver shareholder value in an ever more competitive and increasingly global employment market. The Committee believes that this requires:
  (i)  a pay and benefits package which is competitive with packages offered by other leading multinational companies operating in global markets, and is capable of providing upper quartile total remuneration for the sustained delivery of the clearly superior levels of performance required by our challenging business objectives;
 
  (ii)  a reward structure that links individual performance, company performance and share price performance so as to align the interests of the directors with those of Reed Elsevier and the shareholders of the parent companies; and
 
  (iii)  an approach to performance management that stimulates enhanced performance by directors, recognises their individual contribution to the attainment of our short-term and longer-term results and also encourages the teamwork which is essential to achieve the long-term strategic objectives.
     Base salary and the annual incentive plan (“AIP”) aim to position the executive within the relevant market for executive talent and to provide focus on the delivery of our shorter-term strategic objectives.
     The Executive Share Option Scheme (“ESOS”) and Long-Term Incentive Scheme (“LTIS”) encourage a focus on longer-term earnings growth and increases executives’ alignment with shareholders’ interests.
     The Committee believes that the primary engine for the creation of long-term shareholder value is sustained growth in profitability. In relation to shareholders, the primary measure of profitability is growth in the average of the Reed Elsevier PLC and Reed Elsevier NV adjusted earnings per share (i.e. before the amortisation of acquired intangible assets, acquisition integration costs, disposals and other non operating items, related tax effects and movements on deferred tax balances not expected to crystallise in the near term) at constant exchange rates (“Adjusted EPS”), which is supported, at an operational level, by the measures of revenue growth, profitability and cash generation. Accordingly, these measures are integrated into our reward structure. In all cases payments are made against a sliding scale of performance achievement because this is the fairest and simplest way to relate incentives to business targets. Recognising shareholder preference for longer term incentive arrangements to include a performance measure based on shareholder return, it is proposed that a secondary measure of total shareholder return relative to a focused peer group will apply to awards made under the LTIS from 2006.

43


Table of Contents

Remuneration in practice
     The Committee’s practice is to review the market competitiveness of base salary on the following basis:
  —  UK-based directors against FTSE 50 companies (excluding financial services); and
 
  —  US-based directors (or directors on US-market based reward packages) against US Media Industry companies.
     Benefits, including medical and retirement benefits, are positioned to reflect local country practice. UK directors are eligible to participate in the all-employee SAYE (savings related) share option scheme.
     Recognising the more global approach to the design of its incentive plans, referred to earlier, the annual and longer-term incentive plans for executive directors are operated with common incentive opportunity levels, irrespective of geographical location.
     In relation to long-term incentives, the performance measures are tested once at the end of the specific performance period and are not subsequently re-tested (ie there is no re-testing of any performance condition).
     This overall approach is set out in greater detail below with reference to the individual elements of the reward package for executive directors:
Base Salary
  —  Salaries are reviewed annually to take account of two factors, firstly, market movement and individual performance during the previous year. Secondly, the increased and sustainable contribution of the individual to the group which may position the individual at a higher value relative to the market.
Annual Incentive Plan (“AIP”)
  —  Based on achievement of financial performance targets set against the critical measures of revenue growth, profit, cash generation and Key Performance Objectives (“KPOs”).
 
  —  Targets are approved by the Committee at the beginning of the year and are aligned with the annual budget and strategic business objectives.
 
  —  Payment against each financial performance measure is only made if a threshold of 94% of the target is achieved.
 
  —  Up to 90% of salary is payable for the achievement of highly stretching financial targets which align with the parent companies’ double-digit Adjusted EPS growth objective. This 90% bonus opportunity is allocated as follows, as a % of salary:
         
  — 
Revenue
27%  
  — 
Profit
27%  
  — 
Cash Flow Conversion Rate
9%  
  — 
KPOs
27%  
     The four elements are measured separately, such that there could be a pay-out on one element and not on others.
  —  A maximum of 110% of salary could be paid for exceptional performance. (This degree of upside potential in our AIP is low by market standards and it reflects the demanding nature of the initial targets).
Bonus Investment Plan (“BIP”)
  —  Designed to encourage increased personal shareholding by the participant.
 
  —  Directors and other designated key senior executives may invest up to half of any payment they receive under the AIP in shares of Reed Elsevier PLC or Reed Elsevier NV.
 
  —  Subject to continued employment, and to their retaining these investment shares during a three-year performance period, they will be awarded an equivalent number of matching shares.
 
  —  The award of matching shares is wholly dependent on the achievement of a performance condition. In 2005, this was the achievement of at least 6% per annum compound growth in the average of Reed Elsevier PLC and Reed Elsevier NV Adjusted EPS — measured at constant exchange rates over the three year vesting period.
Executive Share Options (“ESOS”)
  —  Annual grants of options are made over shares in Reed Elsevier PLC and Reed Elsevier NV at the market price at date of grant.

44


Table of Contents

  —  The level of option grant and the performance conditions are determined and reviewed by the Committee annually.
 
  —  The standard performance condition, which governs the size of grant for all participants, relates to the compound annual growth in Adjusted EPS 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 of 2003, as follows:
     
    Target Grant Pool
Adjusted EPS Growth per annum   (as a % of 2003 Grant)
     
Less than 6%
  50%
6% or more
  75%
8% or more
  100%
10% or more
  125%
12% or more
  150%
  —  The awards made to executive directors are subject to an annual maximum of up to three times base salary. The awards are subject to the following three performance criteria:
       On grant
  —  corporate performance as measured by Adjusted EPS growth in accordance with the criteria above, and
 
  —  individual performance over the three year period prior to grant;
       On vesting
  —  a further performance condition such that the compound growth in Adjusted EPS during the three years following grant must be at least 6% per annum. There is no retesting of the performance condition.
  —  The combination of the above tests requires sustained high level profit growth over a continuous six year period in respect of each individual grant to executive directors.
 
  —  Options are normally exercisable between three and ten years from the date of grant.
Long-term Incentive (“LTIS”) — 2004-2006 cycle
  —  For the current performance period 2004-06, awards to directors under the LTIS were made in February 2004 over 5.5 times salary in conventional market price options and 2.5 times salary in performance shares.
 
  —  The awards will vest at the end of the 2004-06 performance period, to the extent that the performance condition has been achieved:
 
     at 8% compound annual growth in Adjusted EPS, 25% of the awards will vest;
 
     at 10%, 100% will vest;
 
     at 12%, 125% of the award will vest; and
 
     awards will vest on a straight line basis between each of these points. There is no retesting of the performance condition.
  —  Even if the Adjusted EPS target is met, the Remuneration Committee retains full discretion to reduce or cancel awards under the Plan based on its assessment as to whether the Adjusted EPS growth achieved is a fair reflection of the progress of the business having regard to underlying revenue growth, cash generation, return on capital and any significant changes in inflation as well as on individual performance.
 
  —  Acceptance of an award under the LTIS (for the 2004-06 cycle) by any individual automatically terminated their award under the previous “Senior Executive Long Term Incentive Plan” introduced in 2000. No payments were therefore made under the 2000 Plan.
Long-term Incentive (“LTIS”) — 2006 and future cycles
     The Committee has reviewed the operation of the LTIS in line with its commitment to shareholders and is proposing the following changes to the operation of the LTIS with effect from 2006:
  —  Grants will be made annually: from 2006, all executive directors will be eligible to receive an annual grant of performance shares with a target value of around 135% of salary. (Lower levels of grant will apply to other senior executives invited to participate in the LTIS.)
 
  —  Awards will consist solely of performance shares (rather than a mix of performance shares and conventional market price options).
 
  —  Relative Total Shareholder Return (“TSR”) will be introduced as a performance measure in addition to the Adjusted EPS target. From 2006, in addition to achieving a demanding Adjusted EPS performance target over

45


Table of Contents

  a three year performance period, an additional TSR performance target over the same three year period will also be taken into account.
 
  The threshold level of compound Adjusted EPS growth will continue to be 8% per annum, with maximum vesting being achieved for growth of 12% per annum. Any award earned through EPS performance may then be increased in line with Reed Elsevier’s TSR performance against a comparator group over the three year period, to a maximum of around 270% of salary (depending on dividend payments). No increase will be applied for TSR performance which is below median, and the maximum increase will be applied at upper quartile or higher levels of TSR achievement. No award will be made to participants if Reed Elsevier fails to achieve the Adjusted EPS growth threshold irrespective of the associated TSR performance.
 
  The effect of this revised structure is that the vesting levels based on Adjusted EPS growth will, in isolation, generate a lower reward than currently. However, in combination with strong relative TSR performance, there will be scope for better reward. The Committee considers the proposed mechanism to be tougher than normal UK practice because the TSR element can improve the reward to participants if, but only if, the Adjusted EPS test has first been achieved.
  —  Reed Elsevier’s TSR will be tested against a selected international group of competitor companies over a three year period. For awards in 2006, it is proposed that these companies will be as follows:
     
                The Thomson Corporation
                McGraw Hill
                Reuters Group
                Pearson
                VNU
                Wolters Kluwer
                ChoicePoint
                EMAP
                Informa
  United Business Media
Fair Isaac
John Wiley & Sons
DMGT
Dow Jones
Lagardere
Dun & Bradstreet
WPP
Taylor Nelson
  —  Any shares which vest will be treated as attracting dividends during the performance period. The value of awards granted to participants will be reduced to take into account a reasonable expectation of the value of dividends over the performance period.
 
  —  As currently, the Committee will have full discretion to reduce or cancel awards granted to participants in 2006 and thereafter 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.
These changes require the approval of shareholders at the 2006 Annual General Meeting of Reed Elsevier PLC and Reed Elsevier NV respectively.
Retirement Benefits
  —  The Committee reviews retirement benefit provision in the context of the total remuneration package for each director, bearing in mind their age and service and against the background of evolving legislation and practice in the group’s major countries of operation.
 
  —  Base salary is the only pensionable element of remuneration.
 
  —  The three 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 Committee has considered the Government changes to UK taxation of pension schemes introduced from 6 April 2006. The Committee currently intends to continue its existing practice of providing the targeted pension 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.
  —  P. Tierney and A. Prozes are covered by a mix of defined benefit and defined contribution arrangements. Reed Elsevier pays a contribution of 19.5% of salary to E. Engstrom’s personal pension plan. In accordance with US legislation, these directors have no defined retirement age.
Shareholding Requirement
     Participants in the LTIS are required to build up a significant personal shareholding in Reed Elsevier PLC and/or Reed Elsevier NV. At executive director level, the current requirement is that they should own shares equivalent to 1.5 times salary and that this shareholding should be acquired prior to any payout being made under the LTIS in February 2007.

46


Table of Contents

     Under the proposed terms of the revised LTIS, the shareholding requirement for the Group Chief Executive Officer will (subject to shareholders’ approval) increase from 1.5 times to three times salary and for other executive directors from 1.5 times to two times salary (the revised shareholding requirements to be met by February 2009).
Service Contracts
     Executive directors are employed under service contracts which generally provide for one year’s notice and neither specify severance payments nor contain specific provisions in respect of change in control.
     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 base salary payable for termination without cause   New York law
P Tierney(ii)
  November 19, 2002   Indefinite   12 months base salary payable for termination without cause   New York law
 
(i) Employed by Reed Elsevier Group plc
 
(ii) Employed by Reed Elsevier Inc
     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.
     No loans, advances or guarantees have been provided on behalf of any director.
     The service contracts for executive directors (and for approximately 130 other senior executives) contain the following provisions:
  —  covenants which prevent them from working with specified competitors, recruiting Reed Elsevier employees and 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 LTIS, ESOS and BIP granted from 2004 onwards, whether or not such awards have vested; and
 
  —  in the event that they join a specified competitor within 12 months of termination, any gains made in the six months prior to termination on the exercise of an LTIS, ESOS and BIP award made from 2004 onwards shall be repayable.
Policy on External Appointments
     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.
  —  Sir Crispin Davis is a non-executive director of GlaxoSmithKline plc and received a fee of £70,000 during 2005.
 
  —  Erik Engstrom is a non-executive director of Eniro AB and received a fee of £22,108 during 2005.
 
  —  Andrew Prozes is a non-executive director of the Cott Corporation and received a fee of £27,377 during 2005.

47


Table of Contents

Non-executive directors — Remuneration policy
     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 which will make a major contribution to the boards and their committee structures.
     With the exception of GJ de Boer-Kruyt, who serves only on the Supervisory Board of Reed Elsevier NV, non-executive 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’ remuneration is determined by the three boards as appropriate to the director concerned. The primary source for comparative market data is the practice of FTSE50 companies, although reference is also made to AEX 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, termination.
     During the year the Reed Elsevier Group plc board introduced 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, the company 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. Messrs Reid and Zelnick each donated a proportion of their fees in respect of 2005 to charity and, in accordance with the programme the company made matching charitable donations of £22,500 and £30,000, respectively.
Fee levels
     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 GJ 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 provisions, share options or other forms of benefit. Fees may be reviewed annually, although in practice they have changed on a less frequent basis and were last reviewed with effect from May 1, 2003. The fee for GJ de Boer-Kruyt was last reviewed with effect from January 1, 2004.
Emoluments of the directors
     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:
(a) Aggregate emoluments
                 
    2005   2004
         
    (In thousands)
Salaries and fees
    £4,234       £3,684  
Benefits
    111       475  
Annual performance-related bonuses
    3,001       3,027  
Pension contributions
    135       54  
Pension to former director
    223       190  
Payment to former director
    10       10  
             
Total
    £7,714       £7,440  
             
     No compensation payments have been made for loss of office or termination in 2004 and 2005.
     Details of share options exercised by the directors over shares in Reed Elsevier PLC and Reed Elsevier NV during the year are shown on pages 53 to 56. The aggregate notional pre-tax gain made by the directors on the exercise of Reed Elsevier PLC and Reed Elsevier NV share options during the year was £471,482 (2004: £2,001).

48


Table of Contents

(b) Individual emoluments of executive directors
                                         
        2005           2004
         
    Salary   Benefits   Bonus   Total   Total
                     
G J A van de Aast
    £430,000       £16,462       £408,741       £855,203       £835,222  
M H Armour
    535,000       19,372       474,989       1,029,361       998,402  
Sir Crispin Davis
    1,040,000       28,173       923,343       1,991,516       1,949,435  
E Engstrom (from August 23, 2004)
    571,429       13,950       465,057       1,050,436       739,732  
A Prozes
    571,429       19,891       557,120       1,148,440       1,080,352  
P Tierney
    571,429       13,009       171,440       755,878       1,087,071  
                               
Total
    £3,719,287       £110,857       £3,000,690       £6,830,834       £6,690,214  
                               
     Benefits principally comprise the provision of a company car, medical insurance and life assurance.
     In setting the levels of payments under the AIP for directors for 2005, the Committee took into account a number of factors including: strong organic revenue growth in the majority of the businesses, continued improvement in underlying operating margin, overall improvement in capital efficiency and strong cash generation when compared to stretching internal targets. Harcourt Education’s disappointing performance in supplemental and assessment was considered against the basal performance. In addition, the directors were generally assessed as performing well against their KPOs, resulting in positive business momentum and an overall promising business outlook.
     Messrs. Prozes, Tierney and McGarr, 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 2005. He exercised a SAYE share option during 2005 over 5,019 Reed Elsevier PLC ordinary shares, at an option price of 336.2p. The notional gain on the exercise amounted to £9,576.
(c) Pensions in more detail
     The target pension for Sir Crispin Davis at a normal retirement age of 60 is 45% of base salary in the 12 months prior to retirement. Other executive directors based in the United Kingdom are provided with pension benefits at a normal retirement age of 60, equivalent to two thirds of base salary in the 12 months prior to retirement, provided they have completed 20 years’ service with Reed Elsevier or at an accrual rate of 1/30th of pensionable salary per annum if employment is for less than 20 years.
     The target pension for A Prozes, a US-based director, is US$300,000 per annum, which becomes payable on retirement only if he completes a minimum of seven years’ service. The pension will be reduced in amount by the value of any other retirement benefits payable by Reed Elsevier or which become payable by any former employer, other than those attributable to employee contributions. The target pension for P Tierney, a US-based director, after completion of five years’ pensionable service is US $440,000 per annum, inclusive of any other retirement benefits from any former employer. In the event of termination of employment before completion of five years’ pensionable service, the pension payable will be reduced proportionately. As US employees Messrs Prozes and Tierney also are eligible to participate in the Reed Elsevier 401k plan, to which Reed Elsevier contributed £3,588 and £4,031 respectively for the year.
     The pension arrangements for the above 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 dependants’ pension on death.
     E Engstrom is not a member of a Reed Elsevier pension scheme and Reed Elsevier made a contribution to Mr. Engstrom’s designated retirement account of £111,429, equivalent to 19.5% of his annual salary. In addition, Mr. Engstrom is provided with life assurance cover whilst in employment.

49


Table of Contents

     The increase in the transfer value of the directors’ pensions, after deduction of contributions, is shown below:
                                                                         
                                    Transfer value
                                Increase in   of increase
                    Increase in           accrued   in accrued
            Transfer   Transfer   transfer       Increase in   annual   annual pension
            value   value   value during   Accrued   accrued   pension   during the
            of accrued   of accrued   the period   annual   annual   during   period (net of
    Age       pension   pension   (net of   pension   pension   the period   inflation
    December 31   Directors’   December 31   December 31   directors’   December 31   during   (net of   and directors’
    2005   contributions   2004   2005   contributions)   2005   the period   inflation)   contributions)
                                     
G J A van de Aast
    48       £4,980       £510,134       £721,552       £206,437       £72,884       £17,615       £15,680       £150,257  
M H Armour
    51       4,980       1,722,165       2,259,816       532,670       194,644       28,090       22,272       253,598  
Sir Crispin Davis
    56       4,980       3,961,740       5,563,704       1,596,984       310,475       61,152       52,425       934,483  
A Prozes
    59                                                  
P Tierney
    60             1,556,726       1,938,541       381,816       170,308       25,500       25,500       288,412  
     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’ pensions entitlement, and is not an amount paid or payable to the director.
(d) Individual emoluments of non-executive directors
                 
    2005   2004
         
G J de Boer-Kruyt
  £ 23,151     £ 22,993  
J F Brock (until 28 April 2005)
    11,130       44,218  
M W Elliott
    45,000       45,000  
J Hommen (from 27 April 2005)
    159,817        
C J A van Lede
    44,521       44,218  
D E Reid
    45,000       45,000  
Lord Sharman
    52,000       52,000  
R W H Stomberg
    52,740       52,381  
M Tabaksblat (until 28 April 2005)
    47,945       190,476  
S Zelnick (from 27 April 2005)
    33,750        
             
Total
  £ 515,054     £ 496,286  
             
     Mr R J Nelissen, a former director of Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc served as Chairman of the Supervisory Board of Elsevier Reed Finance BV throughout 2005. During the period he received fees of £10,274 in such capacity.
Compensation of executive officers
     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, 2005, was £2,006,654 which included contributions made to the pension plans in respect of such officers of £109,825.
BOARD PRACTICES
REED ELSEVIER
     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 2006, 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 40. 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 42.

50


Table of Contents

REED ELSEVIER GROUP PLC
     The Reed Elsevier Group plc board currently consists of six 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 three 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 take-over 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 Take-overs 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.
REED ELSEVIER PLC
     The Reed Elsevier PLC board currently consists of six 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 four non-executive directors, 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 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.

51


Table of Contents

     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 six 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 four 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
     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 supervisory directors 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.
EMPLOYEES
     Reed Elsevier’s average number of employees in the year ended December 31, 2005 was 36,100 (2004: 35,100). Approximately 5,800 were located in the UK (2004: 5,700); 20,100 in North America (2004: 19,800); 2,500 in the Netherlands (2004: 2,600); 4,300 in the rest of Europe (2004: 4,000); and 3,400 in the rest of the world (2004: 3,000). The average number of employees in the business segments in the year ended December 31, 2005 was 7,100 in Elsevier (2004: 6,700); 13,200 in LexisNexis (2004: 12,800); 5,400 in Harcourt Education (2004: 5,300); 10,200 in Reed Business (2004: 10,100); and 200 in corporate/shared functions (2004: 200). At December 31, 2005, the number of employees was approximately 36,500, which comprised 7,300 in Elsevier; 13,400 in LexisNexis; 5,400 in Harcourt Education; 10,200 in Reed Business; and 200 in corporate/shared functions.
     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

52


Table of Contents

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.
SHARE OWNERSHIP
REED ELSEVIER PLC
Share options
     The following table sets forth the details of options held by directors over Reed Elsevier PLC ordinary shares as at December 31, 2005 under share option schemes which are described below under “Reed Elsevier — Share option schemes”:
Over shares in Reed Elsevier PLC
                                                                 
                    Market            
        Granted       Exercised   price at            
    January 1,   during   Option   during the   exercise   December 31,   Exercisable   Exercisable
    2005   the year   price   year   date   2005   from   until
                                 
G J A van de Aast — ESOS
    50,940               638.00 p                     50,940       Dec 1, 2003       Dec 1, 2010  
      49,317               659.00                       49,317       Feb 23, 2004       Feb 23, 2011  
      58,000               600.00                       58,000       Feb 22, 2005       Feb 22, 2012  
      81,728               451.50                       81,728       Feb 21, 2006       Feb 21, 2013  
      124,956               487.25                       124,956       Feb 19, 2007       Feb 19, 2014  
              120,900       533.50                       120,900       Feb 17, 2008       Feb 17, 2015  
              — BIP
    31,217               Nil                       31,217       Mar 26, 2007       Mar 26, 2007  
              — LTIS (options)
    229,087               487.25                       229,087       Feb 19, 2007       Feb 19, 2014  
              — LTIS (shares)
    104,130               Nil                       104,130       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    729,375       120,900                               850,275                  
                                                 
M H Armour — ESOS
    39,600               400.75 p     39,600 (i)     529.50 p                      
      30,000               585.25                       30,000       Apr 23, 1999       Apr 23, 2006  
      52,000               565.75                       52,000       Apr 21, 2000       Apr 21, 2007  
      66,900               523.00                       66,900       Aug 17, 2001       Aug 17, 2008  
      33,600               537.50                       33,600       Feb 21, 2003       April 19, 2009  
      88,202               436.50                       88,202       May 2, 2003       May 2, 2010  
      62,974               659.00                       62,974       Feb 23, 2004       Feb 23, 2011  
      74,000               600.00                       74,000       Feb 22, 2005       Feb 22, 2012  
      104,319               451.50                       104,319       Feb 21, 2006       Feb 21, 2013  
      155,147               487.25                       155,147       Feb 19, 2007       Feb 19, 2014  
              150,422       533.50                       150,422       Feb 17, 2008       Feb 17, 2015  
          — BIP
    11,327               Nil                       11,327       Mar 21, 2006       Mar 21, 2006  
      19,225               Nil                       19,225       Mar 26, 2007       Mar 26, 2007  
              21,861       Nil                       21,861       Apr 14, 2008       Apr 14, 2008  
          — LTIS (options)
    284,437               487.25                       284,437       Feb 19, 2007       Feb 19, 2014  
          — LTIS (shares)
    129,289               Nil                       129,289       Feb 19, 2007       Feb 19, 2007  
          — SAYE
    4,329               377.60                       4,329       Aug 1, 2009       Jan 31, 2010  
                                                 
Total
    1,155,349       172,283               39,600               1,288,032                  
                                                 
Sir Crispin Davis — ESOS
    160,599               467.00 p                     160,599       Feb 21, 2003       Sept 1, 2009  
      80,300               467.00                       80,300       Sept 1, 2003       Sept 1, 2009  
      80,300               467.00                       80,300       Sept 1, 2004       Sept 1, 2009  
      171,821               436.50                       171,821       May 2, 2003       May 2, 2010  
      122,914               659.00                       122,914       Feb 23, 2004       Feb 23, 2011  
      148,500               600.00                       148,500       Feb 22, 2005       Feb 22, 2012  
      209,192               451.50                       209,192       Feb 21, 2006       Feb 21, 2013  
      305,303               487.25                       305,303       Feb 19, 2007       Feb 19, 2014  
              292,409       533.50                       292,409       Feb 17, 2008       Feb 17, 2015  
            — BIP
    22,731               Nil                       22,731       Mar 21, 2006       Mar 21, 2006  
      39,554               Nil                       39,554       Mar 26, 2007       Apr 26, 2007  
              86,042       Nil                       86,042       Apr 14, 2008       Apr 14, 2008  
            — LTIS (options)
    559,722               487.25                       559,722       Feb 19, 2007       Feb 19, 2014  
            — LTIS (shares)
    254,419               Nil                       254,419       Feb 19, 2007       Feb 19, 2007  
            — SAYE
    5,019               336.20       5,019 (i)     527.00 p                      
                                                 
Total
    2,160,374       378,451               5,019               2,533,806                  
                                                 

53


Table of Contents

                                                                 
                    Market            
        Granted       Exercised   price at            
    January 1,   during   Option   during the   exercise   December 31,   Exercisable   Exercisable
    2005   the year   price   year   date   2005   from   until
                                 
E Engstrom — ESOS
    63,460               478.00 p                     63,460       Aug 23, 2007       Aug 23, 2014  
              154,517       533.50                       154,517       Feb 17, 2008       Feb 17, 2015  
        — BIP
            14,020       Nil                       14,020       Apr 14, 2008       Apr 14, 2008  
        — LTIS (options)
    318,398               478.00                       318,398       Aug 23, 2007       Aug 23, 2014  
        — LTIS (shares)
    144,726               Nil                       144,726       Aug 23, 2007       Aug 23, 2007  
        — Restricted shares
    115,781               Nil       38,595 (ii)     524.50 p     77,186       Aug 23, 2005       Aug 23, 2007  
                                                 
Total
    642,365       168,537               38,595               772,307                  
                                                 
A Prozes — ESOS
    188,281               566.00 p                     188,281       Aug 9, 2003       Aug 9, 2010  
      83,785               659.00                       83,785       Feb 23, 2004       Feb 23, 2011  
      103,722               600.00                       103,722       Feb 22, 2005       Feb 22, 2012  
      132,142               451.50                       132,142       Feb 21, 2006       Feb 21, 2013  
      162,666               487.25                       162,666       Feb 19, 2007       Feb 19, 2014  
              154,517       533.50                       154,517       Feb 17, 2008       Feb 17, 2015  
      — BIP
    20,040               Nil                       20,040       Mar 21, 2006       Mar 21, 2006  
      20,104               Nil                       20,104       Mar 26, 2007       Mar 26, 2007  
              23,756       Nil                       23,756       Apr 14, 2008       Apr 14, 2008  
      — LTIS (options)
    298,221               487.25                       298,221       Feb 19, 2007       Feb 19, 2014  
      — LTIS (shares)
    135,555               Nil                       135,555       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    1,144,516       178,273                               1,322,789                  
                                                 
P Tierney — ESOS
    396,426               451.50 p                     396,426       Feb 21, 2006       Feb 21, 2013  
      162,666               487.25                       162,666       Feb 19, 2007       Feb 19, 2014  
              154,517       533.50                       154,517       Feb 17, 2008       Feb 17, 2015  
       — BIP
    19,572               Nil                       19,572       Mar 26, 2007       Mar 26, 2007  
              24,156       Nil                       24,156       Apr 14, 2008       Apr 14, 2008  
       — LTIS (options)
    298,221               487.25                       298,221       Feb 19, 2007       Feb 19, 2014  
       — LTIS (shares)
    135,555               Nil                       135,555       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    1,012,440       178,673                               1,191,113                  
                                                 
 
(i) Retained an interest in all of the shares
 
(ii) Retained an interest in 10,169 shares
    Awards granted under ESOS and BIP which become exercisable from 2007 onwards are subject to post-grant performance conditions, as set out on pages 57 to 59.
     The proportion of the award that may vest under LTIS is subject to the annual growth in Adjusted EPS during the performance period. The numbers of LTIS options and shares included in the above table are calculated by reference to an assumed annual growth rate of 10%, which would result in 100% of the award vesting. Depending on actual Adjusted EPS growth, the proportion of the award that may vest could be lower or higher, as outlined on pages 58 and 59.
     Options under the SAYE scheme, in which all eligible UK employees are invited to participate, are granted at a maximum discount of 20% to the market price at time of grant. They are normally exercisable for a period of 6 months after the expiry of 3 to 5 years from the date of grant. No performance targets are attached to this scheme as it is an all-employee scheme.
     The middle market price of a Reed Elsevier PLC ordinary share on the date of the 2005 award under BIP was 536.50p.
     The middle market price of a Reed Elsevier PLC ordinary share during the year was in the range 474.50p to 553.50p and at December 31, 2005 was 546.00p.

54


Table of Contents

REED ELSEVIER NV
Share options
     The following table sets forth the details of options held by directors over Reed Elsevier NV ordinary shares as at December 31, 2005 under share option schemes which are described below under “Reed Elsevier — Share option schemes”:
Over shares in Reed Elsevier NV
                                                                 
                    Market            
        Granted       Exercised   price at            
    January 1,   during   Option   during   exercise   December 31,   Exercisable   Exercisable
    2005   the year   price   the year   date   2005   from   until
                                 
G J A van de Aast — ESOS
    35,866               14.87                       35,866       Dec 1, 2003       Dec 1, 2010  
      35,148               14.75                       35,148       Feb 23, 2004       Feb 23, 2011  
      40,699               13.94                       40,699       Feb 22, 2005       Feb 22, 2012  
      58,191               9.34                       58,191       Feb 21, 2006       Feb 21, 2013  
      85,805               10.57                       85,805       Feb 19, 2007       Feb 19, 2014  
              82,478       11.31                       82,478       Feb 17, 2008       Feb 17, 2015  
              — BIP
    12,057               Nil                       12,057       Mar 21, 2006       Mar 21, 2006  
              26,347       Nil                       26,347       Apr 14, 2008       Apr 14, 2008  
              — LTIS (options)
    157,309               10.57                       157,309       Feb 19, 2007       Feb 19, 2014  
              — LTIS (shares)
    71,504               Nil                       71,504       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    496,579       108,825                               605,404                  
                                                 
M H Armour — ESOS
    20,244               13.55                       20,244       Feb 21, 2003       Apr 19, 2009  
      61,726               10.73                       61,726       May 2, 2003       May 2, 2010  
      44,882               14.75                       44,882       Feb 23, 2004       Feb 23, 2011  
      51,926               13.94                       51,926       Feb 22, 2005       Feb 22, 2012  
      74,276               9.34                       74,276       Feb 21, 2006       Feb 21, 2013  
      106,536               10.57                       106,536       Feb 19, 2007       Feb 19, 2014  
              102,618       11.31                       102,618       Feb 17, 2008       Feb 17, 2015  
          — BIP
    8,030               Nil                       8,030       Mar 21, 2006       Mar 21, 2006  
      12,842               Nil                       12,842       Mar 26, 2007       Mar 26, 2007  
              15,098       Nil                       15,098       Apr 14, 2008       Apr 14, 2008  
          — LTIS (options)
    195,317               10.57                       195,317       Feb 19, 2007       Feb 19, 2014  
          — LTIS (shares)
    88,780               Nil                       88,780       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    664,559       117,716                               782,275                  
                                                 
Sir Crispin Davis — ESOS
    95,774               12.00                       95,774       Feb 21, 2003       Sept 1, 2009  
      47,888               12.00                       47,888       Sept 1, 2003       Sept 1, 2009  
      47,888               12.00                       47,888       Sept 1, 2004       Sept 1, 2009  
      120,245               10.73                       120,245       May 2, 2003       May 2, 2010  
      87,601               14.75                       87,601       Feb 23, 2004       Feb 23, 2011  
      104,204               13.94                       104,204       Feb 22, 2005       Feb 22, 2012  
      148,946               9.34                       148,946       Feb 21, 2006       Feb 21, 2013  
      209,645               10.57                       209,645       Feb 19, 2007       Feb 19, 2014  
              199,481       11.31                       199,481       Feb 17, 2008       Feb 17, 2015  
            — BIP
    16,115               Nil                       16,115       Mar 21, 2006       Mar 21, 2006  
      26,421               Nil                       26,421       Mar 26, 2007       Mar 26, 2007  
            — LTIS (options)
    384,349               10.57                       384,349       Feb 19, 2007       Feb 19, 2014  
            — LTIS (shares)
    174,704               Nil                       174,704       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    1,463,780       199,481                               1,663,261                  
                                                 
E Engstrom — ESOS
    43,866               10.30                       43,866       Aug 23, 2007       Aug 23, 2014  
              105,412       11.31                       105,412       Feb 17, 2008       Feb 17, 2015  
        — LTIS (options)
    220,090               10.30                       220,090       Aug 23, 2007       Aug 23, 2014  
        — LTIS (shares)
    100,040               Nil                       100,040       Aug 23, 2007       Aug 23, 2007  
        — Restricted shares
    80,032               Nil       26,678 (i)     11.41       53,354       Aug 23, 2005       Aug 23, 2007  
                                                 
Total
    444,028       105,412               26,678               522,762                  
                                                 

55


Table of Contents

                                                                 
                    Market            
        Granted       Exercised   price at            
    January 1,   during   Option   during   exercise   December 31,   Exercisable   Exercisable
    2005   the year   price   the year   date   2005   from   until
                                 
A Prozes — ESOS
    131,062               13.60                       131,062       Aug 9, 2003       Aug 9, 2010  
      59,714               14.75                       59,714       Feb 23, 2004       Feb 23, 2011  
      72,783               13.94                       72,783       Feb 22, 2005       Feb 22, 2012  
      94,086               9.34                       94,086       Feb 21, 2006       Feb 21, 2013  
      111,699               10.57                       111,699       Feb 19, 2007       Feb 19, 2014  
              105,412       11.31                       105,412       Feb 17, 2008       Feb 17, 2015  
      — BIP
    14,552               Nil                       14,552       Mar 21, 2006       Mar 21, 2006  
      13,612               Nil                       13,612       Mar 26, 2007       Mar 26, 2007  
              16,522       Nil                       16,522       Apr 14, 2008       Apr 14, 2008  
      — LTIS (options)
    204,782               10.57                       204,782       Feb 19, 2007       Feb 19, 2014  
      — LTIS (shares)
    93,083               Nil                       93,083       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    795,373       121,934                               917,307                  
                                                 
P Tierney — ESOS
    282,258               9.34                       282,258       Feb 21, 2006       Feb 21, 2013  
      111,699               10.57                       111,699       Feb 19, 2007       Feb 19, 2014  
              105,412       11.31                       105,412       Feb 17, 2008       Feb 17, 2015  
       — BIP
    13,252               Nil                       13,252       Mar 26, 2007       Mar 26, 2007  
              16,800       Nil                       16,800       Apr 14, 2008       Apr 14, 2008  
       — LTIS (options)
    204,782               10.57                       204,782       Feb 19, 2007       Feb 19, 2014  
       — LTIS (shares)
    93,083               Nil                       93,083       Feb 19, 2007       Feb 19, 2007  
                                                 
Total
    705,074       122,212                               827,286                  
                                                 
 
(i)  Retained an interest in all of the shares
     Awards granted under ESOS and BIP which become exercisable from 2007 onwards are subject to post-grant performance conditions, as set out on pages 57 to 59.
     The proportion of the award that may vest under LTIS is subject to the annual growth in Adjusted EPS during the performance period. The numbers of LTIS options and shares included in the above table are calculated by reference to an assumed annual growth rate of 10%, which would result in 100% of the award vesting. Depending on actual Adjusted EPS growth, the proportion of the award that may vest could be lower or higher, as outlined on pages 58 and 59.
     The market price of a Reed Elsevier NV ordinary share on the date of the 2005 award under BIP was 11.35.
     The market price of a Reed Elsevier NV ordinary share during the year was in the range 10.09 to 11.91 and at December 31, 2005 was 11.80.
REED ELSEVIER
Share option schemes
     As of December 31, 2005, Reed Elsevier operated and had granted share options under a number of equity-based compensation plans as follows
(i)  All-Employee Option Plans
     Reed Elsevier’s All-Employee Option Plans comprise:
(a)  Reed Elsevier Group plc SAYE Share Option Scheme (the “SAYE Scheme”)
     Options over Reed Elsevier PLC ordinary shares have been granted under the SAYE Scheme. Shares may be acquired at not less than the higher of (i) 80% of the closing middle market price for the relevant share on The London Stock Exchange three days before invitations to apply for options are issued, and (ii) if new shares are to be subscribed, their nominal value.
     All UK employees of Reed Elsevier Group plc and participating companies under its control in employment at the date of invitation are entitled to participate in the SAYE Scheme. In addition, the directors of Reed Elsevier Group plc may permit other employees of Reed Elsevier Group plc and participating companies under its control to participate.
     Invitations to apply for options may normally only be issued within 42 days after the announcement of the combined results of Reed Elsevier for any period. No options may be granted more than 10 years after the approval of the scheme.
     On joining the SAYE Scheme, a save as you earn contract (a “Savings Contract”) must be entered into with an appropriate savings body, under which savings of between £5 and £250 per month may be made to such savings body for a period of three or five years. A bonus is payable under the Savings Contract at the end of the savings period. The amount

56


Table of Contents

of the monthly contributions may be reduced if applications exceed the number of Reed Elsevier PLC ordinary shares available for the grant of options on that occasion.
     The number of Reed Elsevier PLC ordinary shares over which an option may be granted is limited to that number of shares which may be acquired at the exercise price out of the repayment proceeds (including any bonus) of the Savings Contract.
     Options under the SAYE Scheme may normally only be exercised for a period of six months after the bonus date under the relevant Savings Contract. However, options may be exercised earlier than the normal exercise date in certain specified circumstances, including death, reaching age 60, or on ceasing employment on account of injury, disability, redundancy, reaching contractual retirement age, or the sale of the business or subsidiary for which the participant works, or provided the option has been held for at least three years, on ceasing employment for any other reason. Exercise is allowed in the event of an amalgamation, reconstruction or take-over of the company whose shares are under option; alternatively, such options may, with the agreement of an acquiring company or a company associated with it, be exchanged for options over shares in the acquiring company or that associated company. Options may also be exercised in the event of the voluntary winding-up of the company whose shares are under option. In the event that options are exercised before the bonus date, the participant may acquire only the number of shares that can be purchased with the accumulated savings up to the date of exercise, plus interest (if any).
     In the event of any capitalisation or rights issue by Reed Elsevier PLC or Reed Elsevier NV, or of any consolidation, subdivision or reduction of their share capital, the number of shares subject to any relevant option and/or the exercise price may be adjusted with the approval of the UK Inland Revenue, subject to the independent auditors of Reed Elsevier Group plc confirming in writing that such adjustment is, in their opinion, fair and reasonable.
(b)  Convertible debenture stock arrangements
     For many years Dutch employees of Reed Elsevier have benefited from a mixed savings and option scheme. This facility consists of an annual issue by Reed Elsevier NV of a convertible debenture loan (the “Netherlands Convertible Debenture Stock Scheme”) that is open for subscription by Dutch staff employed by Reed Elsevier companies in the Netherlands or temporarily seconded to affiliates abroad. The interest rate of the scheme is determined on the basis of the average interest for 10-year loans at the end of the year preceding the year in which the loan would be issued and be open for subscription. With effect from February 19, 2004, for new issues interest is determined quarterly on the basis of market rates on internet savings accounts in the Netherlands. Employees can annually subscribe for one or more debentures of 200 each, up to a maximum amount equal to 20%, of the equivalent of their fixed annual salary components. Interest is payable in arrears in the month of January following the subscription year. The loans have a term of 10 years. During the 10 year term of the loan employees can decide to convert their claim on the Company into shares at an exercise price equal to the price of a Reed Elsevier NV ordinary share on Euronext Amsterdam at the end of the month in which the employee has subscribed for the loan (the “exercise price”). Each debenture of 200 can be converted into 50 ordinary shares in Reed Elsevier NV against payment of 50 times the exercise price, less 200.
(ii)  Executive option plans
     Reed Elsevier’s executive option plans comprise:
(a)  Reed Elsevier Group plc executive share option schemes
     Schemes in this group comprise the Reed Elsevier Group plc Executive UK Share Option Scheme (the “Executive UK Scheme”), the Reed Elsevier Group plc Executive Overseas Share Option Scheme (the “Executive Overseas Scheme”) and the Reed Elsevier Group plc Executive Share Option Schemes (No. 2) (the “No. 2 Scheme”) and the Reed Elsevier Group plc Share Option Scheme (together the “Executive Schemes”).
     The Executive Schemes provide for the grant of options to employees of Reed Elsevier Group plc and participating companies under its control. All directors and employees of Reed Elsevier Group plc and participating companies under its control who are contracted to work for at least 25 hours per week are eligible to be nominated for participation. The grant of options is administered by a committee of non-executive directors of Reed Elsevier Group plc. No payment is required for the grant of an option under the Executive Schemes.
     Options granted under the Executive Schemes may be exercised within a period of 10 years and entitle the holder to acquire shares at a price which may not be less than the higher of (i) in the case of a Reed Elsevier PLC ordinary share, the closing middle market price for the relevant share on The London Stock Exchange at the date of grant, (ii) in the case of a Reed Elsevier NV ordinary share, the closing market price for the relevant share on Euronext, Amsterdam at the date of grant and (iii) if new shares are to be subscribed, their nominal value.
     Employees may be granted options under the Executive Schemes to replace those which have been exercised. In granting such replacement options, the committee of non-executive directors must satisfy itself that the grant of such options is justified by the performance of Reed Elsevier in the previous two to three years.

57


Table of Contents

     Options may normally only be granted under the Executive Schemes within 42 days after the announcement of the combined results of Reed Elsevier for any period. No option may be granted under the Executive Schemes more than 10 years after the approval of the respective scheme.
     Options granted under the Executive Schemes will normally be exercisable only after the expiry of three years from the date of their grant and by a person who remains a director or employee of Reed Elsevier Group plc and participating companies under its control. Options granted from 1999 to the end of 2003 are subject to performance criteria. In order for an option to become exercisable, the average compound growth of the Reed Elsevier PLC and Reed Elsevier NV Adjusted EPS at constant exchange rates in the three years immediately preceding vesting, must exceed the average compound growth of the UK and Dutch retail price indices during the same period by a minimum of 6%. Early exercise of such options is permitted in substantially similar circumstances to those set out in relation to the Reed Elsevier Group plc SAYE Scheme. The committee of non-executive directors has discretion to permit the exercise of options by a participant in certain circumstances where it would not otherwise be permitted.
     From 2004 onwards the size of the annual grant pool under the Reed Elsevier Group plc Share Option Scheme is determined by reference to the compound annual growth in Adjusted EPS, at constant exchange rates, over the three years prior to grant, with individual grant size determined by the Committee based on individual performance. At compound growth of between 8% and 10% per annum, the pool of options available will be broadly comparable to the level of options granted under the previous scheme. At executive director level the grants are expected to be up to three times salary. For executive directors, option grants will be subject to a performance condition requiring the achievement of 6% per annum compound growth in Adjusted EPS, at constant exchange rates, during the three years following the grant. There will be no re-testing of the three year EPS performance period.
     In the event of any capitalisation or rights issue by Reed Elsevier PLC or Reed Elsevier NV, or of any consolidation, subdivision or reduction of their share capital, the number of shares subject to any relevant option and/or the exercise price may be adjusted with the approval of the UK Inland Revenue, subject to the independent auditors of Reed Elsevier Group plc confirming in writing that such adjustment is, in their opinion, fair and reasonable.
     Options under the Executive UK Scheme and the Executive Overseas Scheme may be satisfied from new issues or market purchase Reed Elsevier PLC ordinary shares or Reed Elsevier NV ordinary shares. Options under the No. 2 Scheme may be satisfied only from market purchase Reed Elsevier PLC ordinary shares or Reed Elsevier NV ordinary shares.
(b)  Reed Elsevier NV executive option arrangements
     Under arrangements operated by Reed Elsevier NV (the “Reed Elsevier NV Executive Option Arrangements”), options to subscribe for Reed Elsevier NV ordinary shares were granted in 1999 to the members of the executive board and to a small number of other senior executives based in the Netherlands. Such options give the beneficiary the right, at any time during periods of either five years or ten years following the date of the grant, to purchase Reed Elsevier NV ordinary shares. Options were granted at an exercise price equal to the market price on the date of grant. During 1999, options were granted with an exercise period of five years at an exercise price 26% above the market price at the date of grant, or with an exercise period of 10 years at an exercise price equal to the market price at the date of grant, or a combination of both.
(c)  Long term incentive plans
     Awards have been made under the Reed Elsevier Group plc Long Term Incentive Share Option Scheme (the “2003 LTIS”) to directors and a small number of key senior executives (approximately 40). Approximately 50% of the total implied value of a grant took the form of nil cost conditional shares and 50%, took the form of conventional market value options. For executive directors, grant levels comprised conditional shares of 2.5 times salary and conventional options of 5.5 times salary. Grants will vest subject to the achievement of compound annual Adjusted EPS growth, at constant exchange rates, of between 8% and 12%. At 8% compound annual adjusted growth 25% of the award will vest; at 10% compound annual adjusted growth, 100% of the award will vest; and at 12% compound annual adjusted growth, 125% of the award would vest. Awards will vest on a straightline basis between each of these points. There will be no re-testing of the three year performance period. Acceptance of an award under the 2003 LTIS by any individual automatically terminated any option award under the Reed Elsevier Group plc long term incentive arrangement (the “LTIP”). Participants in the 2003 LTIS are required to build up a significant personal shareholding in Reed Elsevier PLC and/or Reed Elsevier NV. At executive director level, the requirement is that they should own shares equivalent to 11/2 times salary, to be acquired over a three year period.
     In order to ensure consistent measurement and accountability, the Remuneration Committee has the discretion to amend Adjusted EPS to take account of any change in accounting standards or practice, fiscal regime or capital structure. The Remuneration Committee also has full discretion to reduce or cancel awards to participants based on its assessment as to whether the Adjusted EPS growth is a fair reflection of the progress of the business having regard to underlying revenue growth, cash generation, return on capital and any significant changes in inflation as well as on individual performance, even if the Adjusted EPS target is met.

58


Table of Contents

     In addition, conditional share awards have been made to approximately 100 senior executives, none of whom are directors, under the Reed Elsevier Group plc Retention Share Plan. The awards took the form of nil cost conditional shares which vest after three years, subject to the achievement of compound annual Adjusted EPS growth, at constant exchange rates, of at least 8% per annum over the three financial years 2004 to 2006. There will be no re-testing of the three year performance period. The Committee has discretion to increase the Adjusted EPS growth performance hurdle in order to take account of the rate of inflation.
(d)  Bonus investment plan
     Since 2003, directors and other senior executives have been able to invest up to half of their annual performance related bonus in Reed Elsevier PLC/ Reed Elsevier NV shares under the Reed Elsevier Group plc Bonus Investment Plan (the “Bonus Investment Plan”). Subject to continuing to hold the shares and remaining in employment, at the end of a three year period, the participants are awarded an equivalent number of Reed Elsevier PLC/ Reed Elsevier NV shares at nil cost. Awards made from 2004 onwards are subject to a performance condition requiring the achievement of compound growth in the average of the Reed Elsevier PLC and Reed Elsevier NV Adjusted EPS, at constant exchange rates, of 6% per annum compound during the three year vesting period.
Limits over option grants
     No options may be granted over new issue shares under the SAYE Scheme, the Executive UK Scheme and the Executive Overseas Scheme if they would cause the number of Reed Elsevier PLC ordinary shares issued or issuable in any 10 year period to exceed in aggregate 10% of the issued share capital of Reed Elsevier PLC from time to time. The number of Reed Elsevier NV ordinary shares which may be issued or issuable under the Netherlands Convertible Debenture Scheme, the Executive UK Scheme, the Executive Overseas Scheme and the Reed Elsevier NV Executive Option arrangements will be determined by the combined board of Reed Elsevier NV, but shall not exceed the percentage limits set out above in relation to Reed Elsevier PLC ordinary shares.
Share options and conditional share awards
     At February 15, 2006, the total number of ordinary shares subject to outstanding options were:
                         
    Number of        
    outstanding   Options over   Option price
    options   shares   range
             
Reed Elsevier Group plc SAYE Share Option Schemes
    3,288,265     Reed Elsevier PLC     336.20p-543.20p  
Reed Elsevier NV Convertible Debenture Stock Scheme
    1,923,200     Reed Elsevier NV     9.23-15.43  
Reed Elsevier Group plc Executive Share Option Schemes
    56,156,138     Reed Elsevier PLC     400.75p-700.00p  
      38,188,468     Reed Elsevier NV     8.81-16.00  
Reed Elsevier NV Executive Options Arrangements
    115,277     Reed Elsevier NV     13.55  
Reed Elsevier Group plc Long Term Incentive Share Option Scheme
    5,281,103     Reed Elsevier PLC     478.00p-525.00p  
      3,626,304     Reed Elsevier NV     10.30-11.35  
Reed Elsevier Group plc Executive Share Option Scheme (No. 2)
    1,265,386     Reed Elsevier PLC     424.00p-537.50p  
      759,777     Reed Elsevier NV     9.57-11.10  
     Share options are expected, upon exercise, to be met principally by the issue of new ordinary shares, but may also be met from shares held by the Reed Elsevier Group plc Employee Benefit Trust.

59


Table of Contents

     At February 15, 2006, the following nil cost conditional share awards were also outstanding:
                 
    Number of    
    outstanding   Awards over
    awards   shares in
         
Reed Elsevier Group plc Long Term Incentive Share Option Scheme
    2,412,884     Reed Elsevier PLC
      1,656,809     Reed Elsevier NV
Reed Elsevier Group plc Retention Share Plan
    1,907,058     Reed Elsevier PLC
      1,308,574     Reed Elsevier NV
Reed Elsevier Group plc Bonus Investment Plan
    1,378,983     Reed Elsevier PLC
      515,236     Reed Elsevier NV
Restricted Share Awards
    225,217     Reed Elsevier PLC
      154,057     Reed Elsevier NV
     These awards will be met by the Reed Elsevier Employee Benefit Trust from shares purchased in the market.
     Options and awards granted under the schemes are not transferable and may be exercised only by the persons to whom they are granted or their personal representatives.
REED ELSEVIER
Share ownership
     The interests of the directors of Reed Elsevier PLC and Reed Elsevier NV in the issued share capital of the respective companies at the beginning and end of the year are shown below. There have been no changes in the interests of the directors since December 31, 2005.
                                 
    Reed Elsevier PLC   Reed Elsevier NV
    ordinary shares   ordinary shares
         
    January 1,   December 31,   January 1,   December 31,
    2005(i)   2005   2005(i)   2005
                 
G J A van de Aast
    18,600       18,600       19,684       35,445  
M H Armour
    46,926       99,321       29,846       38,727  
G J de Boer-Kruyt
                       
Sir Crispin Davis
    473,467       528,847       298,261       298,261  
M W Elliott
                       
E Engstrom
          19,253             26,678  
J Hommen
                       
C J A van Lede
                11,100       11,100  
A Prozes
    76,808       91,444       63,454       73,632  
D E Reid
                       
Lord Sharman
                       
R W H Stomberg
                       
P Tierney
    26,692       42,440       17,952       28,902  
S Zelnick
                       
 
(i) On date of appointment if subsequent to January 1, 2005.
     Any ordinary shares required to fulfil entitlements under nil cost restricted share awards are provided by the Employee Benefit Trust (“EBT”) from market purchases. As a potential beneficiary under the EBT in the same way as other employees of Reed Elsevier, each executive director is deemed to be interested in all the shares held by the EBT which, at December 31, 2005, amounted to 10,780,776 Reed Elsevier PLC ordinary shares and 5,539,922 Reed Elsevier NV ordinary shares.
Shares and options held by executive officers
     The following table indicates the total aggregate number of Reed Elsevier PLC ordinary shares and Reed Elsevier NV ordinary shares beneficially owned and the total aggregate number of share options and conditional share awards

60


Table of Contents

granted to the executive officers (other than directors) of Reed Elsevier Group plc (four persons) as a group, as of February 15, 2006:
                                                 
        Reed                
        Elsevier   Reed       Reed    
    Reed   PLC   Elsevier       Elsevier NV   Reed
    Elsevier   ordinary   PLC   Reed   ordinary   Elsevier NV
    PLC   shares   conditional   Elsevier NV   shares   conditional
    ordinary   subject to   share   ordinary   subject to   share
    shares   options   awards   shares(l)(2)   options   awards
                         
Executive officers (other than directors) as a group
    92,682       1,137,981       263,190       13,544       784,989       139,853  
 
(1) The Reed Elsevier NV ordinary shares may be issued in registered or bearer form.
 
(2) No individual executive officer of Reed Elsevier Group plc has notified Reed Elsevier NV that he holds more than 5% of the issued share capital of Reed Elsevier NV pursuant to the Dutch law requirement described under “Item 7: Major Shareholders and Related Party Transactions-Reed Elsevier NV”.
     The options over Reed Elsevier PLC ordinary shares included in the above table are exercisable at prices ranging from 424p to 700p per share and between the date hereof and 2015. The options over Reed Elsevier NV ordinary shares included in the above table are exercisable at prices ranging from 9.34 to 15.66 per share and between the date hereof and 2015. The Reed Elsevier PLC and Reed Elsevier NV conditional share awards included in the above table are exercisable at nil cost between 2006 and 2008.

61


Table of Contents

ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
REED ELSEVIER PLC
     As of February 15, 2006, Reed Elsevier PLC is aware of the following disclosable interests in the issued Reed Elsevier PLC ordinary shares:
                 
    Number of    
    Reed Elsevier PLC    
    ordinary shares    
    owned   % of Class
         
Identity of Person or Group(1)
               
The Capital Group Companies, Inc. 
    115,904,745       9.08  
FMR Corporation
    66,469,992       5.20  
Legal & General Group plc
    49,863,553       3.90  
Prudential plc
    39,858,771       3.12  
Barclays plc
    38,625,977       3.02  
Directors and Officers
    892,587        
 
(1) Under UK Law, subject to certain limited exceptions, persons or groups owning or controlling 3% or more of the issued Reed Elsevier PLC ordinary shares are required to notify Reed Elsevier PLC of the level of their holdings.
     As far as Reed Elsevier PLC is aware, except as disclosed herein, it is neither directly or indirectly owned nor controlled by one or more corporations or by any government.
     At December 31, 2005, there were 23,922 ordinary shareholders, including the depository for Reed Elsevier PLC’s ADR programme, with a registered address in the United Kingdom, representing 99.70% of shares issued.
     Reed Elsevier PLC is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of Reed Elsevier PLC. The major shareholders of Reed Elsevier PLC do not have different voting rights to other ordinary shareholders.
REED ELSEVIER NV
     As of February 15, 2006, Reed Elsevier NV is aware of the following disclosable interests in the issued Reed Elsevier NV ordinary shares, in addition to the 4,679,249 R-shares in Reed Elsevier NV held by a subsidiary of Reed Elsevier PLC and representing a 5.8% indirect equity interest in the total share capital of Reed Elsevier NV:
                 
    Number of    
    Reed Elsevier NV    
    ordinary shares    
Identity of Person or Group(1)   owned   % of Class
         
Directors and Officers(2)
    526,289        
 
(1) Under Dutch law, any person acquiring or disposing of shares or voting rights in public companies listed on a stock exchange in the European Union, is required to notify the company without delay if such person knows, or should know, that such interest therein reaches a 5-10% range or a 10-25% range, or subsequently drops below the 5-10% range. As of February 15, 2006 Reed Elsevier PLC, ING Group and Capital Group International, Inc., had informed Reed Elsevier NV of an interest in its shares in the 5-10% range, but it had received no notification of any interest in its shares or voting rights reaching the 10-25% range, nor of an interest dropping below the 5-10% range.
 
(2) No individual member of the Supervisory Board or the Executive Board of Reed Elsevier NV or executive officer of Reed Elsevier NV has notified Reed Elsevier NV that they hold more than 5% of the issued share capital of Reed Elsevier NV pursuant to the Dutch law described in the immediately preceding footnote.
     As far as Reed Elsevier NV is aware, except as disclosed herein, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government.
     Reed Elsevier NV is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of Reed Elsevier NV. The major shareholders of Reed Elsevier NV do not have different voting rights to other ordinary shareholders.
RELATED PARTY TRANSACTIONS
     
REED ELSEVIER PLC
  None required to be reported.
 
REED ELSEVIER NV
  None required to be reported.

62


Table of Contents

ITEM 8: FINANCIAL INFORMATION
FINANCIAL STATEMENTS
     See Item 18: Financial Statements.
DIVIDEND POLICY
     Dividends to Reed Elsevier PLC and Reed Elsevier NV shareholders are 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. The dividend policy of the boards of Reed Elsevier PLC and Reed Elsevier NV is that, subject to the effects of currency movements on dividend equalisation, increases in full year dividends are expected to closely align with adjusted earnings growth (i.e. before the amortisation of acquired intangible assets, acquisition integration costs, disposals and other non operating items, related tax effects and movements in deferred tax assets and liabilities that are not expected to crystallise in the near term).
LEGAL PROCEEDINGS
     We are party to various legal proceedings, the ultimate resolutions of which are not expected to have a material adverse effect on our financial position or the results of our operations.
     In March and April 2005, Reed Elsevier announced that unauthorised persons, predominantly using IDs and passwords of legitimate customers of LexisNexis, might have fraudulently acquired personal identifying information from its US risk management (including Seisint, Inc.) databases. Investigations have shown that approximately 347,000 consumers’ records have been accessed. LexisNexis has notified, and is working with, Federal authorities in investigating these issues, and has notified the possible security compromises to all the potentially affected consumers both in California (as required by California law) and elsewhere in the United States. LexisNexis has offered affected consumers credit monitoring and anti-fraud assistance. An intensive review of these breaches was completed to identify ways of better protecting against future breaches. Intensified data security policies and practices have been implemented.
     The following two putative class actions against LexisNexis are pending in California arising from these events namely:
  Syran v. LexisNexis Group et al. In April 2005, this putative class action was filed in the US District Court for the Southern District of California. The lawsuit alleges that LexisNexis violated the federal Fair Credit Reporting Act and similar state consumer protection legislation by failing to maintain reasonable procedures to protect consumer credit information from unauthorized access by third parties. The plaintiff seeks unspecified punitive and statutory damages, attorneys’ fees and costs, and injunctive relief.
 
  Witriol v. LexisNexis Group et al. In June 2005, this putative class action was filed in the US District Court for the Northern District of California. The lawsuit arises out of the same set of facts as the Syran action, alleges similar violations of the same federal and state legislation, and seeks similar damages.
     No substantive proceedings relating to these putative class actions have yet occurred. LexisNexis believes that it has strong procedural and substantive defences to these actions, which it will vigorously pursue.
     Reed Elsevier, Inc. (“REI”) is among several defendants in a putative class action, Richard Fresco, et al. v. Automotive Directions, Inc., et al., brought in the federal district court in Florida. The plaintiffs allege that REI (through both LexisNexis and Seisint) violated certain provisions of the Driver’s Privacy Protection Act, (the “DPPA”), when it obtained and disclosed information originating from various state departments of highway safety and motor vehicles without the consent of the individuals to whom the information related. No proceedings relating to the class certification motions, or other proceedings of substance, have yet occurred. REI has indemnity agreements from the entities that supplied REI with some of the information at issue in these matters. However, REI could still be adversely affected where indemnities were not obtained or where indemnities are available, in the event that the plaintiffs are successful in their claims and full recovery is not available under the indemnities. The plaintiffs seek unspecified compensatory and statutory liquidated damages, attorneys’ fees and costs, and injunctive relief. In November 2005, the court ordered mediation. Mediation hearings are scheduled for March 2006. REI believes it has strong procedural and substantive defences to this action and will vigorously pursue them.

63


Table of Contents

ITEM 9: THE OFFER AND LISTING
TRADING MARKETS
REED ELSEVIER PLC
     The Reed Elsevier PLC ordinary shares are listed on the London Stock Exchange and the New York Stock Exchange. The London Stock Exchange is the principal trading market for Reed Elsevier PLC ordinary shares. Trading on the New York Stock Exchange is in the form of American Depositary Shares (ADSs), evidenced by American Depositary Receipts (ADRs) issued by The Bank of New York, as depositary. Each ADS represents four Reed Elsevier PLC ordinary shares.
     The table below sets forth, for the periods indicated, the high and low closing middle market quotations for the Reed Elsevier PLC ordinary shares on the London Stock Exchange as derived from the Daily Official List of the London Stock Exchange and the high and low last reported sales prices in US dollars for the Reed Elsevier PLC ADSs on the New York Stock Exchange, as derived from the New York Stock Exchange Composite Tape, and reported by Datastream International Ltd:
                                 
    Pence per ordinary share   US dollars per ADS
         
Calendar Periods   High   Low   High   Low
                 
2005
    554       475       42.67       35.26  
2004
    543       450       39.75       33.33  
2003
    552       392       37.14       26.15  
2002
    696       488       41.00       31.35  
2001
    700       493       42.63       28.25  
 
2005
                               
Fourth Quarter
    553       505       38.20       35.26  
Third Quarter
    543       519       39.50       36.86  
Second Quarter
    544       510       41.10       38.57  
First Quarter
    554       475       42.67       35.80  
 
2004
                               
Fourth Quarter
    508       462       38.18       35.09  
Third Quarter
    530       467       38.82       34.37  
Second Quarter
    543       481       39.75       35.86  
First Quarter
    516       450       38.55       33.33  
 
Month
                               
February 2006 (through February 15, 2006)
  554       535       38.67       37.36  
January 2006
    555       525       39.48       37.22  
December 2005
    546       515       37.68       35.59  
November 2005
    553       510       38.20       35.26  
October 2005
    532       505       37.21       35.49  
September 2005
    539       519       39.50       36.86  
August 2005
    534       519       38.05       36.98  

64


Table of Contents

REED ELSEVIER NV
     The Reed Elsevier NV ordinary shares are quoted on Euronext Amsterdam NV and the New York Stock Exchange. Euronext Amsterdam NV is the principal trading market for Reed Elsevier NV ordinary shares. Trading on the New York Stock Exchange is in the form of ADSs, evidenced by ADRs issued by The Bank of New York, as depositary. Each ADS represents two Reed Elsevier NV ordinary shares.
     The table below sets forth, for the periods indicated, the high and low closing middle market quotations for the Reed Elsevier NV Ordinary Shares on Euronext Amsterdam NV as derived from the Officiële Prijscourant of Euronext Amsterdam NV and the high and low last reported sales prices in US dollars for the Reed Elsevier NV ADSs on the New York Stock Exchange, as derived from the New York Stock Exchange Composite Tape, and reported by Datastream International Ltd.
                                 
    per ordinary share   US dollars per ADS
         
Calendar Periods   High   Low   High   Low
                 
2005
    11.91       10.03       31.06       26.25  
2004
    12.19       9.61       29.16       24.55  
2003
    12.03       8.13       26.08       18.14  
2002
    16.01       10.86       28.60       21.70  
2001
    15.66       10.92       29.44       20.15  
 
2005
                               
Fourth Quarter
    11.91       11.04       27.95       26.25  
Third Quarter
    11.85       11.11       29.41       27.28  
Second Quarter
    11.81       10.78       29.56       27.67  
First Quarter
    11.69       10.03       31.06       26.32  
 
2004
                               
Fourth Quarter
    10.76       9.91       27.78       25.57  
Third Quarter
    11.59       10.02       28.29       24.65  
Second Quarter
    12.19       10.82       29.16       26.65  
First Quarter
    11.35       9.61       28.51       24.55  
 
Month
                               
February 2006 (through February 15, 2006)
  11.93       11.63       28.51       27.88  
January 2006
    12.11       11.39       29.32       27.79  
December 2005
    11.83       11.29       27.95       26.61  
November 2005
    11.91       11.10       27.93       26.25  
October 2005
    11.67       11.04       27.77       26.42  
September 2005
    11.85       11.38       29.41       27.46  
August 2005
    11.49       11.11       28.49       27.53  

65


Table of Contents

ITEM 10: ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
REED ELSEVIER PLC
     A summary of Reed Elsevier PLC’s equity capital structure and related summary information concerning provisions of its Memorandum and Articles of Association and applicable English law as at March 2001 is incorporated by reference from the 2000 Annual Report on Form 20-F filed with the SEC on March 13, 2001. Since March 2001 a number of amendments have been made to the Articles of Association. A summary of those changes is incorporated by reference from the 2002 Annual Report on Form 20-F filed with the SEC on March 10, 2003. Being summaries, they do not contain all the information that may be important to you, and they are qualified in their entirety by reference to the UK Companies Act 1985 and the Reed Elsevier PLC Memorandum and Articles of Association. For more complete information, you should read Reed Elsevier PLC’s Memorandum and Articles of Association. A copy of Reed Elsevier PLC’s Memorandum and Articles of Association is incorporated by reference from the 2002 Annual Report on Form 20-F filed with the SEC on March 10, 2003 — see “Item 19: Exhibits” on page F-86.
REED ELSEVIER NV
     A summary of Reed Elsevier NV’s equity capital structure and related summary information concerning provisions of its Articles of Association and applicable Dutch law as at March 2001 is incorporated by reference from the 2000 Annual Report on Form 20-F filed with the SEC on March 13, 2001. At the 2002 Annual General Meeting of Shareholders a number of amendments were approved to the Articles of Association. A summary of those amendments is incorporated by reference from the 2002 Annual Report on Form 20-F filed with the SEC on March 10, 2003. In 2005 a number of further amendments were made to the Articles of Association and these are summarised below. Being summaries they do not contain all the information that may be important to you, and they are qualified in their entirety by reference to Dutch law and the Articles of Association of Reed Elsevier NV. For more complete information, you should read Reed Elsevier NV’s Articles of Association. A copy of Reed Elsevier NV’s Articles of Association has been filed as an exhibit to this Annual Report on Form 20-F see “Item 19: Exhibits” on page F-86.
Changes to Articles of Association since March 2005
     At the 2005 Annual General Meeting of Shareholders, Reed Elsevier NV shareholders approved amendments to the Articles of Association to reflect changes in the Dutch Corporate Governance Code and legislation, and the main changes are summarised below.
  —  To establish that the policy for remuneration of the Executive Board will be proposed by the Supervisory Board and determined by the General Meeting of Shareholders.
 
  —  To require that any resolutions entailing a significant change in the identity or character of the company or its business shall need the approval of the General Meeting of Shareholders.
 
  —  To establish that the remuneration for Supervisory Board members will be proposed by the Combined Board and determined by the General Meeting of Shareholders.
 
  —  To provide that amendments to the policy on reserves and dividends shall be discussed and accounted for at the General Meeting of Shareholders as a separate agenda item.
 
  —  To provide that the distribution of dividends shall be a separate agenda item at the General Meeting of Shareholders.
 
  —  To provide that the company will indemnify directors against third party claims, not relating to inappropriate personal benefits to which the director was not entitled or which result from wilful misconduct or intentional recklessness.
 
  —  To provide that shareholders representing at least 1% of issued share capital or worth at least 50 million of share value may request that items be placed on the agenda of the General Meeting of Shareholders.

66


Table of Contents

MATERIAL CONTRACTS
     Reed Elsevier has not entered into any material contract within the last two years.
EXCHANGE CONTROLS
     There is currently no UK or Dutch legislation restricting the import or export of capital or affecting the remittance of dividends or other payments to holders of, respectively, Reed Elsevier PLC ordinary shares who are non-residents of the United Kingdom and Reed Elsevier NV ordinary shares who are non-residents of the Netherlands.
     There are no limitations relating only to non-residents of the United Kingdom under UK law or Reed Elsevier PLC’s Memorandum and Articles of Association on the right to be a holder of, and to vote, Reed Elsevier PLC ordinary shares, or to non-residents of the Netherlands under Dutch law or Reed Elsevier NV’s Articles of Association on the right to be a holder of, and to vote, Reed Elsevier NV ordinary shares.
TAXATION
     The following discussion is a summary under present law and tax authority practice of the material UK, Dutch and US federal income tax considerations relevant to the purchase, ownership and disposal of Reed Elsevier PLC ordinary shares or ADSs and Reed Elsevier NV ordinary shares or ADSs. This discussion applies to you only if you are a US holder, you hold your ordinary shares or ADSs as capital assets and you use the US dollar as your functional currency. It does not address the tax treatment of US holders subject to special rules, such as banks, dealers or traders in derivatives or currencies, insurance companies, tax-exempt entities, partnerships or other pass-through entities for US Federal income tax purposes, holders of 10% or more of Reed Elsevier PLC or Reed Elsevier NV voting shares, persons holding ordinary shares or ADSs as part of a hedging, straddle, conversion or constructive sale transaction, persons that are resident or ordinarily resident in the UK (or who have ceased to be resident or ordinarily resident within the past five years of assessment) and persons that are resident in the Netherlands. The summary also does not discuss the US Federal alternative minimum tax or the tax laws of particular states or localities in the US.
     This summary does not consider your particular circumstances. It is not a substitute for tax advice. We urge you to consult your own independent tax advisors about the income, capital gains and/or transfer tax consequences to you in light of your particular circumstances of purchasing, holding and disposing of ordinary shares or ADSs.
     As used in this discussion, “US holder” means a beneficial owner of ordinary shares or ADSs that is for US Federal income tax purposes: (i) an individual US citizen or resident, (ii) a corporation, partnership or other business entity created or organised under the laws of the United States, any state thereof or the District of Columbia, (iii) a trust (a) that is subject to the control of one or more US persons and the primary supervision of a US court, or (b) that has valid election in effect under US Treasury regulations to be treated as a US person or (iv) an estate the income of which is subject to US federal income taxation regardless of its source.
UK Taxation
Dividends
     Under current UK taxation legislation, no tax is required to be withheld at source from dividends paid on the Reed Elsevier PLC ordinary shares or ADSs.
Capital Gains
     You may be liable for UK taxation on capital gains realised on the disposal of your Reed Elsevier PLC ordinary shares or ADSs if at the time of the disposal you carry on a trade, profession or vocation in the United Kingdom through a branch or agency, or in the case of a company a permanent establishment, and such ordinary shares or ADSs are or have been used, held or acquired for the purposes of such trade, profession, vocation, branch, agency or permanent establishment.
UK Stamp Duty and Stamp Duty Reserve Tax
     UK stamp duty reserve tax (SDRT) or UK stamp duty is payable upon the transfer or issue of Reed Elsevier PLC ordinary shares to the Depositary in exchange for Reed Elsevier PLC ADSs evidenced by ADRs. For this purpose, the current rate of stamp duty and SDRT of 1.5% would be applied, in each case, to: (i) the issue price when the ordinary shares are issued; (ii) the amount or value of the consideration where shares are transferred for consideration in money or money’s worth; or (iii) the value of the ordinary shares in any other case.
     Provided that the relevant instrument of transfer is not executed in the UK and remains outside the UK, no UK stamp duty will be payable on the acquisition or subsequent transfer of Reed Elsevier PLC ADRs. An agreement to transfer Reed Elsevier PLC ADRs will not give rise to a liability to SDRT.

67


Table of Contents

     A transfer of Reed Elsevier PLC ordinary shares by the Depositary to an ADR holder where there is no transfer of beneficial ownership will give rise to UK stamp duty at the rate of £5 per transfer.
     Purchases of Reed Elsevier PLC ordinary shares, as opposed to ADRs, will give rise to UK stamp duty or SDRT at the time of transfer or agreement to transfer, normally at the rate of 0.5% of the amount payable for the ordinary shares. SDRT and UK stamp duty are usually paid by the purchaser. If the ordinary shares are later transferred to the Depositary, additional UK stamp duty or SDRT will normally be payable as described above.
Dutch Taxation
Withholding tax
     Dividends distributed to you by Reed Elsevier NV normally are subject to a withholding tax imposed by the Netherlands at a rate of 25%. Under the US-Netherlands income tax treaty, the rate of Dutch withholding tax on dividends distributed to you can be reduced from 25% to 15%. Dividends include, among other things, stock dividends unless the dividend is distributed out of recognised paid-in share premium for Dutch tax purposes.
     You can claim the benefits of the reduced US-Netherlands income tax treaty withholding rate by submitting a Form IB 92 U.S.A. that includes an affidavit of a financial institution (typically the entity that holds the Reed Elsevier NV ordinary shares or ADSs for you as custodian). If Reed Elsevier NV receives the required documentation before the relevant dividend payment date, it may apply the reduced withholding rate at source. If you fail to satisfy these requirements, you can claim a refund of the excess amount withheld by filing Form IB 92 U.S.A. with the Dutch tax authorities within three years after the calendar year in which the withholding tax was levied and describing the circumstances that prevented you from claiming withholding tax relief at source.
Taxation of dividends and capital gains
     You will not be subject to any Dutch taxes on dividends distributed by Reed Elsevier NV (other than the withholding tax described above) or any capital gain realised on the disposal of Reed Elsevier NV ordinary shares or ADSs provided that (i) the Reed Elsevier NV ordinary shares or ADSs are not attributable to an enterprise or an interest in an enterprise that you carry on, in whole or part through a permanent establishment or a permanent representative in the Netherlands, (ii) you do not have a substantial interest or a deemed substantial interest in Reed Elsevier NV (generally, 5% or more of either the total issued and outstanding capital or the issued and outstanding capital of any class of shares) or, if you have such an interest, it forms part of the assets of an enterprise, and (iii) if you are an individual, such dividend or capital gain from your Reed Elsevier NV ordinary shares or ADSs does not form benefits from miscellaneous activities (“resultaat uit overige werkzaamheden”) in the Netherlands.
US Federal Income Taxation
     Holders of the ADSs generally will be treated for US federal income tax purposes as owners of the ordinary shares represented by the ADSs.
Dividends
     Dividends on Reed Elsevier PLC ordinary shares or ADSs or Reed Elsevier NV ordinary shares or ADSs (including any Dutch tax withheld) will generally be included in your gross income as ordinary income from foreign sources. The dollar amount recognised on receiving a dividend in pounds sterling or euros will be based on the exchange rate in effect on the date the depositary receives the dividend, or in the case of ordinary shares on the date you receive the dividend, as the case may be, whether or not the payment is converted into US dollars at that time. Any gain or loss recognised on a subsequent conversion of pounds sterling or euros for a different amount will be US source ordinary income or loss. Dividends received will not be eligible for the dividends-received deduction available to corporations.
     On March 31, 2003, representatives of the United Kingdom and United States exchanged instruments of ratification for a new income tax convention (the “New UK Treaty”). The New UK Treaty has the force and effect of law in respect of withholding taxes on dividends from May 1, 2003. Investors who qualified for benefits under the terms of the prior treaty between the United Kingdom and United States (the “Old UK Treaty”) were eligible, subject to generally applicable limitations, to receive a special US foreign tax credit equal to one-ninth of the amount of certain cash dividends that they received on the Reed Elsevier PLC ordinary shares or Reed Elsevier PLC ADSs, so long as they made an election to include in their income, as an additional notional dividend, an amount equal to the tax credit.
     This foreign tax credit benefit is not available under the New UK Treaty, and thus generally is unavailable with respect to dividends paid after May 1, 2003. However, the New UK Treaty provides for an election pursuant to which persons eligible for the benefits of the Old UK Treaty may elect to apply the Old UK Treaty in its entirety, in lieu of the New UK Treaty, for an optional 12-month extension period. Thus, if an investor were to elect the application of the Old UK Treaty, that investor could obtain the special foreign tax credit benefit described above with respect to any dividends received on the Reed Elsevier PLC ordinary shares or Reed Elsevier PLC ADSs prior to May 1, 2004. Investors should consult their own tax advisers regarding their potential eligibility for this foreign tax credit benefit, as well as the

68


Table of Contents

advisability of and procedure for electing the application of the Old UK Treaty and for including in income the additional notional dividend described above.
     If you hold Reed Elsevier NV ordinary shares or ADSs and are eligible to claim benefits under the US-Netherlands income tax treaty, you may claim a reduced rate of Dutch dividend withholding tax equal to 15%. Subject to generally applicable limitations, you can claim a deduction or a foreign tax credit only for Dutch tax withheld at the rate provided under the US-Netherlands income tax treaty. For purposes of calculating the foreign tax credit, dividends paid on the Reed Elsevier NV ordinary shares or ADSs will be treated as income from sources outside the US and will generally constitute passive income. Further, in certain circumstances, if you have held the Reed Elsevier NV ordinary shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for Dutch taxes imposed on the dividends on the Reed Elsevier NV ordinary shares or ADSs. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
     With respect to US holders who are individuals, certain dividends received before January 1, 2009 from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of certain comprehensive income tax treaties with the United States. United States Treasury Department guidance indicates that the United Kingdom is a country with which the United States has a treaty in force that meets these requirements, and Reed Elsevier PLC believes it is eligible for the benefits of this treaty. Additionally, the same guidance indicates that the Netherlands is also a country with which the United States has a treaty in force that meets the above requirements, and Reed Elsevier NV believes it is eligible for the benefits of this treaty. Individuals that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to section 163(d)(4) of the US Internal Revenue Code of 1986, as amended, will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. US holders should consult their own tax advisors regarding the application of these rules given their particular circumstances.
Dispositions
     You will recognise a gain or loss on the sale or other disposition of ordinary shares or ADSs in an amount equal to the difference between your basis in the ordinary shares or ADSs and the amount realised. The gain or loss will be capital gain or loss. It will be long term capital gain or loss if you have held the ordinary shares or ADSs for more than one year at the time of sale or other disposition. Long term capital gains of individuals are eligible for reduced rates of taxation. Deductions for capital losses are subject to limitations.
     If you receive pounds sterling or euros on the sale or other disposition of your ordinary shares or ADSs, you will realise an amount equal to the US dollar value of the pounds sterling or euros on the date of sale or other disposition (or in the case of cash basis and electing accrual basis taxpayers, the settlement date). You will have a tax basis in the pounds sterling or the euros that you receive equal to the US dollar amount received. Any gain or loss realised by a US holder on a subsequent conversion of pounds sterling or euros into US dollars will be US source ordinary income or loss.
Information Reporting and Backup Withholding Tax
     Dividends from ordinary shares or ADSs and proceeds from the sale of the ordinary shares or ADSs may be reported to the IRS unless the shareholder is a corporation or other exempt recipient. A backup withholding tax may apply to such amounts unless the shareholder (i) is a corporation, (ii) provides an accurate taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules, or (iii) otherwise establishes a basis for exemption. The amount of any backup withholding tax will be allowed as a credit against the holder’s US federal income tax liability and may entitle the holder to a refund, provided the required information is furnished to the IRS.
DOCUMENTS ON DISPLAY
     You may read and copy documents referred to in this annual report that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC, 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.

69


Table of Contents

ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Reed Elsevier’s primary market risks are to interest rate fluctuations and to exchange rate movements. Net finance costs are exposed to interest rate fluctuations on borrowings, cash and cash equivalents. Upward fluctuations in interest rates increase the interest cost of floating rate borrowings whereas downward fluctuations in interest rates decrease the interest return on floating rate cash and cash equivalents. Interest expense payable on fixed rate borrowings is protected against upward fluctuations in interest rates but does not benefit from downward fluctuations. In addition, Reed Elsevier companies engage in foreign currency denominated transactions and are subject to exchange rate risk on such transactions.
     Reed Elsevier seeks to limit these risks by means of derivative financial instruments, including interest rate swaps, interest rate options, forward rate agreements and forward foreign exchange contracts. Reed Elsevier only enters into derivative financial instruments to hedge (or reduce) the underlying risks described above, and therefore has no net market risk on derivative financial instruments held at the end of the year. Reed Elsevier does, however, have a credit risk from the potential non-performance by the counterparties to these financial instruments, which are unsecured. The amount of this credit risk is normally restricted to the amount of the hedge gain and not the principal amount being hedged. This credit risk is controlled by means of regular credit reviews of these counterparties and of the amounts outstanding with each of them. Reed Elsevier does not expect non-performance by the counterparties, which are principally licensed commercial banks and investment banks with strong long term credit ratings.
     Reed Elsevier enters into interest rate swaps in order to achieve an appropriate balance between fixed and variable rate borrowings, cash and cash equivalents. They are used to hedge the effects of fluctuating interest rates on variable rate borrowings, cash and cash equivalents by allowing Reed Elsevier to fix the interest rate on a notional principal amount equal to the principal amount of the underlying floating rate cash, cash equivalents or borrowings being hedged. They are also used to swap fixed interest rates payable on long term borrowings for a variable rate. Such swaps may be used to swap a whole fixed rate bond for variable rate or they may be used to swap a portion of the period or a portion of the principal amount for the variable rate.
     Forward swaps and forward rate agreements are entered into to hedge interest rate exposures known to arise at a future date. These exposures may include new borrowings or cash deposits to be entered into at a future date or future rollovers of existing borrowings or cash deposits. Interest exposure arises on future, new and rollover borrowings and cash deposits because interest rates can fluctuate between the time a decision is made to enter into such transactions and the time those transactions are actually entered into. The business purpose of forward swaps and forward rate agreements is to fix the interest cost on future borrowings or interest return on cash investments at the time it is known such a transaction will be entered into. The fixed interest rate, the floating rate index (if applicable) and the time period covered by forward swaps and forward rate agreements are known at the time the agreements are entered into. The use of forward swaps and forward rate agreements is limited to hedging activities; consequently no trading position results from their use. The impact of forward swaps and forward rate agreements is the same as interest rate swaps. Similarly, Reed Elsevier utilises forward foreign exchange contracts to hedge the effects of exchange rate movements on its foreign currency revenue and operating costs.
     Interest rate options protect against fluctuating interest rates by enabling Reed Elsevier to fix the interest rate on a notional principal amount of borrowings or cash deposits (in a similar manner to interest rate swaps and forward rate agreements) whilst at the same time allowing Reed Elsevier to improve the fixed rate if the market moves in a certain way. Reed Elsevier uses interest rate options from time to time when it expects interest rates to move in its favour but it is deemed imprudent to leave the interest rate risk completely unhedged. In such cases, Reed Elsevier may use an option to lock in at certain rates whilst at the same time maintaining some freedom to benefit if rates move in its favour.
     Reed Elsevier’s net finance cost is also exposed to changes in the fair value of interest rate and foreign exchange derivatives which are not part of a designated hedging relationship under IAS39 — Financial Instruments, and to ineffectiveness that may arise. Reed Elsevier manages these risks by designating derivatives in a highly effective hedging relationship unless the potential change in their fair value is deemed to be insignificant.
     Derivative financial instruments are utilised to hedge (or reduce) the risks of interest rate or exchange rate movements and are not entered into unless such risks exist. Derivatives utilised, while appropriate for hedging a particular kind of risk, are not considered specialised or high-risk and are generally available from numerous sources.
     The following analysis sets out the sensitivity of the fair value of Reed Elsevier’s financial instruments to selected changes in interest rates and exchange rates. The range of changes represents Reed Elsevier’s view of the changes that are reasonably possible over a one year period.
     The fair values of interest rate swaps, interest rate options, forward rate agreements and forward foreign exchange contracts set out below represent the replacement costs calculated using market rates of interest and exchange at December 31, 2005. The fair value of long term borrowings has been calculated by discounting expected future cash flows at market rates.
     Reed Elsevier’s use of financial instruments and its accounting policies for financial instruments are described more fully in notes 2 and 18 to the combined financial statements.

70


Table of Contents

(a)    Interest Rate Risk
     The following sensitivity analysis assumes an immediate 100 basis point change in interest rates for all currencies and maturities from their levels at December 31, 2005 with all other variables held constant.
                         
        Fair Value
        Change
         
    Fair Value   +100   -100
    December 31,   basis   basis
Financial Instrument   2005   points   points
             
    (in millions)
Short term borrowings
    £(536 )     £—       £—  
Long term borrowings (including current portion)
    (2,685 )     110       (125 )
Interest rate swaps (swapping fixed rate debt to floating)
    175       (56 )     64  
Interest rate swaps (swapping floating rate debt to fixed)
    (1 )     17       (17 )
Interest rate options
    (1 )            
Forward rate agreements
    1              
     A 100 basis point change in interest rates would not result in a material change to the fair value of other financial instruments.
     At December 31, 2005, the majority of borrowings are either fixed rate or have been fixed through the use of interest rate swaps, forward rate agreements and options. A 100 basis point reduction in interest rates would result in an estimated decrease in net interest expense of £5 million, based on the composition of financial instruments including cash, cash equivalents, bank loans and commercial paper borrowings at December 31, 2005. A 100 basis points rise in interest rates would result in an estimated increase in net interest expense by £5 million.
(b)    Foreign Exchange Rate Risks
     The following sensitivity analysis assumes an immediate 10% change in all foreign currency exchange rates against sterling from their levels at December 31, 2005, with all other variables held constant. A +10% change indicates a strengthening of the currency against sterling and a -10% change indicates a weakening of the currency against sterling.
                         
        Fair Value
        Change
    Fair Value    
    December 31,        
Financial Instrument   2005   +10%   -10%
             
    (in millions)
Cash and cash equivalents
    £296       £20       £(17 )
Short term borrowings
    (536 )     (59 )     49  
Long term borrowings (including current portion)
    (2,685 )     (298 )     244  
Interest rate swaps (including cross currency interest rate swaps)
    174       19       (16 )
Forward foreign exchange contracts
    5       (38 )     37  
     A 10% change in foreign currency exchange rates would not result in a material change to the fair value of other financial instruments.

71


Table of Contents

PART II
ITEM 15: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
     Management, including the Chief Executive Officer and Chief Financial Officer of Reed Elsevier PLC and Reed Elsevier NV, have reviewed and evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of Reed Elsevier PLC and Reed Elsevier NV have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report, timely providing them with all material information required to be disclosed in this annual report.
Internal Controls over Financial Reporting
     Management, including the Chief Executive Officer and Chief Financial Officer of Reed Elsevier PLC and Reed Elsevier NV, have reviewed whether or not during the period covered by the annual report, there have been any changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. Based on that review, the Chief Executive Officer and Chief Financial Officer of Reed Elsevier PLC and Reed Elsevier NV have concluded that there have been no such significant changes.
     An outline of the internal control structure is set out below.
Parent companies
     The boards of Reed Elsevier PLC and Reed Elsevier NV exercise independent supervisory roles over the activities and systems of internal control of Reed Elsevier Group plc and Elsevier Reed Finance BV. The boards of Reed Elsevier PLC and Reed Elsevier NV have each adopted a schedule of matters which are required to be brought to them for decision. In relation to Reed Elsevier Group plc and Elsevier Reed Finance BV, the boards of Reed Elsevier PLC and Reed Elsevier NV approve the strategy and the annual budgets, and receive regular reports on the operations, including the treasury and risk management activities of the two companies. Major transactions proposed by the boards of Reed Elsevier Group plc or Elsevier Reed Finance BV require the approval of the boards of both Reed Elsevier PLC and Reed Elsevier NV.
     The Reed Elsevier PLC and Reed Elsevier NV Audit Committees meet on a regular basis to review the systems of internal control and risk management of Reed Elsevier Group plc and Elsevier Reed Finance BV.
Operating companies
     The board of Reed Elsevier Group plc is responsible for the system of internal control of the Reed Elsevier publishing and information businesses, while the boards of Elsevier Reed Finance BV are responsible for the system of internal control in respect of the finance group activities. The boards of Reed Elsevier Group plc and Elsevier Reed Finance BV are also responsible for reviewing the effectiveness of their system of internal control.
     The boards of Reed Elsevier Group plc and Elsevier Reed Finance BV have implemented an ongoing process for identifying, evaluating, monitoring and managing the more significant risks faced by their respective businesses. This process has been in place throughout the year ended December 31, 2005, and up to the date of the approvals of this annual report.
Reed Elsevier Group