-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EncUm5SkIfopJAoke18LjBwTqviJAX1Gsk0jOoVV19cpVbIjn76Q4SIv209JjX1e JDQb8UXUZiLm/Kt1hzFGJA== 0000944209-97-001349.txt : 19971008 0000944209-97-001349.hdr.sgml : 19971008 ACCESSION NUMBER: 0000944209-97-001349 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19971007 SROS: NONE GROUP MEMBERS: PEARSON MERGER CO INC GROUP MEMBERS: PEARSON PLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ALL AMERICAN COMMUNICATIONS INC CENTRAL INDEX KEY: 0000783265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 953803222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-37891 FILM NUMBER: 97691930 BUSINESS ADDRESS: STREET 1: 808 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401-1810 BUSINESS PHONE: 310-656-1100 MAIL ADDRESS: STREET 1: 808 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401-1810 FORMER COMPANY: FORMER CONFORMED NAME: ALL AMERICAN TELEVISION INC DATE OF NAME CHANGE: 19910306 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ALL AMERICAN COMMUNICATIONS INC CENTRAL INDEX KEY: 0000783265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 953803222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-37891 FILM NUMBER: 97691931 BUSINESS ADDRESS: STREET 1: 808 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401-1810 BUSINESS PHONE: 310-656-1100 MAIL ADDRESS: STREET 1: 808 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401-1810 FORMER COMPANY: FORMER CONFORMED NAME: ALL AMERICAN TELEVISION INC DATE OF NAME CHANGE: 19910306 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PEARSON MERGER CO INC CENTRAL INDEX KEY: 0001047377 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 30 ROCKEFELLE PLAZA STREET 2: 50TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10112 BUSINESS PHONE: 2126412423 MAIL ADDRESS: STREET 1: 30 ROCKEFELLER PLAZA STREET 2: 50TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10112 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PEARSON MERGER CO INC CENTRAL INDEX KEY: 0001047377 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 30 ROCKEFELLE PLAZA STREET 2: 50TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10112 BUSINESS PHONE: 2126412423 MAIL ADDRESS: STREET 1: 30 ROCKEFELLER PLAZA STREET 2: 50TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10112 SC 14D1 1 SCHEDULE 14D & SCHEDULE 13D - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14D-1 TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 AND SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 ALL AMERICAN COMMUNICATIONS, INC. (NAME OF SUBJECT COMPANY) PEARSON MERGER COMPANY, INC. PEARSON PLC (Bidders) COMMON STOCK, $.0001 PAR VALUE AND CLASS B COMMON STOCK, $.0001 PAR VALUE (Title of Class of Securities) 016480105 (COMMON STOCK) 016480204 (COMMON STOCK) 016480402 (CLASS B COMMON STOCK) (CUSIP Number of Class of Securities) DAVID M. VEIT PEARSON INC. 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10112 (212) 713-1919 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on behalf of Bidders) Copy to: MICHAEL S. HOBEL ROBERT D. HAYMER O'MELVENY & MYERS LLP 1999 AVENUE OF THE STARS, SUITE 700 LOS ANGELES, CALIFORNIA 90067 (310) 553-6700 OCTOBER 7, 1997 (Date of Event Which Requires Filing of this Statement) CALCULATION OF FILING FEE TRANSACTION VALUATION* $310,314,779 AMOUNT OF FILING FEE $62,063 * Estimated for purposes of calculating the amount of the filing fee only. The amount assumes the purchase of 7,019,557 Shares of Common Stock, $.0001 par value, and 5,149,650 Shares of Class B Common Stock, $.0001 par value (collectively, the "Shares") of All American Communications, Inc. (the "Company") at a price per Share of $25.50 in cash (the "Offer Price"). Such number of Shares represents all the Shares outstanding as of September 30, 1997. Such number does not include any Shares issuable upon exercise of employee stock options or warrants. [_] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount previously paid: none Filing party: n/a Form or registration no.: n/a Date filed: n/a
(Continued on following pages) (Exhibit Index is located on Page 6) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 14D-1 AND 13D CUSIP No. 016480105 (Common Stock) CUSIP No. 016480204 (Common Stock) CUSIP No. 016480402 (Class B Common Stock) 1. Name of Reporting Persons S.S. or I.R.S. Identification Nos. of Above Persons PEARSON MERGER COMPANY, INC 2. Check the Appropriate Box if a Member of a Group (a) /x/ (b) / / 3. SEC Use Only 4. Sources of Funds WC, AF 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(e) or 2(f) / / 6. Citizenship or Place of Organization DELAWARE 7. Aggregate Amount Beneficially Owned by Each Reporting Person 3,502,759 shares of Common Stock 2,470,000 shares of Class B Common Stock 8. Check if the Aggregate Amount in Row 7 Excludes Certain Shares / / 9. Percent of Class Represented by Amount in Row 7 Approximately 49.9% Common Stock Approximately 48.0% Class B Common Stock 10. Type of Reporting Person CO 14D-1 AND 13D CUSIP No. 016480105 (Common Stock) Page 3 CUSIP No. 016480204 (Common Stock) CUSIP No. 016480402 (Class B Common Stock) 1. Name of Reporting Persons S.S. or I.R.S. Identification Nos. of Above Persons PEARSON plc 2. Check the Appropriate Box if a Member of a Group (a) /x/ (b) / / 3. SEC Use Only 4. Sources of Funds WC, BK 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(e) or 2(f) / / 6. Citizenship or Place of Organization ENGLAND 7. Aggregate Amount Beneficially Owned by Each Reporting Person 3,502,759 shares of Common Stock 2,470,000 shares of Class B Common Stock 8. Check if the Aggregate Amount in Row 7 Excludes Certain Shares / / 9. Percent of Class Represented by Amount in Row 7 Approximately 49.9% Common Stock Approximately 48.0% Class B Common Stock 10. Type of Reporting Person CO TENDER OFFER This Tender Offer Statement on Schedule 14D-1 relates to the offer by Pearson Merger Company, Inc., a Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of Pearson plc, a corporation incorporated under the laws of England ("Parent"), to purchase all outstanding Shares of Common Stock, par value $.0001 per share (the "Common Stock") and all outstanding shares of Class B Common Stock, par value $.0001 per share (the "Class B Common Stock," and together with the Common Stock, the "Shares"), of All American Communications, Inc., a Delaware corporation, at $25.50 per Share, net to the seller in cash, on the terms and subject to the conditions set forth in the Offer to Purchase dated October 7, 1997 (the "Offer to Purchase") and in the related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively (which, as amended or supplemented from time to time, together constitute the "Offer"). This Tender Offer Statement on Schedule 14D-1 also constitutes a Statement on Schedule 13D with respect to the acquisition by Purchaser of a beneficial ownership of the Shares subject to an Agreement and Plan of Merger, dated as of October 1, 1997 (the "Merger Agreement"), by and among the Company, Parent and Purchaser, and a Stockholders Agreement, dated as of October 1, 1997, by and among Parent, Purchaser, Anthony J. Scotti, Benjamin Scotti, Myron Roth, Thomas Bradshaw, Sydney D. Vinnedge, Lawrence Lamattina and The Interpublic Group of Companies, Inc. (the "Stockholders Agreement"). The item numbers and responses thereto below are in accordance with the requirements of Schedule 14D-1. ITEM 1. SECURITY AND SUBJECT COMPANY (a) The name of the subject company is All American Communications, Inc., a Delaware corporation (the "Company"). The address of the Company's principal executive offices is 808 Wilshire Boulevard, Santa Monica, California 90404. (b) The information set forth in the Introduction of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 "Price Range of Shares; Dividends" of the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND (a)-(d), (g) This Statement is filed by Purchaser and Parent. The information set forth in the Introduction, in Section 8--"Certain Information Concerning Parent and Purchaser" and in Schedule I of the Offer to Purchase is incorporated herein by reference. (e)-(f) During the last five years, neither Parent nor Purchaser nor, to their knowledge, any of the persons listed in Schedule I (Directors and Executive Officers) of the Offer to Purchase, (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY (a)-(b) The information set forth in Section 8 "Certain Information Concerning Parent and Purchaser," Section 10--"Background of the Offer; Contacts with the Company" and Section 11--"The Offer and Merger; Merger Agreement; Other Agreements" of the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION (a)-(b) The information set forth in Section 9 "Sources and Amounts of Funds" of the Offer to Purchase is incorporated herein by reference. 1 (c) Not applicable. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDERS (a)-(g) The information set forth in the Introduction, in Section 11 "The Offer and Merger; Merger Agreement; Other Agreements," in Section 12 "Purpose of the Offer and the Merger; Plans for the Company" and in Section 13 "Effect of the Offer on the Market for the Shares; Exchange Act Registration; Margin Regulations; Voting" of the Offer to Purchase is incorporated herein by reference. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY (a)-(b) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, the information set forth in Section 8 "Certain Information Concerning Parent and Purchaser" and in Section 11 "The Offer and Merger; Merger Agreement; Other Agreements" of the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESECT TO THE SUBJECT COMPANY'S SECURITIES The information set forth in the Introduction, in Section 8 "Certain Information Concerning Parent and Purchaser," in Section 10 "Background of the Offer; Contacts with the Company," in Section 11 "The Offer and Merger; Merger Agreement; Other Agreements" and in Section 12 "Purpose of the Offer and the Merger; Plans for the Company" of the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED The information set forth in the Introduction, in Section 17 "Fees and Expenses" and in Section 18 "Miscellaneous" of the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS The Purchaser and Parent do not believe that any of the financial statements of either of them or of any of their affiliates is material to a decision by stockholders of the Company whether to sell, tender or hold Shares. However, as supplemental material not required to be included in the Offer to Purchase or this Tender Offer Statement, the financial information with respect to the financial statements of Parent set forth in Section 8 "Certain Information Concerning Purchaser and Parent -- Summary Consolidated Financial Information for Parent" of the Offer to Purchase and Exhibit (g) attached to this Schedule 14D-1 are incorporated herein by reference. ITEM 10. ADDITIONAL INFORMATION (a) The information set forth in the Introduction, in Section 8 "Certain Information Concerning Parent and Purchaser," in Section 10 "Background of the Offer; Contacts with the Company," in Section 11 "The Offer and Merger; Merger Agreement; Other Agreements" and in Section 12 "Purpose of the Offer and the Merger; Plans for the Company" of the Offer to Purchase is incorporated herein by reference. (b)-(c) The information set forth in Section 1 "Terms of the Offer," in Section 11 "The Offer and Merger; Merger Agreement; Other Agreements," in Section 15 "Conditions to the Offer" and in Section 16 "Certain Legal Matters; Regulatory Approvals" of the Offer to Purchase is incorporated herein by reference. 2 (d) The information set forth in Section 13 "Effect of the Offer on the Market for the Shares; Exchange Act Registration; Margin Regulations; Voting" and in Section 16 "Certain Legal Matters; Regulatory Approvals" of the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) The information set forth in the Offer to Purchase and the Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, is incorporated herein by reference in its entirety. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS (a)(1) Offer to Purchase, dated October 7, 1997. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Text of Press Release issued by Parent, dated October 1, 1997. (b) Multicurrency Multi-Option Facility Agreement with Parent, Pearson Inc., Midland Bank plc and Union Bank of Switzerland on Arrangers, Samuel Montagu & Co. Limited as Facility Agent and Sterling Swing-Line Agent, Midland Bank as Dollar- Swing-Line Agent and certain other financial institutions. (c)(1) Agreement and Plan of Merger dated as of October 1, 1997 by and among Parent, Purchaser and the Company. (c)(2) Stockholders Agreement dated as of October 1, 1997, by and among Parent, Purchaser, Anthony J. Scotti, Benjamin Scotti, Myron Roth, Thomas Bradshaw, Sydney D. Vinnedge, Lawrence Lamattina and The Interpublic Group of Companies, Inc. (c)(3) Confidentiality Agreement dated November 20, 1995 by and between Pearson Television Limited and the Company. (c)(4) Termination of November 20, 1995 Confidentiality Agreement dated December 7, 1995. (c)(5) February 16, 1996 Letter by and between Pearson Television Limited and the Company reinstating November 20, 1995 Confidentiality Agreement. (c)(6) Agreement Not to Compete dated as of October 1, 1997, by and between the Company and Anthony J. Scotti. 3 (c)(7) Fifth Amendment to Employment Agreement dated as of October 1, 1997, by and between the Company and Anthony J. Scotti. (c)(8) Letter dated as of October 1, 1997 regarding Confidentiality Agreement and Standstill Provisions. (d)None. (e)Not applicable. (f)None. (g)Pearson plc Report and Accounts 1996. (h)Power of Attorney dated October 7, 1997. 4 SIGNATURES After due inquiry and to the best of my knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. Dated: October 7, 1997 Pearson plc /s/ JOHN DAVIS By___________________________________ Name: John Davis Title: Authorized Signatory Pearson Merger Company, Inc. /s/ JOHN DAVIS By___________________________________ Name: John Davis Title: Vice President EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE ------- ----------- ---- (a)(1) Offer to Purchase, dated October 7, 1997 (a)(2) Letter of Transmittal (a)(3) Notice of Guaranteed Delivery (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (a)(7) Text of Press Release issued by Parent, dated October 1, 1997 (b) Multicurrency Multi-Option Facility Agreement with Parent, Pearson Inc., Midland Bank plc and Union Bank of Switzerland on Arrangers, Samuel Montagu & Co. Limited as Facility Agent and Sterling Swing-Line Agent, Midland Bank as Dollar-Swing-Line Agent and certain other financial institutions. (c)(1) Agreement and Plan of Merger dated as of October 1, 1997 by and among Parent, Purchaser and the Company (c)(2) Stockholders Agreement dated as of October 1, 1997, by and among Parent, Purchaser, Anthony J. Scotti, Benjamin Scotti, Myron Roth, Thomas Bradshaw, Sydney D. Vinnedge, Lawrence Lamattina and The Interpublic Group of Companies, Inc. (c)(3) Confidentiality Agreement dated November 20, 1995 by and between Pearson Television Limited and the Company (c)(4) Termination of November 20, 1995 Confidentiality Agreement dated December 7, 1995 (c)(5) February 16, 1996 Letter by and between Pearson Television Limited and the Company reinstating November 20, 1995 Confidentiality Agreement (c)(6) Agreement Not to Compete dated as of October 1, 1997, by and between the Company and Anthony J. Scotti. (c)(7) Fifth Amendment to Employment Agreement dated as of October 1, 1997, by and between the Company and Anthony J. Scotti. (c)(8) Letter dated as of October 1, 1997 regarding Confidentiality Agreement and Standstill Provisions. (d) None (e) Not applicable (f) None (g) Pearson plc Report and Accounts 1996 (h) Power of Attorney dated October 7, 1997.
EX-99.(A)(1) 2 OFFER TO PURCHASE, DATED 10/07/97 EXHIBIT 99(a)(1) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. AT $25.50 NET PER SHARE BY PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, NOVEMBER 4, 1997, UNLESS EXTENDED. THE BOARD OF DIRECTORS OF ALL AMERICAN COMMUNICATIONS, INC. (THE "COMPANY") HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE OFFER AND THE MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY, AND UNANIMOUSLY RECOMMENDS ACCEPTANCE OF THE OFFER AND APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER BY THE STOCKHOLDERS OF THE COMPANY. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE A NUMBER OF SHARES OF COMMON STOCK, $.0001 PAR VALUE PER SHARE (THE "COMMON STOCK"), AND CLASS B COMMON STOCK, $.0001 PAR VALUE PER SHARE (THE "CLASS B COMMON STOCK", AND TOGETHER WITH THE COMMON STOCK, THE "SHARES"), WHICH CONSTITUTES AT LEAST A MAJORITY OF THE TOTAL NUMBER OF SHARES OF COMMON STOCK AND A MAJORITY OF THE TOTAL NUMBER OF SHARES OUTSTANDING ON THE EXPIRATION DATE (INCLUDING FOR PURPOSES OF SUCH CALCULATION ALL SHARES ISSUED UPON EXERCISE OF ALL VESTED AND UNVESTED STOCK OPTIONS AND WARRANTS PRIOR TO OR SIMULTANEOUSLY WITH THE ACCEPTANCE OF THE OFFER) (THE "MINIMUM CONDITION"). BENEFICIAL OWNERS OF APPROXIMATELY 55.79% OF THE TOTAL NUMBER OF OUTSTANDING SHARES OF COMMON STOCK AND CLASS B COMMON STOCK (EXCLUDING, IN EACH CASE, OPTIONS AND WARRANTS) HAVE AGREED TO TENDER SHARES OF THEIR COMMON STOCK EQUAL TO 49.9% OF THE OUTSTANDING SHARES OF COMMON STOCK AND ALL (APPROXIMATELY 48% OF THE OUTSTANDING SHARES OF CLASS B COMMON STOCK) OF THEIR SHARES OF CLASS B COMMON STOCK (WHICH ASSUMING NO EXERCISE OF OPTIONS OR WARRANTS CONSTITUTES 3,502,759 SHARES OF COMMON STOCK AND 2,470,000 SHARES OF CLASS B COMMON STOCK, OR APPROXIMATELY 49% OF THE OUTSTANDING SHARES) PURSUANT TO THE OFFER. SEE SECTION 11. THE OFFER IS ALSO CONDITIONED UPON EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 AND RECEIPT OF ANY APPROVAL REQUIRED BY THE GERMAN FEDERAL CARTEL OFFICE. SEE SECTION 16. --------------- IMPORTANT Any stockholder desiring to tender all or any portion of such holder's Shares (as defined herein) should either (a) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal and mail or deliver it together with the certificate(s) evidencing the tendered Shares and all other required documents to the Depositary, or tender such Shares pursuant to the procedure for book- entry transfer set forth in Section 3 of this Offer to Purchase or (b) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. A stockholder whose Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such stockholder desires to tender such Shares. Any stockholder who desires to tender Shares and whose certificates evidencing such Shares are not immediately available or who cannot comply with the procedures for book-entry transfer on a timely basis may tender such Shares by following the procedures for guaranteed delivery set forth in Section 3 of this Offer to Purchase. Questions and requests for assistance and for additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the other tender offer materials may also be obtained from brokers, dealers, commercial banks or trust companies. --------------- THE DEALER MANAGER FOR THE OFFER IS: LAZARD FRERES & CO. LLC --------------- October 7, 1997 TABLE OF CONTENTS
PAGE ---- INTRODUCTION............................................................. 3 1. Terms of the Offer.................................................. 4 2. Acceptance for Payment and Payment.................................. 6 3. Procedures for Tendering Shares..................................... 7 4. Withdrawal Rights................................................... 9 5. Certain Tax Considerations.......................................... 9 6. Price Range of Shares; Dividends.................................... 11 7. Certain Information Concerning the Company.......................... 12 8. Certain Information Concerning Parent and Purchaser................. 15 9. Sources and Amounts of Funds........................................ 18 10. Background of the Offer; Contacts with the Company.................. 19 11. The Offer and Merger; Merger Agreement; Other Agreements............ 21 12. Purpose of the Offer and the Merger; Plans for the Company.......... 33 13. Effect of the Offer on the Market for the Shares; Exchange Act Registration; Margin Regulations; Voting........................... 33 14. Dividends and Distributions......................................... 34 15. Conditions to the Offer............................................. 34 16. Certain Legal Matters; Regulatory Approvals......................... 36 17. Fees and Expenses................................................... 39 18. Miscellaneous....................................................... 39 Schedule I--Directors and Executive Officers of Pearson Merger Company, Inc. and Pearson plc.................................................... S-1
2 To the Holders of Common Stock and Class B Common Stock of All American Communications, Inc.: INTRODUCTION Pearson Merger Company, Inc., a Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of Pearson plc, a corporation incorporated under the laws of England ("Parent" or "Pearson"), hereby offers to purchase all of the outstanding shares of Common Stock, $.0001 par value per share (the "Common Stock"), and all of the outstanding shares of Class B Common Stock, $.0001 par value per share (the "Class B Common Stock," and together with the Common Stock, "Shares"), of All American Communications, Inc., a Delaware corporation (the "Company"), at $25.50 per Share, net to the seller in cash (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares by Purchaser pursuant to the Offer. Purchaser or Parent will pay all charges and expenses of Lazard Freres & Co. LLC ("Lazard"), which is acting as the Dealer Manager (in such capacity, the "Dealer Manager"), ChaseMellon Shareholder Services (the "Depositary"), and D.F. King & Co., Inc. (the "Information Agent"), incurred in connection with the Offer in accordance with the terms of agreements entered into between Purchaser and/or Parent and such persons. See Section 17. For purposes of this Offer to Purchase, references to "Section" are references to a section of this Offer to Purchase, unless the context otherwise requires. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE A NUMBER OF SHARES WHICH CONSTITUTES AT LEAST A MAJORITY OF THE TOTAL NUMBER OF SHARES OF COMMON STOCK AND A MAJORITY OF THE TOTAL NUMBER OF SHARES OUTSTANDING ON THE EXPIRATION DATE (INCLUDING FOR PURPOSES OF SUCH CALCULATION ALL SHARES ISSUED UPON EXERCISE OF ALL VESTED AND UNVESTED STOCK OPTIONS AND WARRANTS PRIOR TO OR SIMULTANEOUSLY WITH THE ACCEPTANCE OF THE OFFER). The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of October 1, 1997 (the "Merger Agreement"), by and among the Company, Parent and Purchaser. The Merger Agreement provides, among other things, that as promptly as practicable following the completion of the Offer and the satisfaction or waiver of certain conditions, including the purchase of Shares pursuant to the Offer (the "consummation" of the Offer) and the approval and adoption of the Merger Agreement by the stockholders of the Company, if required by applicable law, Purchaser will be merged with and into the Company (the "Merger"), with the Company as the surviving corporation (the "Surviving Corporation"). In the Merger, each issued and outstanding Share (other than Dissenting Shares (as hereinafter defined)) not owned by Parent, Purchaser, or any of the wholly owned subsidiaries of Parent (collectively, "Parent Companies") or shares held in the treasury of the Company will be converted into and represent the right to receive $25.50 in cash or any higher price that may be paid per Share in the Offer, without interest (the "Merger Price"). See Section 11. Simultaneously with entering into the Merger Agreement, Anthony J. Scotti, Benjamin Scotti, Myron Roth, Thomas Bradshaw, Sydney D. Vinnedge, Lawrence E. Lamattina and The Interpublic Group of Companies, Inc. (the "Selling Stockholders"), entered into a stockholders agreement, dated as of October 1, 1997, with Parent and Purchaser (the "Stockholders Agreement"). The Selling Stockholders beneficially own 4,319,260 shares of Common Stock (61.53% of the Common Stock) and 2,470,000 shares of Class B Common Stock (excluding, in each case, options and warrants) representing 55.79% of the total outstanding Shares. Pursuant to the Stockholders Agreement, the Selling Stockholders have agreed, among other things, to validly tender and sell into the Offer all such Shares which are owned of record or beneficially by such Selling Stockholders prior to the Expiration Date (as hereinafter defined) and vote such Shares in favor of the Merger, in each case upon the 3 terms and subject to conditions and limitations set forth in the Stockholders Agreement, including the limitation that the shares of Common Stock that are subject to such agreements shall be limited to 49.9% of the outstanding Common Stock (including shares of Common Stock issued upon exercise of any stock options or warrants). Based upon the number of Shares outstanding as of September 23, 1997, and assuming no exercise of options or warrants to purchase Shares, the agreement described above would be applicable to 3,502,759 shares of Common Stock and 5,972,759 Shares overall. The Stockholders Agreement is more fully described in Section 11. The Company has advised the Purchaser and Parent that as of September 23, 1997 there were (i) 7,019,557 shares of Common Stock and 5,149,650 of Class B Common Stock issued and outstanding, (ii) 80,000 of Common Stock and 578,200 shares of Class B Common Stock held in the treasury of the Company, (iii) 3,617,706 shares of Common Stock and Class B Common Stock subject to outstanding options, warrants or other rights to acquire Shares, and (iv) 30,000 shares of Common Stock awarded but not issued. As a result, as of such date, the Minimum Condition would be satisfied if Purchaser acquired 3,509,779 shares of Common Stock and 6,084,605 Shares overall (7,020 shares of Common Stock and 111,846 Shares overall in addition to those covered by the Stockholders Agreement), assuming none of such warrants or options or other rights to acquire Shares are exercised and such options, warrants or other rights are settled as described in Section 11. If the Minimum Condition is satisfied and Purchaser accepts for payment Shares tendered pursuant to the Offer, Purchaser will be able to elect a majority of the Company's Board of Directors and to effect the Merger without the affirmative vote of any other stockholder of the Company. Options to purchase Shares which are unvested will become accelerated as a result of the acceptance of the Offer, so as to permit the exercise of any such unvested options and the tender of the underlying Shares. The Company's Restated Certificate of Incorporation provides that the Class B Common Stock, which is non-voting stock, automatically converts to Common Stock, which is voting stock, upon a Change of Control (as defined in the Company's Restated Certificate of Incorporation). Parent and Purchaser believe that the execution of the Stockholders Agreement does not result in a Change of Control. THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD" OR "BOARD OF DIRECTORS") HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE OFFER AND THE MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY, AND UNANIMOUSLY RECOMMENDS ACCEPTANCE OF THE OFFER AND APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER BY THE STOCKHOLDERS OF THE COMPANY. ACCORDINGLY, SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW ("DELAWARE LAW") (WHICH RESTRICTS THE ABILITY OF AN "INTERESTED STOCKHOLDER" FROM ENGAGING IN A "BUSINESS COMBINATION" WITH A DELAWARE CORPORATION FOR A PERIOD OF THREE YEARS FOLLOWING THE DATE ON WHICH SUCH STOCKHOLDER BECAME AN "INTERESTED STOCKHOLDER") IS INAPPLICABLE TO THE OFFER AND THE MERGER AND THE STOCKHOLDERS AGREEMENT. SEE SECTION 16. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 1. TERMS OF THE OFFER Upon the terms and subject to the conditions of the Offer, Purchaser will accept for payment and pay for all Shares which are validly tendered on or prior to the Expiration Date and not withdrawn in accordance with Section 4. The term "Expiration Date" means 12:00 midnight, New York City time, on Tuesday, November 4, 4 1997, unless and until Purchaser, subject to the terms of the Merger Agreement, shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall refer to the latest time and date at which the Offer, as so extended by Purchaser, shall expire. The Offer is subject to certain conditions set forth in Section 15, including satisfaction of the Minimum Condition and the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office. If any such condition is not satisfied prior to the expiration of the Offer, Purchaser may, subject to the terms of the Merger Agreement, (i) terminate the Offer and return all tendered Shares to tendering stockholders, (ii) extend the Offer and, subject to withdrawal rights as set forth in Section 4, retain all such Shares until the expiration of the Offer as so extended, (iii) waive such condition (other than the Minimum Condition) and, subject to any requirement to extend the period of time during which the Offer is open, purchase all Shares validly tendered and not withdrawn by the Expiration Date or (iv) delay acceptance for payment of (whether or not the Shares have theretofore been accepted for payment), or payment for, any Shares tendered and not withdrawn, subject to applicable law, until satisfaction or waiver of the conditions to the Offer. Any extension, amendment or termination will be followed as promptly as practicable by public announcement thereof, the announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date in accordance with Rules 14d-4(c), 14d-6(d) and 14e- 1(d) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Without limiting the obligation of Purchaser under such rules or the manner in which Purchaser may choose to make any public announcement, Purchaser currently intends to make announcements by issuing a release to the Dow Jones News Service. Parent expressly reserves the right to waive any such condition other than the Minimum Condition, to increase the price per Share payable in the Offer, and to make any other changes in the terms and conditions of the Offer; provided, however, that the Merger Agreement provides that no change may be made to the Minimum Condition, and no change may be made which decreases the price per Share payable in the Offer, which reduces the maximum number of Shares to be purchased in the Offer, which imposes conditions to the Offer other than those set forth in Section 15 or which extends the Offer (except as set forth in the following sentence). Notwithstanding the foregoing, Parent may, without the consent of the Company, (i) extend the Offer beyond the scheduled expiration date (the initial scheduled expiration date being 20 business days following the commencement of the Offer) if, at the scheduled expiration date of the Offer, any of the conditions to Parent's obligation to accept for payment, and to pay for, the Shares, shall not be satisfied or waived, (ii) extend the Offer for any period required by any rule, regulation or interpretation of the Commission or the staff thereof applicable to the Offer, or (iii) extend the Offer for an aggregate period of not more than 10 business days beyond the latest applicable date that would otherwise be permitted under clause (i) or (ii) of this sentence, if as of such date, all of the conditions to Parent's obligations to accept for payment, and to pay for, the Shares are satisfied or waived, but (x) the number of Shares validly tendered and not withdrawn pursuant to the Offer is less than 90% and (y) Parent reasonably believes that such extension would cause the number of validly tendered and not withdrawn shares to exceed 90% of the outstanding Shares. Notwithstanding the foregoing, the Company may terminate the Merger Agreement if Parent or Purchaser shall not have purchased any Shares pursuant to the Offer by the later of 45 days after the date of the Merger Agreement and three business days after the expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Offer under the HSR Act and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office have been obtained. If Purchaser extends the Offer, or if Purchaser (whether before or after its acceptance for payment of Shares) is delayed in its purchase of or payment for Shares or is unable to pay for Shares pursuant to the Offer for any reason, then, without prejudice to Purchaser's rights under the Offer, the Depositary may retain tendered Shares on behalf of Purchaser, and such Shares may not be withdrawn except to the extent tendering stockholders are entitled to withdrawal rights as described in Section 4. However, the ability of Purchaser to delay the payment for Shares which Purchaser has accepted for payment is limited by Rule 14e-1(c) under the Exchange Act, which 5 requires that a bidder pay the consideration offered or return the securities deposited by or on behalf of holders of securities promptly after the termination or withdrawal of the Offer. If Purchaser makes a material change in the terms of the Offer or the information concerning the Offer or waives a material condition of the Offer, subject to the Merger Agreement, Purchaser will disseminate additional tender offer materials and extend the Offer if and to the extent required by Rules 14d-4(c) and 14d-6(d) under the Exchange Act. The minimum period during which the Offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in the Offer Price or a change in percentage of securities sought, will depend upon the facts and circumstances, including the relative materiality of the terms or information. With respect to a change in the Offer Price or a change in percentage of securities sought, a minimum ten business day period is required to allow for adequate dissemination to stockholders and investor response. If, prior to the Expiration Date, Purchaser should decide to increase the Offer Price, such increase will be applicable to all stockholders whose Shares are accepted for payment pursuant to the Offer. As used in this Offer to Purchase, "business day" means any day other than a Saturday, Sunday or a federal holiday and consists of the time period from 12:01 AM through 12:00 midnight, New York City time, as computed in accordance with Rule 14d-1 under the Exchange Act. The Company has provided Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares and will be furnished to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT Upon the terms and subject to the terms and conditions of the Merger Agreement and the conditions of the Offer, Purchaser will accept for payment and pay for all Shares validly tendered and not withdrawn prior to the Expiration Date as soon as practicable after the later of (i) the Expiration Date and (ii) satisfaction or waiver of the conditions to the Offer set forth in Section 15 in accordance with the terms of the Merger Agreement. For a description of Purchaser's right to terminate the Offer and not accept for payment or pay for Shares or to delay acceptance for payment or payment for Shares, see Section 1. For purposes of the Offer, Purchaser will be deemed to have accepted for payment tendered Shares if, as and when Purchaser gives oral or written notice to the Depositary of its acceptance of the tenders of such Shares. Payment for Shares purchased pursuant to the Offer will be made by deposit of the Offer Price with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from Purchaser and transmitting such payments to tendering stockholders. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates evidencing such Shares ("Stock Certificates") or confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in Section 3), (ii) a properly completed and duly executed Letter of Transmittal (or facsimile thereof), or in the case of a book-entry transfer, an Agent's Message (as defined in Section 3) and (iii) any other required documents. For a description of the procedure for tendering Shares pursuant to the Offer, see Section 3. Accordingly, payment may be made to tendering stockholders at different times if delivery of the Shares and other required documents occur at different times. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY PURCHASER ON THE CONSIDERATION PAID FOR SHARES PURSUANT TO THE OFFER, REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT. If Purchaser increases the consideration to be paid for Shares pursuant to the Offer, Purchaser will pay such increased consideration for all Shares purchased pursuant to the Offer. Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates the right to purchase Shares tendered pursuant to the Offer, but any such transfer or assignment will 6 not relieve Purchaser of its obligations under the Offer or prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment. If any tendered Shares are not purchased pursuant to the Offer for any reason, or if Stock Certificates are submitted for more Shares than are tendered, Stock Certificates for Shares not purchased or tendered will be returned (or, in the case of Shares tendered by book-entry transfer, such Shares will be credited to an account maintained at one of the Book-Entry Transfer Facilities (as defined in Section 3)), without expense to the tendering stockholder, as promptly as practicable after the expiration or termination of the Offer. 3. PROCEDURES FOR TENDERING SHARES Valid Tender. To tender Shares pursuant to the Offer, either (a) a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees or an Agent's Message (in the case of any book-entry transfer), and any other documents required by the Letter of Transmittal must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date and either (i) the Stock Certificates evidencing such Shares to be tendered must be received by the Depositary along with the Letter of Transmittal or (ii) such Shares must be delivered to the Depositary pursuant to the procedures for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary including an Agent's Message, in each case prior to the Expiration Date, or (b) the tendering stockholder must comply with the guaranteed delivery procedures described below. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to and received by the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgement from the participant in such Book-Entry Transfer Facility tendering the Shares which are the subject of such Book-Entry Confirmation, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against such participant. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at each of The Depository Trust Company and the Philadelphia Depository Trust Company (collectively referred to as the "Book-Entry Transfer Facilities") for purposes of the Offer within two business days after the date of this Offer to Purchase, and any financial institution that is a participant in the system of any Book-Entry Transfer Facility may make book-entry delivery of Shares by causing a Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at a Book-Entry Transfer Facility in accordance with the procedures of such Book-Entry Transfer Facility. However, although delivery of Shares may be effected through book-entry transfer, the Letter of Transmittal (or facsimile thereof) properly completed and duly executed, together with any required signature guarantees and any other required documents, must, in any case, be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the guaranteed delivery procedures described below must be complied with. DELIVERY OF THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signature Guarantees. Generally, signatures on all Letters of Transmittal must be guaranteed by a recognized member of a Medallion Signature Guarantee Program or by any other "eligible guarantor institution" as defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing, an "Eligible Institution"). Signatures on a Letter of Transmittal need not be guaranteed (a) if the Letter of Transmittal is signed by the registered holder of the Shares tendered therewith and such holder has not completed the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (b) if such Shares are tendered for the account of an Eligible Institution. If a Stock Certificate is registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or a Stock Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), then the Stock Certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the Stock Certificate, with the signature(s) on such Stock Certificate or stock powers guaranteed as described above. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's Stock Certificates are not immediately available or time will not permit all required documents to reach the 7 Depositary on or prior to the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, such Shares may nevertheless be tendered if all the following conditions are satisfied: (i) the tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser, is received by the Depositary prior to the Expiration Date as provided below; and (iii) the Stock Certificates for such Shares, in proper form for transfer (or a Book-Entry Confirmation), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees (or in the case of a book-entry transfer, an Agent's Message) and any other documents required by the Letter of Transmittal, are received by the Depositary within three trading days after the date of execution of the Notice of Guaranteed Delivery. A "trading day" is any day on which the New York Stock Exchange (the "NYSE") is open for business. The Notice of Guaranteed Delivery may be delivered by hand or transmitted by facsimile transmission or mailed to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, INCLUDING THROUGH BOOK-ENTRY TRANSFER FACILITIES, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. Back-Up Federal Income Tax Withholding. Under the federal income tax laws, the Depositary will be required to withhold 31% of the amount of any payments made to certain stockholders pursuant to the Offer. In order to avoid such backup withholding, each tendering stockholder must provide the Depositary with such stockholder's correct taxpayer identification number and certify that such stockholder is not subject to back-up federal income tax withholding by completing the Substitute Form W-9 included in the Letter of Transmittal (see Instruction 10 of the Letter of Transmittal) or by filing a Form W-9 with the Depositary prior to any such payments. If the stockholder is a nonresident alien or foreign entity not subject to backup withholding, the stockholder must give the Depositary a completed Form W-8 Certificate of Foreign Status prior to receipt of any payments. Other Requirements. By executing a Letter of Transmittal as set forth above, a tendering stockholder irrevocably appoints designees of Purchaser as the stockholder's attorneys-in-fact and proxies, in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of the stockholder's rights with respect to the Shares tendered by the stockholder and accepted for payment by Purchaser (and any and all other Shares or other securities or property issued or issuable in respect of such Shares on or after the date of the Merger Agreement). All such proxies and powers of attorney shall be irrevocable and coupled with an interest in the tendered Shares. Such appointment is effective only upon acceptance for payment of the Shares by Purchaser. Upon such acceptance for payment, all prior proxies and consents given by the stockholder with respect to such Shares and other securities will, without further action, be revoked, and no subsequent proxies may be given nor any subsequent written consent executed by such stockholder (and, if given or executed, will not be deemed to be effective) with respect thereto. The designees of Purchaser will, with respect to the Shares and other securities, be empowered to exercise all voting and other rights of such stockholder as they in their sole discretion may deem proper at any annual, special or adjourned meeting of the Company's stockholders, by written consent or otherwise. Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser is able to exercise full voting and other rights with respect to such Shares (including voting at any meeting of stockholders then scheduled or acting by written consent without a meeting). A tender of Shares pursuant to any one of the procedures described above will constitute the tendering stockholder's acceptance of the terms and conditions of the Offer, as well as the tendering stockholder's 8 representation and warranty that such stockholder has the full power and authority to tender and assign the Shares tendered, as specified in the Letter of Transmittal. Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the tendering stockholder and Purchaser upon the terms and subject to the conditions of the Offer. Determination of Validity. All questions as to the form of documents and the validity, eligibility (including time of receipt) and acceptance for payment of any tendered Shares will be determined by Purchaser in its sole discretion, which determination shall be final and binding. Purchaser reserves the absolute right to reject any or all tenders of any Shares determined by it not to be in proper form or the acceptance for payment of, or payment for which may, in the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the absolute right to waive any defect or irregularity in any tender of Shares. No tender of Shares will be deemed to have been properly made until all defects and irregularities relating thereto have been cured or waived. Purchaser's interpretation of the terms and conditions of the Offer in this regard (including the Letter of Transmittal and the Instructions thereto) will be final and binding. None of Purchaser, Parent, the Depositary, the Dealer Manager, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. 4. WITHDRAWAL RIGHTS Tenders of Shares made pursuant to the Offer may be withdrawn at any time prior to the Expiration Date. Thereafter, such tenders are irrevocable, except that they may be withdrawn at any time after December 6, 1997 if they have not previously been accepted for payment as provided in this Offer to Purchase. To be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Stock Certificates evidencing Shares to be withdrawn have been delivered to the Depositary, a signed notice of withdrawal with signatures guaranteed by an Eligible Institution (except in the case of Shares tendered by an Eligible Institution), must be submitted prior to the release of such Shares. In addition, such notice must specify, in the case of Shares tendered by delivery of Stock Certificates, the name of the registered holder (if different from that of the tendering stockholder) and the serial numbers shown on the particular Stock Certificates evidencing the Shares to be withdrawn, or, in the case of Shares tendered by book-entry transfer, the name and number of the account at one of the Book-Entry Transfer Facilities to be credited with the withdrawn Shares. Withdrawals may not be rescinded, and Shares withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 3 at any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. None of Purchaser, Parent, the Depositary, the Dealer Manager, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 5. CERTAIN TAX CONSIDERATIONS The summary of tax consequences set forth below is for general information only and is based on the federal income tax law as currently in effect, including modifications made by the Taxpayer Relief Act of 1997. The summary does not address all aspects of federal income taxation that may be relevant to particular holders of Shares and thus, for example, may not be applicable to holders of Shares who are not citizens or residents of the United States, who are employees and who acquired their Shares pursuant to the exercise of compensatory stock 9 options, or who are entities that are otherwise subject to special tax treatment under the Internal Revenue Code of 1986, as amended (the "Code") (such as insurance companies, tax-exempt entities and regulated investment companies); nor does this summary address the effect of any applicable foreign, state, local or other tax laws. The discussion assumes that each holder of Shares holds such Shares as a capital asset within the meaning of Section 1221 of the Code. The precise tax consequences of the Offer or the Merger will depend on the particular circumstances of the holder. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO THEM OF THE PROPOSED TRANSACTION. The receipt of cash for Shares pursuant to the Offer or the Merger will be a taxable transaction for federal income tax purposes and may also be a taxable transaction under applicable state, local or foreign tax laws. In general, a stockholder who receives cash for Shares pursuant to the Offer or the Merger will recognize gain or loss for federal income tax purposes equal to the difference between the amount of cash received in exchange for the Shares sold and such stockholder's adjusted tax basis in such Shares. Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the holder has held the Shares for more than one year at the time of sale. Gain or loss will be calculated separately for each Share tendered pursuant to the Offer. Pursuant to the Tax Relief Act of 1997, long-term capital gains recognized after July 28, 1997, on marketable securities such as the Shares, will be taxable at a maximum rate of 20% for individuals if the individual's holding period is more than 18 months and 28% if the holding period is more than one year but not more than 18 months. Short term capital gain for individuals is taxed at the same rate as ordinary income or, a maximum rate of 39.6%. Corporations are taxed at a maximum rate of 35% on both ordinary income and capital gain. Withholding. Unless a stockholder complies with certain reporting and/or certification procedures, or is an exempt recipient under applicable provisions of the Code (and regulations promulgated thereunder), such stockholder may be subject to a "backup" withholding tax of 31% with respect to any payments received in the Offer, the Merger or as a result of the exercise of the holder's dissenters' rights. Stockholders should contact their brokers to ensure compliance with such procedures. Foreign stockholders should consult with their tax advisors regarding U.S. withholding taxes in general. Dissenters. A stockholder who does not sell Shares in the Offer or the Merger and who exercises and perfects such stockholder's rights under Delaware Law to demand fair value for such Shares will recognize capital gain or loss (and may recognize an amount of interest income) attributable to any payment received pursuant to the exercise of such rights based upon the principles described above. See Section 16. 10 6. PRICE RANGE OF SHARES; DIVIDENDS The Common Stock is traded on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market ("NNM") under the symbol AACI. The Class B Common Stock is traded on the NNM under the symbol AACIB. The following table sets forth, for the periods indicated, the high and low closing sale prices per Share for the Common Stock and the Class B Common Stock. For the period prior to December 14, 1995, the table sets forth the high and low bid price quotations per Share of the Common Stock as reported on the NASDAQ SmallCap Market. The sale prices per Share set forth below are as reported in published financial sources and do not include commissions.
CLASS B COMMON STOCK COMMON STOCK --------------- --------------- LOW HIGH LOW HIGH ------- ------- ------- ------- YEAR ENDING DECEMBER 31, 1997 First Quarter................................ $12.500 $15.250 $ 8.750 $11.875 Second Quarter............................... 12.375 15.250 10.875 13.906 Third Quarter................................ 14.250 24.375 12.250 22.750 YEAR ENDED DECEMBER 31, 1996 First Quarter................................ 9.625 12.250 7.750 9.125 Second Quarter............................... 10.000 11.875 7.370 9.125 Third Quarter................................ 8.875 11.250 5.250 8.875 Fourth Quarter............................... 11.500 14.375 8.620 10.750 YEAR ENDED DECEMBER 31, 1995 First Quarter................................ 6.250 10.000 -- -- Second Quarter............................... 8.250 11.500 -- -- Third Quarter................................ 9.750 13.688 -- -- Fourth Quarter (through December 13, 1995)... 9.875 13.375 -- -- Fourth Quarter (commencing December 14, 1995)....................................... 9.250 10.625 8.375 10.625
On September 29, 1997, the last full trading day prior to a news release on Reuters identifying that Parent might be making an offer to acquire the Company, and indicating the price range for the offer, the reported closing sale price per share of Common Stock and Class B Common Stock (as reported in The Wall Street Journal on September 30, 1997) was $23.375 and $20.125, respectively. On September 30, 1997, the last full day of trading prior to the public announcement of the execution of the Merger Agreement, the reported closing sale price per Share of Common Stock and Class B Common Stock (as reported in The Wall Street Journal on October 1, 1997) was $24.375 and $22.75, respectively. On October 3, 1997, two trading days prior to commencement of the Offer, the reported closing sale price per Share of Common Stock and Class B Common Stock (as reported in The Wall Street Journal on October 6, 1997) was $25.25 and $24.9375, respectively. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. Dividends. The Purchaser has been advised by the Company that the Company did not pay dividends on its Common Stock or Class B Common Stock during the years ended December 31, 1996, 1995 or 1994. The Merger Agreement prohibits the Company from declaring or paying any dividends until the effectiveness of the Merger. Further, the Company's Credit Facility and Senior Subordinated Notes (both as hereinafter defined) restrict the payment of dividends to holders of the Common Stock or Class B Common Stock. 11 7. CERTAIN INFORMATION CONCERNING THE COMPANY The following information concerning the Company has been taken from or based upon publicly available documents on file with the Securities and Exchange Commission (the "Commission"), other publicly available information and information provided by the Company. Although neither Purchaser nor Parent has any knowledge that would indicate that such information is untrue, neither Purchaser nor Parent takes any responsibility for, or makes any representation with respect to, the accuracy or completeness of such information or for any failure by the Company to disclose events that may have occurred and may affect the significance or accuracy of any such information but which are unknown to Purchaser or Parent. General. The Company is a Delaware corporation with its headquarters located at 808 Wilshire Boulevard, Santa Monica, California 90401. The Company is a diversified entertainment company with operations in television and recorded music production and distribution. The Company is a leading independent producer and distributor of television programming and believes it is the largest supplier of game show programming in multiple formats and languages worldwide. Available Information. The Company is subject to the information requirements of the Exchange Act, and is required to file reports and other information with the Commission relating to its business, financial condition and other matters. Information, as of particular dates, concerning the Company's directors and officers, their remuneration, options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be described in periodic statements filed with the Commission. These reports, proxy statements, and other information, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "Company 10-K"), the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 and the Schedule 14D-9, are available for inspection and copying at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of this material may also be obtained by mail, upon payment of the Commission's customary fees, from the Commission's principal office. The Commission also maintains an Internet site on the World Wide Web at http://www.sec.gov that contains reports and other information. A copy of this Offer to Purchase, and certain of the agreements referred to herein, are attached to Purchaser's Tender Offer Statement on Schedule 14D-1, dated October 7, 1997 (the "Schedule 14D-1"), which has been filed with the Commission. The Schedule 14D-1 and the exhibits thereto, along with such other documents as may be filed by Purchaser with the Commission, may be examined and copied at the offices of the Commission in the manner set forth above. Certain Financial Information for the Company. The following table sets forth certain summary consolidated financial information with respect to the Company and its subsidiaries excerpted or derived from the audited financial statements contained in the Company 10-K and the unaudited financial information contained in the Company's Quarterly Reports on Form 10-Q for the six months ended June 30, 1996 and 1997. More comprehensive financial information is included in such reports and other documents filed by the Company with the Commission, and the following summary is qualified in its entirety by reference to such documents (which may be inspected and obtained as described above), including the financial statements and related notes contained therein. Neither Parent nor Purchaser assumes any responsibility for the accuracy of the financial information set forth below. 12 ALL AMERICAN COMMUNICATIONS, INC. SELECTED CONSOLIDATED FINANCIAL DATA ($ IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ----------------- ----------------- 1995 1996 1996 1997 -------- -------- -------- -------- (UNAUDITED) OPERATING DATA: Revenues: Television............................... $206,734 $210,874 $ 71,673 $ 94,707 Recorded music and merchandising......... 22,026 25,584 15,815 9,810 -------- -------- -------- -------- 228,760 236,458 87,488 104,517 -------- -------- -------- -------- Expenses: Television............................... 164,764 152,252 51,465 68,845 Recorded music and merchandising......... 15,803 17,903 11,551 5,348 Selling, general and administrative...... 24,102 26,197 13,293 14,337 Goodwill amortization.................... 2,399 4,602 2,186 2,271 -------- -------- -------- -------- 207,068 200,954 78,495 90,801 -------- -------- -------- -------- Operating income........................... 21,692 35,504 8,993 13,716 -------- -------- -------- -------- Income from continuing operations, before extraordinary charge...................... 7,248 14,106 2,223 3,573 -------- -------- -------- -------- Net income from continuing operations...... $ 7,248 $ 12,686 $ 2,223 $ 3,573 ======== ======== ======== ======== Income per share from continuing operations (1): Before extraordinary charge.............. $ 0.87 $ 1.18 $ 0.19 $ 0.27 ======== ======== ======== ======== After extraordinary charge............... $ 0.87 $ 1.06 $ 0.19 $ 0.27 ======== ======== ======== ======== Income per share........................... $ 0.87 $ 1.06 $ 0.19 $ 0.27 ======== ======== ======== ======== BALANCE SHEET DATA: Receivables, net........................... $115,581 $109,982 $ 74,560 $ 83,784 Television program costs, net.............. 74,644 94,031 95,392 110,781 Total assets............................... 301,582 359,735 306,502 357,216 -------- -------- -------- -------- Notes payable.............................. 134,982 179,000 143,352 174,000 Total liabilities.......................... 233,302 271,765 234,923 268,511 -------- -------- -------- -------- Stockholders' equity....................... 68,280 87,970 71,579 88,705 ======== ======== ======== ========
- -------- (1) Fully diluted earnings per share for 1994 through 1996 were restated to reflect the November 1996 redemption of the Company's 6 1/2% Convertible Subordinated Notes. As a result of such restatement, the presentation of fully diluted earnings per share is no longer required for the periods 1993 through 1996. 13 Projected Financial Information. In connection with Parent's review of the Company and in the course of the negotiations described in Section 10, the Company and its representatives provided Parent with certain business and financial information relating to the projected potential performance of the Company over the next 10 years which Parent and Purchaser believe is not publicly available. Following is a summary of the material forecast and financial model information which was prepared by the Company in connection with the discussion of a possible transaction. SUMMARY FINANCIAL OUTLOOK (AS OF JANUARY 1997) ($ IN THOUSANDS)
1997 1998 1999 2000 -------- -------- -------- -------- Revenues Television............................... $265,039 $294,974 $289,971 $320,035 Recorded music and merchandising......... 25,617 29,461 33,873 38,960 -------- -------- -------- -------- Total Revenues............................. $290,656 $324,435 $323,844 $358,995 Expenses, excluding amortization of goodwill Television............................... 216,207 231,388 225,042 241,554 Recorded music and merchandising......... 23,862 29,351 32,280 35,514 Corporate and depreciation............... 7,000 7,500 7,800 8,100 -------- -------- -------- -------- Total Expenses............................. $247,069 $268,239 $265,122 $285,168 Operating income before amortization, interest and taxes........................ $ 43,587 $ 56,196 $ 58,722 $ 73,827 Free cash flow (before interest but after tax)...................................... $ 35,901 $ 32,396 $ 62,529 $ 44,148
In addition to the above information, the forecasts which the Company provided to Parent estimated the following results for the years 2001 through 2006: total revenues ranging from approximately $376.5 million to $512.5 million, operating income ranging from approximately $80.0 million to $128.6 million and free cash flow ranging from approximately $60.9 million to $82.9 million. Subsequent to providing such projections, members of the Company's management advised Parent that poor ratings received by the Company with respect to its television show "Arthel & Fred" launched in September 1997 could result in a reduction in operating income of $4.0 million to $6.0 million for the year ending December 31, 1997. In reaching its decision to acquire the Company, Parent made certain assumptions of its own with regard to revenues, operations and costs of the Company's businesses as a wholly-owned subsidiary including expense reductions based on integration with similar businesses now owned by Parent, which assumptions are not reflected in the above financial information. FURTHER, THE COMPANY HAS ADVISED PARENT AND PURCHASER THAT THE FOREGOING FORECAST AND FINANCIAL MODEL INFORMATION (THE "PROJECTIONS") WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS. THE COMPANY DID NOT MAKE ANY REPRESENTATIONS TO THE PARENT OR THE PURCHASER CONCERNING THE PROJECTIONS. THE PROJECTIONS HAVE NOT BEEN UPDATED BY THE COMPANY. THE PROJECTIONS ARE INCLUDED IN THIS OFFER TO PURCHASE ONLY BECAUSE THEY WERE PROVIDED TO PARENT. PARENT DID AN INDEPENDENT ASSESSMENT OF THE COMPANY'S VALUE AND DID NOT RELY TO ANY MATERIAL DEGREE UPON THE FOREGOING PROJECTIONS. NONE OF PARENT, PURCHASER, THE COMPANY OR ANY OF THEIR RESPECTIVE ADVISORS OR ANY OTHER PARTY WHO RECEIVED SUCH INFORMATION ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY, REASONABLENESS, ACCURACY OR COMPLETENESS OF THE PROJECTIONS. THE PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS RELATING TO THE BUSINESSES OF THE COMPANY, INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, ALL OF WHICH MAY NOT BE REALIZED 14 AND ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. THERE CAN BE NO ASSURANCE THAT THE PROJECTIONS SET FORTH ABOVE WILL BE REALIZED, AND ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE SHOWN. THE PROJECTIONS HAVE NOT BEEN EXAMINED OR COMPILED BY THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS. FOR THESE REASONS, AS WELL AS THE BASES ON WHICH SUCH PROJECTIONS WERE COMPILED, THERE CAN BE NO ASSURANCE THAT ACTUAL RESULTS WILL NOT DIFFER MATERIALLY FROM THOSE ESTIMATED. THE INCLUSION OF SUCH PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT PARENT, PURCHASER, THE COMPANY, ANY OF THEIR RESPECTIVE ADVISORS OR ANY OTHER PARTY WHO RECEIVED SUCH INFORMATION CONSIDERS IT AN ACCURATE PREDICTION OF FUTURE EVENTS. NONE OF THE COMPANY, PARENT, PURCHASER OR ANY OTHER PARTY INTENDS PUBLICLY TO UPDATE OR OTHERWISE PUBLICLY REVISE THE PROJECTIONS SET FORTH ABOVE EVEN IF EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT SUCH PROJECTIONS WILL NOT BE REALIZED. THE PROJECTIONS SET FORTH ABOVE CONSTITUTE FORWARD-LOOKING INFORMATION. FOR A DISCUSSION OF CERTAIN FACTORS REGARDING SUCH FORWARD-LOOKING INFORMATION SEE "--CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION" BELOW. Cautionary Statement Regarding Forward-Looking Information. Parent and Purchaser have identified the following important factors which could cause the Company's actual results to differ materially from the foregoing projections: (a) The Company's ability to (i) further develop, produce and distribute programming for the international and domestic market, (ii) continue to license formats for future exploitation and production, (iii) continue to identify and consummate suitable acquisition or expansion opportunities and the risks of such growth and (iv) maintain its sources of quality programming, (b) audience reaction to current and future Company programming, (c) sufficiency of the Company's working capital, availability of borrowings and cash flow from operating activities for the Company's future operating and capital expenditures, (d) competition from major entertainment companies and others, (e) dependence on a limited number of continuing and new projects, (f) fluctuations in ratings and advertising rates, (g) other risks detailed in the Company's filings with the Commission, (h) the speculative nature of the television and recorded music businesses; and (i) significant fluctuations on results of operations from period to period depending on, among other things, the delivery or availability dates of certain programs. 8. CERTAIN INFORMATION CONCERNING PARENT AND PURCHASER General. Parent is an international media group with a diverse range of skills in newspaper, magazine and book publishing, on-line and software services, television and visitor attractions. Parent focuses these core skills, through separate business divisions, on three markets worldwide: information, education and entertainment. Parent also has significant interests in investment banking. For a description of the Company's investment in Lazard, see Section 17. Parent's principal executive office is located at 3 Burlington Gardens, London W1X 1LE. The Purchaser, a Delaware corporation, was recently incorporated for the purpose of acquiring the Company. The Purchaser has not conducted any other business. The principal executive office of the Purchaser is located at 30 Rockefeller Plaza (50th Floor), New York, New York 10112. All outstanding shares of common stock of Purchaser are indirectly owned by Parent. The name, business address, present principal occupation or employment, five-year employment history and citizenship of each of the directors and executive officers of the Purchaser and Parent as well as the name, principal business and address of the corporation or other organization in which such present occupation or employment is carried on are set forth in Schedule I hereto. 15 Summary Financial Information for Parent. Set forth below is a summary of certain selected financial information with respect to Parent for the years ended December 31, 1994, 1995 and 1996. The selected consolidated financial data are stated in pounds sterling. On October 1, 1997, The Wall Street Journal reported that, as of September 30, 1997, one pound sterling equaled 1.6154 U.S. dollars. SUMMARY CONSOLIDATED FINANCIAL INFORMATION FOR PARENT ((Pounds) IN MILLIONS)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1994 1995 1996 ------------- ------------- ------------- PROFIT AND LOSS: Revenue Continuing operations... (Pounds)1,413 (Pounds)1,687 (Pounds)2,049 Discontinued operations. 137 143 137 ------------- ------------- ------------- Total revenue............. (Pounds)1,550 (Pounds)1,830 (Pounds)2,186 ============= ============= ============= Operating profit Continuing operations... (Pounds) 257 (Pounds) 238 (Pounds) 146 Discontinued operations. 16 22 35 ------------- ------------- ------------- Total operating profit.... 273 260 181 Non-operating items*...... 41 129 215 Interest.................. (16) (24) (40) ------------- ------------- ------------- Profit before tax......... 298 365 356 Taxation.................. (74) (93) (108) Minority interest......... (1) (11) (8) ------------- ------------- ------------- Profit after tax and minorities............... (Pounds) 223 (Pounds) 261 (Pounds) 240 ============= ============= =============
- -------- * Includes profits/(losses) on disposal of fixed assets and businesses.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1994 1995 1996 ------------- ------------- ------------- BALANCE SHEET: Tangible fixed assets..... (Pounds) 543 (Pounds) 530 (Pounds) 484 Working capital*.......... 289 410 390 Investments and other net assets**................. 613 113 138 ------------- ------------- ------------- Net trading assets........ (Pounds)1,445 (Pounds)1,053 (Pounds)1,012 ============= ============= ============= Shareholders funds........ (Pounds)1,036 (Pounds) 833 (Pounds) 389 Provisions and minorities. 263 157 193 Net debt***............... 146 63 430 ------------- ------------- ------------- Capital employed.......... 1,445 1,053 1,012 ------------- ------------- ------------- Cumulative goodwill written off.............. (Pounds)1,042 (Pounds)1,438 (Pounds)1,896 ============= ============= =============
- -------- * Includes trading receivables, plus inventories less trading payables. ** Includes investments, taxation, dividends payable and non-trading receivables and payables. *** The split of net debt between cash and borrowings is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 ------------ ----------- ------------ Cash.............................. (Pounds) 367 (Pounds)672 (Pounds) 299 Borrowings........................ (513) (735) (729) ------------ ----------- ------------ Net debt.......................... (Pounds)(146) (Pounds)(63) (Pounds)(430) ============ =========== ============
16 Pearson's selected consolidated financial data included herein have been prepared in accordance with applicable United Kingdom ("UK") accounting standards, including the Companies Act of 1985, FRS 1 (Revised 1996) "Cash Flow Statements" and FRS 8 "Related Party Disclosures," which represent generally accepted accounting principles in the UK ("U.K. GAAP"). The Directors' Report & Accounts 1996 (the "Annual Report"), a copy of which has been filed with the Commission as Exhibit (g) to the Schedule 14D-1, is incorporated herein by reference. The Annual Report may be examined and copies may be obtained at the places and in the manner set forth under the heading "--Available Information" in Section 7 of this Offer to Purchase. U.K. GAAP differs in certain significant respects from United States generally accepted accounting principles ("U.S. GAAP"). Pearson has not determined its financial position or results of operations for any period under U.S. GAAP. A general summary of the significant differences between UK GAAP and U.S. GAAP is set forth below under "--Summary of Certain Significant Differences Between U.K. and U.S. GAAP." Pearson, however, believes that the differences between UK GAAP and U.S. GAAP are not material to a decision by a holder of Shares whether to sell, tender or hold any Shares. Parent is partially exempt from the informational filing requirements of the Exchange Act but furnishes to the Commission the information which it files with the London Stock Exchange. Summary of Certain Significant Differences Between U.K. and U.S. GAAP The consolidated accounts of Parent are prepared in accordance with U.K. GAAP, which differs in certain respects from U.S. GAAP. The following is a general summary of the significant differences: Goodwill. The excess of the cost of shares in subsidiaries and associates over the fair value of underlying separable net assets at the date of acquisition and other purchased goodwill is deducted from Pearson's consolidated stockholders' equity in the year of acquisition. Under U.S. GAAP, goodwill is capitalized and amortized over its estimated useful life, but not more than 40 years. Property. Freehold and long leasehold property may be revalued, and the surplus or deficit arising on such revaluation is included in Parent's consolidated reserves which form part of ordinary stockholders' equity. Revaluation of freehold and long leasehold property is not permitted under U.S. GAAP. Inventory. Inventory is valued at the lower of cost or realizable value. In the UK, cost of inventory, other than long-term work in progress, is calculated using FIFO (first in first out) or average. U.S. GAAP allows LIFO (last in first out) to be used in addition to the two former methods. Disposal of businesses. Profits and losses on disposal of a subsidiary or associate under U.K. GAAP are calculated as the net of the proceeds over (i) carrying value plus (ii) amounts with respect to goodwill previously charged to stockholders' equity. U.S. GAAP reflects the unamortized element of goodwill in the calculation. Dividends. Ordinary share dividends are provided in the financial year in respect of which they are declared by the board of directors. Under U.S. GAAP, such dividends are not provided for until the date declared. Deferred Taxation. Deferred taxation is provided where it is probable that a taxation liability will crystallize. Under U.S. GAAP, as provided by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", full provision must generally be made for all potential taxation liabilities. Pensions. Pension costs, based on actuarial assumptions and methods, are charged in the accounts so as to allocate the cost of providing benefits over the service lives of employees in a consistent manner approved by the actuary. U.S. GAAP prescribes the method of actuarial valuation and also requires assets to be assessed at fair value and the assessment of liabilities to be based on current interest rates. 17 Interest in Shares; Contracts and Relationships With Respect to Company Securities. Except as described in this Offer to Purchase, none of Purchaser, Parent or, to the best of their knowledge, any of the persons listed on Schedule I or any associate or wholly-owned or majority-owned subsidiary of the Purchaser, Parent or any of the persons so listed, beneficially owns or has a right to acquire directly or indirectly any Shares. Except as described in this Offer to Purchase, none of Purchaser, Parent or, to the best of their knowledge, any of the persons or entities referred to above, or any of the respective executive officers, directors or subsidiaries of any of the foregoing, has effected any transactions in the Shares during the past sixty (60) days. Except as described in this Offer to Purchase, none of Purchaser nor Parent nor, to the best of their knowledge, any of the persons listed on Schedule I, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including but not limited to contracts, arrangements, understandings or relationships concerning the transfer or voting of such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, since January 1, 1994, none of Purchaser nor Parent nor, to the best of their knowledge, any of the persons listed on Schedule I, has had any business relationships or transactions with the Company or any of its executive officers, directors or affiliates that are required to be reported under the rules and regulations of the Commission applicable to the Offer. Except as set forth in this Offer to Purchase, since January 1, 1994, there have been no contacts, negotiations or transactions between any of Parent, the Purchaser or, to the best of their knowledge, any of the persons listed on Schedule I, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, a tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets. 9. SOURCES AND AMOUNTS OF FUNDS The total amount of funds required by the Purchaser and Parent to consummate the Offer and the Merger (including the cash out of stock options and warrants as described in Section 11) and to pay related fees and expenses (approximately $4 million) is estimated to be approximately $377 million. The Company's Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of April 13, 1995, as amended and restated as of October 23, 1996, and as in effect on the date hereof (the "Credit Facility"), between the Company and The Chase Manhattan Bank, as agent and fronting bank ("Chase") provides that upon a Change of Control, as defined therein, Chase will have the right to accelerate the indebtedness outstanding thereunder and take the other remedies provided therein. Although the execution of the Stockholders Agreement may constitute a Change of Control, Chase orally agreed to waive any right it may have to consider such event to be a Change of Control and is currently seeking a written waiver from the necessary number of lenders under the Credit Agreement. Additionally, the Indenture with respect to the Company's Senior Subordinated Notes due 2001 (the "Senior Subordinated Notes") provides that the Company is required to make an offer to repurchase all of such Senior Subordinated Notes upon a Change of Control (as defined in the Indenture), which provision would be triggered by the purchase of Shares in the Offer, at an amount equal to 101% of the principal amount of the Senior Subordinated Notes plus accrued and unpaid interest thereon. The acceleration of the Credit Facility would permit the noteholders or the trustee under the Indenture to accelerate the Senior Subordinated Notes and take the other remedies provided therein. The aggregate amount of debt outstanding under the Credit Facility and the Senior Subordinated Notes was approximately $182 million (excluding accrued interest) at October 3, 1997. If any such indebtedness is accelerated or such offer to repurchase is accepted, the Purchaser and Parent will require additional funds to repay such indebtedness. The total amount required for the Offer, Merger, related fees and expenses and the refinancing of indebtedness described above, net of estimated cash of approximately $37 million, would total approximately $522 million. This amount will be provided to Purchaser by Parent, both directly and indirectly, via other wholly owned subsidiaries, through loans, advances or capital contributions. Approximately $300 million of the total amount to make such loans, advances or contributions will be obtained by Parent from its working capital; the remainder will be obtained by Parent from bank borrowings. 18 Such bank borrowings are expected to be made pursuant to a (Pounds)325 million multicurrency Multi-Option Facility (the "Facility") among Parent, Pearson Inc., Samuel Montagu & Co. Limited as Facility Agent, Midland Bank PLC as Dollar Swing-Line Agent and certain other financial institutions. A copy of the Facility agreement has been filed with the Commission as Exhibit (b) to the Schedule 14D-1. Such borrowings will be unsecured and repayable (with a right to reborrow) on the last day of each advance period of up to six months, with full and final repayment and termination of the Facility on August 25, 2002. Borrowed amounts will bear interest payable at the end of each advance period, at a rate not exceeding the relevant London Interbank Offered Rate plus 0.11 percent per annum. The Facility includes customary covenants by Pearson, Inc. and Parent including an interest coverage covenant. No plans have been made to refinance any such borrowings under the Facility. Parent may, if more advantageous financial terms are available, choose to borrow under one or more credit facilities other than the Facility. THE OFFER IS NOT CONDITIONED UPON THE PURCHASER OBTAINING FINANCING. 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY Parent's indirect, wholly owned subsidiary, Grundy International Operations, Ltd. ("Grundy") has had substantial contacts with the Company since the Company's acquisition of a 50% interest in Mark Goodson Productions, L.P. ("Goodson") in October 1995 (which was completed as to the remaining 50% interest in January 1996). Grundy had entered into an agreement as of June 28, 1991 with an affiliate of Goodson pursuant to which such Goodson affiliate licensed to Grundy in certain territories the right to distribute game shows and to produce new episodes based on game show formats for a period of five years, subject to extension. In 1994 and 1995, prior to the Company's acquisition of Goodson, Grundy had discussions and negotiations with respect to the possible acquisition of Goodson but did not proceed with such acquisition. In late October 1995, Greg Dyke, Chief Executive and Chairman of Pearson Television Limited, an indirect, wholly owned subsidiary of Parent ("Pearson TV") and as of March 1996 a Director of Parent, and other representatives of Pearson TV met with Anthony J. Scotti, President and Chief Executive Officer of the Company, and other representatives of the Company to have preliminary discussions concerning the Company's business and a potential transaction. Additional discussions between representatives of Pearson TV and the Company concerning a potential transaction took place through early December 1995. On November 20, 1995, Parent and the Company executed a confidentiality agreement (the "Confidentiality Agreement"), and the Company provided to Pearson TV certain limited confidential non-public information concerning the Company. In early December 1995, the Company informed Pearson TV that the Company desired not to proceed with any further discussions with Pearson TV or its affiliates. At the Company's request, all discussions were terminated and Pearson TV returned to the Company all information it was provided by the Company. On February 16, 1996, following renewed contact between Parent and the Company, the Company sent a letter to Pearson TV reinstating the Confidentiality Agreement. In March and April 1996, the Company provided additional information to Parent and representatives of the Company had several meetings with representatives of Parent and Pearson TV to further discuss a potential transaction. Discussions between the two companies came to a standstill in April 1996. During May 1996 and August 1996, representatives of Pearson TV met on several occasions with representatives of the Company to express Pearson TV's interest in resuming discussions between the two companies. In a meeting on February 12, 1997, Media Finance Inc. ("Media Finance"), acting on behalf of the Company, provided an information book concerning the Company to representatives of Pearson TV. In January 1997, discussions between the Company and Pearson TV resumed once again. 19 Throughout February and March 1997 discussions continued between the two companies and the Company provided Pearson TV with financial and certain other information. Discussions came to a standstill once again in late March 1997. During May, June and August 1997 representatives of Pearson TV spoke with representatives of the Company several times to relay Pearson TV's continued interest in a potential transaction between the two companies. In late May 1997, representatives of Goldman Sachs, acting on behalf of the Company, contacted representatives of Lazard to offer Parent an opportunity to submit a preemptive bid for the Company prior to the commencement of a formal competitive sale process. Parent declined to submit a bid at that time because it did not desire to bid within the range which the Company indicated it then considered preemptive. Company has informed Parent that in June through August 1997, the Company and Goldman Sachs contacted multiple potential bidders and began negotiating and executing confidentiality agreements with interested qualified parties in order to conduct an auction process to identify potential purchasers of the Company. The Company provided to Parent an information book prepared by Goldman Sachs based upon information provided by the Company. On September 3, 1997, Goldman Sachs, on behalf of the Company, invited Parent to submit a proposal by September 22, 1997 to acquire the Company. Immediately, Parent contacted Lazard to provide financial services and O'Melveny & Myers LLP ("O'Melveny") to serve as Parent's and Purchaser's counsel, for the purpose of engaging in a potential acquisition transaction with respect to the Company. On September 9, 1997, representatives of Parent and Lazard met with representatives of the Company and Goldman Sachs in Los Angeles, California to discuss the potential transaction. Parent also received a letter from representatives of the Company transmitting a draft of the Merger Agreement. Between September 9 and September 30, 1997, representatives of Parent, O'Melveny, Lazard and Parent's accountants met with representatives of the Company, their legal counsel, financial advisors and accountants at the offices of the Company and its counsel to conduct their due diligence investigation of the Company, including to discuss the business and financial conditions of the Company, and to discuss the possible terms of an acquisition transaction. During this period, representatives of the Company made various presentations to the representatives of Parent with respect to the Company's business plan. The Company provided to representatives of Parent access to a data room containing contracts and other documents relating to the Company. On September 15, 1997, the Company issued a press release stating that it was in preliminary discussions with third parties concerning a possible sale of the Company and that it had retained Goldman Sachs and Media Finance in connection therewith. On September 22, 1997, the Board of Directors of each of Parent and Purchaser approved a proposal to acquire the Company with a purchase price of $25.50 per Share (the "Proposal"), which included proposed changes to the draft Merger Agreement that had been provided by the Company and a proposed Stockholders Agreement, and authorized a committee of Parent's Board of Directors (the "Standing Committee") to approve the final terms of the proposed acquisition transaction and the documents relating thereto. On September 23, 1997, Lazard, on behalf of Parent and Purchaser, submitted the Proposal to the Company through Goldman Sachs. On September 25, 1997, Goldman Sachs, on behalf of the Company, responded to the Proposal. Between September 25 and September 30, 1997, representatives of Pearson and the Company negotiated with respect to the terms of the Proposal and reached agreement on the definitive terms of the proposed acquisition. Representatives of Pearson, the Company and Mr. Scotti negotiated and reached agreement on the terms of the Agreement Not to Compete and the Amendment to Employment Agreement (See Section 11). 20 Interpublic owns 1% of Fremantle International, Inc., the other 99% of which is owned by the Company. In connection with the negotiations related to the Merger Agreement, discussions were held with respect to the acquisition by Purchaser or Parent of an option to acquire such minority interest from Interpublic. No agreement was reached but discussions may continue. The Company has informed Parent that the following events occurred on September 30, 1997. The Company's Board of Directors held a special meeting at its offices in Los Angeles, California to consider the Merger Agreement, the Offer, the Merger and the transactions contemplated thereby. At the meeting, the Company's Board of Directors reviewed the Merger Agreement, the Offer, the Merger and the transactions contemplated thereby with the Company's management, representatives of Kaye, Scholer, Fierman, Hays & Handler, LLP, the Company's legal counsel, and representatives of Goldman Sachs and Media Finance. The Company's Board of Directors heard a presentation by its legal counsel regarding the members' fiduciary duties and the terms of the proposed Offer and Merger, and by representatives of Goldman Sachs regarding the financial terms of the proposed Offer and Merger. The Board of Directors of the Company discussed together and with the Company's management and advisors alternatives reasonably available to the Company. At the conclusion of their presentation, Goldman Sachs delivered its oral opinion to the Company's Board of Directors (subsequently confirmed in writing) to the effect that as of the date of such opinion the $25.50 in cash to be received by the holders of shares of the Common Stock and Class B Common Stock pursuant to the Offer and the Merger was fair from a financial point of view to such holders (other than the Parent and its subsidiaries). On September 30, 1997, the Standing Committee approved the terms of the proposed acquisition, including the proposed Merger and Offer and the documents relating thereto. On October 1, 1997, Parent, Purchaser and the Company executed the Merger Agreement, Parent and the Selling Stockholders executed the Stockholders Agreement and the Company and Mr. Scotti executed the Agreement Not to Compete and the Amendment to the Employment Agreement. Thereafter, Pearson and the Company issued press releases announcing the transaction. To the extent any of the foregoing information described events to which neither Parent nor Purchaser or their advisors were a party, it is based on information provided by the Company. 11. THE OFFER AND MERGER; MERGER AGREEMENT; OTHER AGREEMENTS The Merger Agreement The following is a summary of certain provisions of the Merger Agreement, a copy of which is filed with the Commission as Exhibit (c)(1) to the Schedule 14D-1 and which is incorporated herein by reference. The following summary is qualified in its entirety by reference to the Merger Agreement. The Offer. The Merger Agreement provides that as promptly as reasonably practicable after the date of execution of the Merger Agreement, but in no event later than five business days after the public announcement of the execution of the Merger Agreement, Parent or Purchaser will commence the Offer for all of the Shares at a price of not less than $25.50 per Share, in cash, net to the seller, subject to the conditions set forth in Exhibit A to the Merger Agreement and, subject only to the terms and conditions of the Offer, will pay, as promptly as reasonably practicable after the Expiration Date, for all Shares duly tendered and not withdrawn. Purchaser may waive any such condition other than the Minimum Condition (as defined below), increase the price per Share payable in the Offer, and make any other changes in the terms and conditions of the Offer; provided, however, that no change may be made to the Minimum Condition, and no change may be made which decreases the price per Share payable in the Offer, which reduces the maximum number of Shares to be purchased in the Offer, which imposes conditions to the Offer other than those described below or which extends the Offer (except as set forth in the following sentence). Notwithstanding the foregoing, Purchaser may, without the consent of the Company, (i) extend the Offer beyond the Expiration Date if, at the Expiration Date, any of the conditions to Parent's obligation to accept for payment, and to pay for, the Shares, shall not have been satisfied or waived, (ii) extend the Offer for any period required by any rule, regulation or interpretation of the SEC or the staff 21 thereof applicable to the Offer, or (iii) extend the Offer for an aggregate period of not more than ten (10) business days beyond the latest applicable date that would otherwise be permitted under clause (i) or (ii) of this sentence, if as of such date, all of the conditions to Parent's obligations to accept for payment, and to pay for, the Shares are satisfied or waived, but (x) the number of Shares validly tendered and not withdrawn pursuant to the Offer is less than ninety percent (90%) and (y) Parent reasonably believes that such extension would cause the number of validly tendered and not withdrawn Shares to exceed ninety percent (90%) of the outstanding Shares. For purposes hereof, the term "Minimum Condition" shall mean a majority of the outstanding shares of Common Stock and a majority of the outstanding Shares (including for purposes of such calculation all Shares issued upon exercise of all vested and unvested stock options and warrants prior to or simultaneously with the acceptance of the Offer) being validly tendered and not withdrawn prior to the expiration of the Offer. The Merger. The Merger Agreement provides that, subject to the terms and conditions thereof, at such time as the Certificate of Merger or Certificate of Ownership is filed with the Secretary of State of Delaware (the "Effective Time"), Purchaser shall be merged with and into the Company and the separate corporate existence of Purchaser shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware, and the separate corporate existence of the Company with all its rights, privileges, immunities and franchises shall continue unaffected by the Merger. At the Effective Time, each Share issued and outstanding immediately prior to the Effective Time (other than Shares owned by the Parent Companies, the Dissenting Shares or shares held in the treasury of the Company) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive, in cash, the greater of (x) $25.50 per Share or (y) such greater amount which may be paid pursuant to the Offer (the "Merger Consideration"). All such Shares, by virtue of the Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall thereafter cease to have any rights with respect to such Shares, except the right to receive the Merger Consideration for such Shares without interest upon the surrender of such certificate in accordance with the Merger Agreement or the right, if any, to receive payment from the Surviving Corporation of the "fair value" of such Shares as determined in accordance with Section 262 of Delaware Law. Charter Documents; Initial Directors and Officers. The Merger Agreement provides that the Restated Certificate of Incorporation of the Company in effect at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation, provided that, subject to the requirement that such Certificate of Incorporation contain the provisions with respect to indemnification, advancement and director exculpation set forth in the Restated Certificate of Incorporation of the Company, it shall be amended to read as set forth in Exhibit A to the Merger Agreement. The Merger Agreement also provides that the Bylaws of the Company in effect at the Effective Time shall be the Bylaws of the Surviving Corporation, provided that, subject to the requirement that such Bylaws contain the provisions with respect to indemnification, advancement and director exculpation set forth in the Bylaws of the Company, they shall be amended to read as set forth in Exhibit B to the Merger Agreement. Pursuant to the Merger Agreement, the directors and officers of Purchaser at the Effective Time shall, from and after the Effective Time, continue as the directors and officers, respectively, of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and Bylaws. Stockholders Meeting. The Merger Agreement provides that the Company will take all action reasonably necessary in accordance with applicable law and its Restated Certificate of Incorporation and Bylaws to convene a meeting of its stockholders to consider and vote upon the approval of the Merger Agreement and the Merger and such other matters as may be necessary to effectuate the transactions contemplated by the Merger Agreement (the "Transactions"), if necessary to comply with applicable law, as promptly as practicable after the expiration of the Offer. The Board of Directors of the Company shall recommend such approval and take all lawful action to solicit such approval; provided, however, that the Board of Directors of the Company may at any time prior to such time as Parent's designees shall constitute a majority of the members of the Board of Directors of the 22 Company (the "Transition Time"), withdraw, modify or change any such recommendations to the extent that the Board of Directors of the Company determines in good faith after consultation with independent legal counsel that the failure to so withdraw, modify or change its recommendation would cause the Board of Directors of the Company to breach its fiduciary duties to the Company's stockholders under applicable law. The Parent Companies will vote all Shares over which they exercise voting control in favor of the Merger Agreement and the Merger. Notwithstanding the foregoing, in the event that Parent acquires at least ninety percent (90%) of the then outstanding Shares of each then outstanding class of shares of the Company, the Company, Parent and Purchaser will take all necessary and appropriate action to cause the Merger to become effective, in accordance with Section 253 of Delaware Law, as soon as reasonably practicable after such acquisition, without a meeting of the stockholders of the Company. Conduct of Business. Pursuant to the Merger Agreement, the Company covenants and agrees that, prior to the Transition Time (unless Parent shall otherwise agree in writing and except as otherwise contemplated by the Merger Agreement): (a) the business of the Company and any subsidiary of the Company identified as a Company Subsidiary on the Company Disclosure Schedule (each a "Company Subsidiary") shall be conducted only in the ordinary and usual course and, to the extent consistent therewith, each of the Company and the Company Subsidiaries shall use commercially reasonable efforts to preserve its business organization and maintain its existing relations with customers, employees and business associates; (b) the Company shall not (i) sell or pledge or agree to sell or pledge any stock owned by it in any of the Company Subsidiaries (except in connection with its bank working capital facility); (ii) amend its Restated Certificate of Incorporation or Bylaws or the similar organizational documents of any of the Company Subsidiaries; (iii) split, combine or reclassify the outstanding Shares; or (iv) declare, set aside or pay (unless declared prior to the date of the Merger Agreement) any dividend payable in cash, stock or property with respect to the Shares; (c) neither the Company nor any of the Company Subsidiaries shall (i) issue, deliver or sell or authorize or propose the issuance, delivery or sale of, any shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, capital stock of any class of the Company or the Company Subsidiaries other than Shares issuable pursuant to the agreements described in Section 3.3 of the Company Disclosure Schedule or (ii) repurchase, redeem or otherwise acquire, or permit any Company Subsidiary to repurchase, redeem or otherwise acquire, any shares of capital stock of the Company; (d) neither the Company nor any of the Company Subsidiaries shall (i) grant any increase in the compensation of any director, officer or employee earning in excess of $100,000 per year except for increases contemplated by or required under employment agreements, (ii) enter into any new employment, severance or termination agreement with any such director, officer or employee or (iii) except as may be required to comply with applicable law, become obligated under any bonus, deferred compensation, severance pay, profit-sharing, retirement, insurance, stock purchase, stock option, or other fringe benefit plan, arrangement or practice maintained, or contributed to, by the Company or any of the Company Subsidiaries for the benefit of any current or former employees, officers or directors of the Company or of the Company Subsidiaries (each a "Benefit Plan") that was not in existence on the date of the execution of the Merger Agreement or amend any Benefit Plan in existence on the date of the execution of the Merger Agreement to enhance the benefits thereunder; (e) the Company shall not, and shall not permit any of the Company Subsidiaries to, sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its material assets outside the ordinary course of business other than (i) dispositions listed in Section 5.1 (e) of the Company Disclosure Schedule, (ii) assets no longer used in the operation of the Company's and the 23 Company Subsidiaries' respective businesses and (iii) assets related to any discontinued operations of the Company and the Company Subsidiaries; (f) the Company shall not, and shall not permit any of the Company Subsidiaries to, incur or enter into any agreement to incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any Company Subsidiary, except in the ordinary course of business consistent with past practice, including, without limitation, borrowings under the Company's existing credit agreements, as amended from time to time in the ordinary course of business, and overnight borrowings; (g) the Company shall not and shall not permit any of the Company Subsidiaries to enter into any contract or agreement or series of related contracts or agreements which involves the expenditure by the Company of over (i) One Hundred Thousand Dollars ($100,000) if outside the ordinary course of business, or (ii) Five Hundred Thousand Dollars ($500,000) if within the ordinary course of business; and (h) neither the Company nor any of the Company Subsidiaries will enter into an agreement to do any of the foregoing. No Solicitation of Transactions. The Merger Agreement provides that, prior to the execution of the Merger Agreement, the Company, through its investment bankers, has engaged in an auction process in which participants were offered an opportunity to submit their best offers to purchase the Company. The Merger Agreement further provides that the Company will not, and will instruct its officers, employees, counsel, accountants and other authorized representatives ("Representatives") not to, initiate, solicit or encourage (including by way of furnishing information or assistance) any Competing Transaction (as defined below), or enter into or maintain discussions or negotiate with any person in furtherance of or relating to or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any Representative of the Company or any of its subsidiaries to take any such action, and the Company shall use its reasonable best efforts to cause Representatives of the Company and its subsidiaries not to take any such action; provided, however, that nothing described above shall prohibit the Board of Directors of the Company prior to stockholder approval of the Merger from (i) furnishing information to, or entering into discussions or negotiations with, any person that makes an unsolicited bona fide proposal regarding a Competing Transaction, if, and only to the extent that, (A) the Board of Directors of the Company, after consultation with independent legal counsel, determines in good faith that such action is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law and (B) prior to furnishing such information to such person, the Company receives from such person an executed confidentiality agreement with terms no less favorable to the Company than those contained in the Confidentiality Agreement (as hereinafter defined), or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard to a Competing Transaction. Pursuant to the Merger Agreement, the Company shall promptly advise Parent if any such proposal or offer, or any inquiry or contact made with any person with respect thereto, is made. For purposes of the Merger Agreement, a "Competing Transaction" means any of the following involving the Company or any of its subsidiaries: (a) any merger, consolidation, business combination, or other similar transaction (other than the Merger) which results in a sale of the Company; (b) any sale or other disposition outside the ordinary course of business of 30% or more of the fair market value of the assets (other than assets held in inventory for resale and other than the licensing of the Company's programming in the ordinary course of business) of the Company and its subsidiaries, taken as a whole, in a single transaction or series of transactions; or (c) any tender offer or exchange offer for more than 50% of the outstanding Shares. Directors. The Merger Agreement provides that, promptly upon the acceptance for payment of, and payment for, Shares constituting a majority of the then outstanding Shares by Parent or Purchaser, as applicable, pursuant to the Offer, Parent from time to time shall be entitled to designate such number of directors (rounded up to the next whole number) on the Company's Board of Directors as will give Parent or Purchaser, as applicable, subject to compliance with Section 14(f) of the Exchange Act, that percentage of the total number of directors on the Company's Board of Directors (giving effect to the election of any additional directors pursuant 24 to the Merger Agreement) equal to the percentage of then outstanding Shares owned by Parent or Purchaser (provided that such percentage of the total number of directors shall not be less than a majority of the Company's Board of Directors), and the Company shall, at such time, cause Parent's or Purchaser's designees, as applicable, to be elected by the Company's existing Board of Directors; provided, however, that in the event that such designees are elected to the Company's Board of Directors, until the Effective Time such Board of Directors shall have at least two directors who are directors on the date of the Merger Agreement and who are neither officers of the Company or any holder of more than 5% of the Shares (as of the date of the execution of the Merger Agreement) nor affiliates of Parent or Purchaser (the "Independent Directors"); and provided further that if the number of Independent Directors shall be reduced below two for any reasons whatsoever, the remaining Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of the Merger Agreement or, if no Independent Directors then remain, the other directors shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company or of any holder of more than 5% of the Shares (as of the date of the Merger Agreement) or officers or affiliates of Parent or any of its subsidiaries, and such persons shall be deemed to be Independent Directors for purposes of the Merger Agreement. The Merger Agreement also provides that, subject to applicable law, the Company will take all actions requested by Parent necessary to effect any such election, including mailing to its stockholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder by the Commission, and that the Company will make such mailing with the mailing of its Schedule 14D-9. In connection with the foregoing, subject to the Independent Director requirement discussed above, the Company has agreed to promptly, at the option of Parent, either increase the size of the Company's Board of Directors and/or obtain the resignation of such number of its current directors as is necessary to enable Parent's or Purchaser's designees, as applicable, to be elected or appointed to, and to constitute (rounded up to the next whole number) that percentage of the total number of directors on the Company's Board of Directors (giving effect to the election of any additional directors as described in this paragraph) equal to the percentage of then outstanding Shares owned by Parent or Purchaser (provided that such percentage of the total number of directors shall not be less than a majority of the Company's Board of Directors). The Merger Agreement also provides that following the election of Parent's or Purchaser's designees, as applicable, pursuant to the Merger Agreement, prior to the Effective Time, any amendment or termination of the Merger Agreement or waiver of any of the Company's rights thereunder requires the concurrence of a majority of the Independent Directors. Indemnification. The Merger Agreement requires that the Certificate of Incorporation and Bylaws of the Surviving Corporation contain the provisions with respect to indemnification, advancement and director exculpation set forth in the Restated Certificate of Incorporation and Bylaws of the Company as of the date of the Merger Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of persons who at any time prior to the Effective Time were entitled to indemnification, advancement or exculpation under the Restated Certificate of Incorporation or Bylaws of the Company in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the Transactions). The Merger Agreement further provides that from and after the Effective Time, Parent and the Surviving Corporation shall, jointly and severally, indemnify, defend and hold harmless the present and former officers, directors and employees of the Company and its subsidiaries (collectively, the "Indemnified Parties") against all losses, expenses, claims, damages, liabilities or amounts that are paid in settlement of (with approval of Parent and the Surviving Corporation, which approval shall not be unreasonably withheld or delayed), or otherwise in connection with, any claim, action, suit, proceeding or investigation (a "Claim"), to which any such person is or may become a party by virtue of his or her service as a present or former director, officer or employee of the Company and any of its subsidiaries and arising out of actual or alleged events, actions or omissions occurring or alleged to have occurred at or prior to the Effective Time (including, without limitation, the Transactions), in each case to the fullest extent permitted under Delaware Law (and shall pay expenses in advance of the final 25 disposition of any such action or proceeding to each Indemnified Party to the fullest extent permitted under Delaware Law, upon receipt from the Indemnified Party to whom expenses are advanced of the undertaking to repay such advances contemplated by Section 145(e) of Delaware Law). Parent has agreed to maintain in effect for not less than six years after the Effective Time (except to the extent not generally available in the market) directors' and officers' liability insurance and fiduciary liability insurance that is substantially equivalent in coverage to the Company's current insurance, with an amount of coverage of not less than 100% of the amount of coverage maintained by the Company as of the date of the Merger Agreement with respect to matters occurring prior to the Effective Time. Company Options and Warrants. In the Merger Agreement Parent acknowledged that the consummation of the Offer and the other Transactions will constitute an "Event" (as defined in the Company's 1991 Incentive Stock Option Plan and 1994 Stock Incentive Plan (collectively, the "Plans")) with respect to the options granted thereunder and certain other options and warrants disclosed by the Company and that the vesting of such options will therefore become accelerated as a result of the Transactions. Parent acknowledges that the accelerated vesting will occur simultaneously with the acceptance of the Offer so as to permit the exercise of any such unvested options and tender of the underlying Shares. At the Effective Time, each holder of a then outstanding option or warrant to purchase Shares, whether or not then exercisable, shall, in settlement thereof, except to the extent otherwise agreed to by the holder of the option or warrant, the Company and Parent, receive from the Company (from funds provided by Parent to the paying agent) for each Share subject to such stock option or warrant an amount in cash equal to the excess, if any, of the Merger Consideration over the per Share exercise price of such stock option or warrant (such amount being hereinafter referred to as the "Option Consideration"). Upon receipt of the Option Consideration, the stock option or warrant shall be canceled. The surrender of any stock option or warrant to the Company in exchange for the Option Consideration shall be deemed a release of any and all rights the holder had or may have had in respect of such stock option or warrant. Prior to the Effective Time, the Company shall use its best efforts to obtain all necessary consents or releases from holders of stock options and warrants and to take all such other lawful action as may be necessary to give effect to the transactions contemplated above (except for such action that may require the approval of the Company's stockholders). Except as otherwise agreed to by the parties, (a) the Plans shall terminate, effective as of the Effective Time and the Company shall use its reasonable efforts to cause the provisions in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company or any of its subsidiaries to be canceled as of the Effective Time and (b) the Company shall use its reasonable efforts to ensure that following the Effective Time no participant in the Plans or other plans, programs or arrangements shall have any right thereunder to acquire equity securities of the Company, the Surviving Corporation or any subsidiary of the Company or the Surviving Corporation and to terminate all such plans, programs or arrangements. Employee Benefit Plans. Pursuant to the Merger Agreement, Parent agrees to cause the Surviving Corporation (and any successor thereto) to honor, without modification, all disclosed employment, consulting, severance, termination or indemnification agreements, arrangements or understandings, including recognition of the value (either in cash, replacement options or other consideration) of any outstanding agreement to issue a fixed number of options in the future (up to 123,000 options), between the Company or any of its subsidiaries and any current or former employee, officer or director of the Company or any of its subsidiaries in effect on the date of the Merger Agreement, except as may be otherwise mutually agreed by the Parent and a current or former employee, officer or director covered by such an agreement. Parent also agreed to cause the Surviving Corporation and its successors to pay or provide all benefits vested as of the Effective Time under any Benefit Plan in accordance with the terms of such plans. Parent will for a period of at least 24 months cause the Company or the Surviving Corporation and its successors to maintain for all employees of the Company employee benefit plans, programs, policies and practices which, in the aggregate, provide substantially equivalent benefits to such employees as the benefit plans from time to time in effect for employees of the Surviving Corporation, provided that employees covered by collective bargaining agreements shall be provided the benefits required under such agreements. For purposes of their participation in Parent's or the Surviving Corporation's employee and fringe 26 benefit plans, programs, policies and practices, Parent will credit each Company employee with full credit for all service credited under the comparable plan, program, policy or practice of the Company (including service with the Company prior to the Effective Time and, where applicable, service with prior or predecessor employers to the extent credit is given for such service under the comparable Company plans) for purposes of eligibility to participate and for purposes of vesting. Use of Name. The Merger Agreement provides that, pursuant to a pre-existing obligation, effective as of the Effective Time, the Company confirms the assignment to Anthony J. Scotti and Benjamin J. Scotti all of its rights, title and interest in the name "Scotti Brothers" and all variations and derivatives thereof (the "Retained Names"). Promptly after the Effective Time, Parent agrees to cause the names of the Company and its subsidiaries which contain the Retained Names to be changed so as not to include the Retained Names. No Parent Company shall put into use after 90 days after the Effective Date any products, signs, television or recorded music credits and other materials that bear any Retained Name or any name, mark or logo similar thereto. Notwithstanding the foregoing, the Parent Companies shall have the right to continue using the Retained Names in connection with the sale of inventory which as of the Effective Time contains any Retained Name on the label identifying such inventory. Conditions of the Offer. The Merger Agreement provides that Parent and Purchaser shall not be required to accept for payment or pay for any Shares tendered and may terminate or amend the Offer (subject to the provisions of the Merger Agreement) and may postpone the acceptance of, and payment for, any Shares tendered (subject to Rule 14e-1(c) of the Exchange Act), in the circumstances described in Section 15 below. Conditions to the Obligations of Each Party. The Merger Agreement provides that the respective obligations of each party to consummate the Merger are subject to the satisfaction of the following conditions: (a) if required by Delaware Law, the Merger Agreement shall have been approved and adopted by the stockholders of the Company in accordance with Delaware Law, the Company's Restated Certificate of Incorporation and its Bylaws, (b) any waiting period (and any extensions thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated, and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office shall have been obtained and shall have remained in full force and effect, (c) no United States (federal, state or local) or foreign government or governmental regulatory, administrative authority, agency, commission, board, bureau, court or instrumentality or arbitrator of any kind ("Governmental Authority") shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order or other order, that is then in effect and has the effect of prohibiting the consummation of the Merger, and (d) the Offer shall not have been terminated in accordance with its terms prior to the purchase of any Shares. Representations and Warranties. The Merger Agreement contains various customary representations and warranties of the parties thereto including, but not limited to, representations by the Company as to corporate organization and qualification, subsidiaries, capitalization, authority to enter into the Merger Agreement, no conflicts, required filings and consents, filings with the Commission and other governmental authorities, financial statements, the absence of certain changes or events, intellectual property, material contracts, environmental matters, benefit plans, tax matters, litigation, the opinion of the Company's financial advisors, brokers, properties and assets, compliance with laws in general, labor matters and insurance. Payment of Expenses. Except as otherwise set forth in the Merger Agreement, whether or not the Merger is consummated, each party will pay its own Expenses incident to preparing for, entering into and carrying out the Merger Agreement and the consummation of the Merger. "Expenses" as used in the Merger Agreement will include all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of outside counsel, investment bankers, experts and consultants to a party hereto) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of the Merger Agreement and all other matters relating to the closing of the Transactions. Pursuant to the Merger Agreement, the Company agrees that (i) if Parent terminates the Merger Agreement as a result of a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in the Merger 27 Agreement such that any of the conditions set forth in clause (f) or (g) of Section 15 below would not be satisfied, (ii) if Parent terminates the Merger Agreement because the Board of Directors of the Company withdraws, modifies or changes its recommendation of the Merger Agreement or the Merger in a manner adverse to Parent or Purchaser or the Board of Directors of the Company shall have recommended to the stockholders of the Company any Competing Transaction (as hereinafter defined) or (iii) if the Company terminates the Merger Agreement because the Board of Directors of the Company withdraws, modifies or changes its recommendation of the Merger Agreement or the Merger or recommends to the stockholders of the Company a Competing Transaction (the termination described in these subclauses (ii) and (iii) shall be referred to as a "Fiduciary Termination"), the Company will reimburse Parent for its Expenses up to an aggregate amount not to exceed $500,000. In addition, if the Merger Agreement is terminated pursuant to a termination right which constitutes a Fiduciary Termination or a Competing Transaction Termination, then the Company will pay Parent $3,500,000 upon demand after such termination, and if, within twelve months after such termination, a Competing Transaction shall be consummated, the Company shall pay Parent an additional $3,500,000 concurrently with the consummation of such Competing Transaction. Pursuant to the Merger Agreement, Parent agrees that if the Company terminates the Merger Agreement as a result of a breach of any material representation, warranty, covenant or agreement on the part of Parent as set forth in the Merger Agreement ("Terminating Purchaser Breach"), Parent will reimburse the Company for its Expenses and all damages caused to the Company as a result thereof. Termination of the Merger Agreement. The Merger Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after the approval by holders of Common Stock, by the mutual consent of Parent and the Company, by action of their respective Boards of Directors. In addition, the Merger Agreement may be terminated and the Merger and the other Transactions may be abandoned by action of the Board of Directors of either Parent or the Company if (a) the Merger has not been consummated on or before February 28, 1998, unless the failure to consummate the Merger is the result of a material breach of the Merger Agreement by the party seeking to terminate the Merger Agreement, (b) there is any Law that makes consummation of the Merger illegal or otherwise prohibited or any Order that is final and nonappealable preventing the consummation of the Merger, or (c) Purchaser and Parent have terminated the Offer in accordance with its terms and conditions without purchasing any Shares pursuant thereto. The Merger Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after approval of the holders of Common Stock, by action of the Board of Directors of Parent: (a) if, prior to the Transition Time there has been a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in the Merger Agreement such that any of the conditions set forth in clause (f) or (g) of Section 15 below would not be satisfied (a "Terminating Company Breach") provided, however, that, if such Terminating Company Breach is curable by the Company through the exercise of its reasonable best efforts and for so long as the Company continues to exercise such reasonable best efforts (but in no event longer than 30 days after Parent's notification to the Company of the occurrence of such Terminating Company Breach), Parent may not terminate the Merger Agreement as a result thereof; or (b) if prior to the Transition Time (i) the Board of Directors of the Company withdraws, modifies or changes its recommendation of the Merger Agreement or the Merger or other Transactions in a manner adverse to Parent or Purchaser or (ii) the Board of Directors of the Company shall have recommended to the stockholders of the Company any proposal involving a Competing Transaction. The Merger Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after the approval by holders of Common Stock by action of the Board of Directors of the Company: (a) if there has been Terminating Purchaser Breach; provided, however, that, if such Terminating Purchaser Breach is curable by Parent or Purchaser through the exercise of its reasonable best efforts and 28 for so long as Parent or Purchaser continue to exercise such reasonable best efforts (but in no event longer than 30 days after the Company's notification to Purchaser of the occurrence of such Terminating Purchaser Breach), the Company may not terminate the Merger Agreement as a result thereof; or (b) if prior to the Transition Time (i) the Board of Directors of the Company withdraws, modifies or changes its recommendation of the Merger Agreement or the Merger or other Transactions or (ii) the Board of Directors of the Company shall have recommended to the stockholders of the Company any Competing Transaction, or resolved to do either of the foregoing after consultation with independent legal counsel, having determined in good faith that such action is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law; provided, that any such termination of this Agreement by the Company shall not be effective until the close of business on the second (or, in the event that the party with whom the Company proposes to engage in the Competing Transaction was a participant in the competitive sale process described in Contacts with the Company; Background of the Offer the, fifth) full business day after notice of such termination to Parent; or (c) if (i) Parent or Purchaser have failed to commence the Offer within five business days after the public announcement of the execution of the Merger Agreement, or (ii) Purchaser or Parent will not have purchased any Shares pursuant to the Offer by the later of 45 days after the date of the Merger Agreement and three business days after the expiration or termination of any waiting periods (and any extensions thereof) applicable to the consummation of the Offer under the HSR Act and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office has been obtained or (iii) the Offer shall have been terminated without Parent or Purchaser having purchased any Shares pursuant thereto. Issuance of New or Treasury Shares. The Merger Agreement provides that if the Merger Agreement is terminated because of a Fiduciary Termination or if the Purchaser shall terminate the Offer because the Minimum Condition is not satisfied and at or prior to such time there has been publicly announced or the Company has received one or more proposals for a Competing Transaction which at the time of such termination has not been absolutely or unconditionally withdrawn or abandoned (a "Competing Transaction Termination"), the Company will not, until the expiration of one year following such termination, issue any new or treasury shares (other than pursuant to commitments in effect on the date of the Merger Agreement) unless it shall have first given the Parent at least 5 business days advance written notice thereof (the "Issuance Notice"). Parent may, by written notice to the Company prior to the expiration of 5 business days from receipt of the Issuance Notice, elect to exercise the Option (as defined below) in full. If Purchaser has exercised the Option the Company shall not thereafter issue any such shares unless the Parent shall have consented in advance thereto, which consent shall not be unreasonably withheld. If at any time after the exercise of the Option, Parent beneficially owns, or if before exercise of the Option, if the Option were fully exercised Purchaser would own, less than 30% of the voting securities of the Company on a fully diluted basis, the provisions restricting issuance of shares shall immediately terminate and be of no further force or effect with respect to any issuances of shares by the Company. Effect of Termination and Abandonment. Except as set forth in Section 10.1 of the Merger Agreement, in the event of termination of the Merger Agreement and abandonment of the Merger pursuant to Article VIII of the Merger Agreement, no party (or any of its directors or officers) will have any liability or further obligation to any other party to the Merger Agreement, except that nothing herein will relieve the Company, Parent or Purchaser from liability for any breach of the Merger Agreement. Timing. The exact timing and details of the Merger will depend upon legal requirements and a variety of other factors, including the number of Shares acquired by Purchaser pursuant to the Offer. Although Purchaser and Parent have agreed to cause the Merger to be consummated on the terms set forth above, there can be no assurance as to the timing of the Merger. 29 Stockholders Agreement The following is a summary of certain provisions of the Stockholders Agreement. The summary is qualified in its entirety by reference to the Stockholders Agreement which is incorporated herein by reference and a copy of which has been filed with the Commission as Exhibit (C)(2) to the Schedule 14D-1. The Stockholders Agreement may be examined and copies may be obtained at the places and in the manner set forth in Section 8. As a condition and inducement to Parent's and Purchaser's entering into the Merger Agreement and incurring the liabilities therein, concurrently with the execution and delivery of the Merger Agreement, the Selling Stockholders, who own or share voting power and dispositive power with respect to approximately 55.79% of the Shares (excluding Shares issuable upon exercise of options and warrants), entered into a Stockholders Agreement. In the Stockholders Agreement, the Selling Stockholders have represented that they own, in the aggregate, 6,789,260 Shares. The Stockholders Agreement provides that nothing therein shall be construed to prohibit any Selling Stockholder or any affiliate of any Selling Stockholder who is or has been designated a member of the Board of Directors of the Company from taking any action solely in his or her capacity as a member of the Board of Directors of the Company or from exercising his, her or its fiduciary duties as a member of such Board of Directors. Agreement to Tender. Each Selling Stockholder severally agrees to tender its Shares and any shares subsequently acquired pursuant to exercises after the date thereof of options or warrants to purchase Common Stock or Class B Common Stock (the "Subject Shares") into the Offer in accordance with the terms and conditions of the Offer and to not withdraw any Subject Shares so tendered unless the Merger Agreement is terminated in accordance with its terms. In addition, each Selling Stockholder has agreed to sell to Purchaser, and Purchaser has hereby agreed to purchase, all such Selling Stockholders' Subject Shares at a price per Share equal to $25.50 or such higher price per Share as may be offered by Purchaser in the Offer (the "Purchase Price"), provided that such obligation to purchase is subject to Purchaser having accepted Shares for payment under the Offer and the Minimum Condition and other conditions described in Section 15 having been satisfied or (other than the Minimum Condition) waived, which conditions (other than the Minimum Condition) may be waived by Purchaser in its sole discretion. Notwithstanding anything to the contrary herein, the Subject Shares which are shares of Common Stock, shall not, in the aggregate for all purposes of the Stockholders Agreement, exceed 49.9% of the then outstanding shares of Common Stock, and the number of Subject Shares shall be reduced on a share-for-share basis for any Shares owned by Purchaser or any affiliate thereof as of the date of the Merger Agreement. In the Merger Agreement, Parent has represented to the Company that, to its knowledge, neither Parent nor any affiliate thereof owned any shares as of the date of the Merger Agreement. As of September 30, 1997, there were 5,972,759 Subject Shares, consisting of 3,502,759 Shares of Common Stock and 2,470,000 shares of Class B Common Stock (approximately 48% of the outstanding Class B Common Stock) prior to giving effect to any Shares issued pursuant to exercises after the date of the Stockholders Agreement of options or warrants to purchase Common Stock or Class B Common Stock. The Company's Restated Certificate provides that the Class B Common Stock, which is non- voting stock, automatically converts to Common Stock which is voting stock, upon a Change in Control (as defined in the Company's Restated Certificate of Incorporation). Parent and Purchaser believe that the execution of the Stockholder Agreement does not result in a Change in Control until the Shares are purchased. Option. Each Selling Stockholder has also granted to Purchaser an irrevocable option (collectively, the "Option") to purchase all but not less than all such Selling Stockholder's Subject Shares at a price per Share equal to the Purchase Price, exercisable in whole but not in part during the one year period after (i) a Fiduciary Termination or (ii) a Competing Transaction Termination. Any such purchase shall be subject to the expiration of any applicable waiting periods under the HSR Act and the ARC or, as the case may be, receipt of a clearance letter from the German Federal Cartel Office. Agreement not to Transfer. Each Selling Stockholder agrees that prior to the termination of the Stockholders Agreement that such Selling Stockholder shall not (i) transfer or consent to any transfer of any or all of such Selling Stockholder's Shares; (ii) enter into any contract, option or other agreement or understanding 30 with respect to any transfer of any or all of such Selling Stockholder's Shares or any interest therein; (iii) except as described below, grant any proxy, power-of-attorney or other authorization or consent with respect to such Selling Stockholder's Shares; or (iv) deposit such Selling Stockholder's Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Selling Stockholder's Shares. The Selling Stockholders may transfer all or a portion of their Shares to a person or entity who, by written instrument reasonably acceptable in form and substance to Purchaser, agrees to be bound by each of the terms of the Stockholders Agreement, and any Selling Stockholder may sell any of such Stockholder's Shares in a sale which complies with Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), subject to a right of first refusal in favor of Purchaser at the Purchase Price. Prior to the Transition Time, no Selling Stockholder shall exercise any outstanding options or warrants to purchase Common Stock except (i) as necessary to avoid the expiration of such option or warrant or (ii) in connection with the tender or sale of the underlying Shares to Purchaser or its affiliates. Agreement to Vote and Grant of Proxy. Each Selling Stockholder agrees that at any meeting (whether annual or special and whether or not an adjourned or postponed meeting) of the holders of Shares, however called, or in connection with any written consent of the holders of Shares solicited by the Board of Directors, such Stockholder will appear at the meeting or otherwise cause the Proxy Shares (as hereinafter defined) to be counted as present thereat for purposes of establishing a quorum and vote or consent (or cause to be voted or consented) such Stockholder's Proxy Shares (i) in favor of the Merger during the term of the Merger Agreement and (ii) against any Competing Transaction (as defined in the Merger Agreement) during the term of the Stockholders Agreement. "Proxy Shares" shall mean (i) the Subject Shares unless and until the Class B Common Stock shall have become voting stock, and (ii) all shares of voting stock of the Company from and after the time that the Class B Common Stock shall have become voting stock; provided, however, that unless and until the Transition Time shall have occurred, the Proxy Shares shall not in the aggregate exceed such amount of the then outstanding shares of voting stock of the Company as would result in the occurrence of a Change in Control under the Indenture with respect to the Senior Subordinated Notes. Each Selling Stockholder has granted to, and appointed Purchaser and any nominee thereof, its proxy and attorney-in-fact (with full power of substitution) during the term of the Stockholders Agreement, for and in the name, place and stead of such Selling Stockholder, to vote such Selling Stockholder's Proxy Shares, or grant a consent or approval in respect of such Selling Stockholder's Proxy Shares, in connection with any meeting of the stockholders of the Company (i) in favor of the Merger during the term of the Merger Agreement, and (ii) against any Competing Transaction during the term of the Stockholders Agreement. Until any such Selling Stockholder's Proxy Shares are purchased by Purchaser pursuant to the Stockholders Agreement, such Selling Stockholder shall retain the right to vote such Selling Stockholder's Proxy Shares (as well as any other Shares) for the election of directors of the Company and for any other matter other than those specified in the Stockholders Agreement. Termination of the Stockholders Agreement. The Stockholders Agreement terminates upon the earlier of (a) the date that is one year following a Competing Transaction Termination or a Fiduciary Termination or immediately on the date upon which the Merger Agreement is otherwise terminated in accordance with its terms or (b) the Effective Time. Scotti Agreement Not to Compete and Fifth Amendment to Employment Agreement The following is a summary of certain provisions of an agreement relating to noncompetition, nonsolicitation, nondisclosure and other matters by and between Company and Anthony J. Scotti (the "Agreement Not to Compete") and Amendment to Employment Agreement by and between Company and Anthony J. Scotti (the "Amendment to Employment Agreement") entered into in connection with the Merger Agreement. The summary is qualified in its entirety by reference to the Agreement Not to Compete and Amendment to Employment Agreement which are incorporated herein by reference and a copy each of which has been filed with the Commission as Exhibits (c)(6) and (c)(8), respectively to the Schedule 14D-1. The 31 Agreement Not to Compete and Amendment to Employment Agreement may be examined and copies may be obtained at the places and in the manner set forth in Section 8. Under his employment agreement, as amended, with the Company, Anthony J. Scotti has the right, upon a change of control of the Company, to terminate his employment and compete with the Company. Upon the insistence of Parent and Purchaser and to induce Parent and Purchaser to enter into the Merger Agreement, the Company and Mr. Scotti entered into the Agreement Not to Compete and Amendment to Employment Agreement. Under the Amendment to Employment Agreement, Mr. Scotti has agreed to report certain income under the Agreement Not to Compete and his employment agreement in accordance with the Form W-2 to be provided by the Company with respect thereto, and the Company has agreed to indemnify Mr. Scotti for any interest and penalties payable to any taxing authority as a result thereof. Pursuant to the Agreement Not to Compete, effective as of the time Purchaser purchases more than 50% of the Shares (the "Non-Compete Time"), Mr. Scotti has agreed that: (i) he will resign (a) as Chief Executive Officer of Company, (b) from the Board of Directors of the Company (and all committees thereof), (c) the Boards of Directors (and all committees thereof) of all Company Subsidiaries of which he is a member, and (d) any other position of employment or engagement which he may occupy in the Company or any affiliate of the Company and waive his right to further compensation and benefits under his employment agreement, except for certain vested benefits; and (ii) during the period commencing at the Non- Compete Time and continuing until December 1, 1999, (a) he will not engage in any activity which is competitive with the Company's game show business or music business (subject to certain exceptions relating to musical compositions or performances of family members of Mr. Scotti); (b) he will not solicit or entice away any employee or independent contractor of the Company or performer engaged by the Company; (c) he will not discuss or negotiate with respect to television projects which were submitted to or in development with the Company prior to Non-Compete Time, unless they are resubmitted to the Company after the Non-Compete Time; and (d) he will not reveal any trade secrets or confidential information of or about the Company. In addition, under the Agreement Not to Compete and effective as of January 1, 1998, Mr. Scotti has agreed to exercise his existing option to sublease from the Company the Gulfstream aircraft leased by the Company and to assume all of the Company's obligations under the aircraft lease. After the Transition Time but prior to January 1, 1998, Mr. Scotti will have the exclusive use of the aircraft but will be responsible for all costs incurred in connection with the aircraft after the Transition Time. In consideration of the foregoing, the Company has agreed to pay to Mr. Scotti approximately $2.9 million, subject to adjustment if the Non-Compete Time does not occur by December 1, 1997. Confidentiality Agreement The following is a summary of certain provisions of the Confidentiality Agreement, dated as of November 20, 1995 (terminated December 7, 1995 and reinstated February 16, 1996), between Pearson T.V. and the Company (the "Confidentiality Agreement"). This summary is qualified in its entirety by reference to the Confidentiality Agreement which is incorporated herein by reference and a copy of which has been filed with the Commission as Exhibit (c)(6) to the Schedule 14D-1. The Confidentiality Agreement contains customary provisions pursuant to which, among other matters, Pearson T.V. and its affiliates, including Parent, agreed to keep confidential all nonpublic, confidential or proprietary information furnished to it by the Company relating to the Company, subject to certain exceptions (the "Confidential Information"), and to use the Confidential Information solely for the purpose of evaluating a possible transaction involving the Company and Parent. The Confidentiality Agreement also contains customary non-solicitation and standstill provisions. The Company has agreed that such standstill provisions will not be applicable to the Offer on the Merger Agreement, or after the earlier to occur of (i) a Fiduciary Termination, (ii) a Competing Transaction Termination, (iii) November 20, 1997, or (iv) the Transition Time. 32 12. PURPOSE OF THE OFFER AND THE MERGER; PLANS FOR THE COMPANY The purpose of the Offer, the Merger and the Merger Agreement is to enable Parent to acquire control of the entire equity interest of the Company. Upon consummation of the Merger, the Company will become a wholly owned indirect subsidiary of Parent. The Offer is being made pursuant to the Merger Agreement. After consummation of the Offer, Parent and Purchaser plan to assess various aspects of the Company's business and operations to identify how best to maximize the Company's strengths in implementing Parent's long-term strategy. Parent will consider taking certain actions to integrate certain operations of the Company (many of which are located in the foreign jurisdictions) with the existing television operations of the Purchaser and its affiliates (some of which are in the United States). Parent is considering a number of alternatives in order to facilitate these objectives. No decision has been made concerning the structure of such alternatives. 13. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; EXCHANGE ACT REGISTRATION; MARGIN REGULATIONS; VOTING The purchase of Shares pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and may reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by stockholders other than Purchaser. Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future market prices to be greater or less than the Offer Price. Depending upon the aggregate market value and per Share price of any Shares not purchased pursuant to the Offer, following the Offer the Shares may no longer meet the standards for continued listing on the NNM which requires an issuer to have at least 750,000 publicly held Shares and net tangible assets of at least $4,000,000 or at least 1.1 million publicly held Shares with a market capitalization, total assets or total revenue of at least $75 million. Shares held by directors and officers (or their immediate families) of the Company and other concentrated holdings of 10% or more of the Shares outstanding generally will not be considered to be publicly held for the purpose of the foregoing standards. If the Shares were no longer quoted on the NNM, it is possible that the Shares could continue to trade in the over-the- counter market and that quotations would continue to be reported through other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend upon the number of stockholders remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act, as described below, and other factors. If, as a result of the purchase of Shares pursuant to the Offer, the Shares no longer meet the requirements of the NNM for continued listing and the listing of Shares is discontinued, the market for the Shares could be adversely affected. The Shares are currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that, following the Offer, the Shares would no longer constitute "margin securities" for the purposes of the margin regulations of the Federal Reserve Board and therefore could no longer be used as collateral for loans made by brokers. The Shares are currently registered under the Exchange Act. Registration of the Shares under the Exchange Act may be terminated upon application of the Company to the Commission if the Shares are neither listed on a national securities exchange nor held by 300 or more holders of record. Termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to its stockholders and to the Commission and would make certain provisions of the Exchange Act no longer applicable to the Company, such as the short-swing profit recovery provisions of Section 16(b) of the Exchange 33 Act, the requirement of furnishing a proxy statement pursuant to Section 14(a) of the Exchange Act in connection with stockholders' meetings and the related requirement of furnishing an annual report to stockholders and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 or 144A promulgated under the Securities Act may be impaired or eliminated. It is the current intention of Parent to seek to cause the Company to deregister the Shares after consummation of the Offer if the requirements for termination of registration are met. The Company's Restated Certificate of Incorporation provides that the Class B Common Stock, which is non-voting stock, automatically converts to Common Stock, which is voting stock, upon a Change of Control (as defined in the Certificate of Incorporation). Parent and Purchaser believe that the execution of the Stockholders Agreement does not result in a Change of Control. 14. DIVIDENDS AND DISTRIBUTIONS As described above, the Merger Agreement provides that, prior to the Effective Time, the Company will not, among other things, declare, set aside or pay (unless declared prior to September 30, 1997) any dividend payable in cash, stock or property with respect to the Shares. In addition, pursuant to the provisions of the Merger Agreement, the Company may not (i) sell or pledge or agree to sell or pledge any stock owned by it in any of the Company Subsidiaries (except in connection with its bank working facility); (ii) amend its Restated Certificate of Incorporation or Bylaws or the similar organizational documents of any of the Company Subsidiaries; or (iii) split, combine or reclassify the outstanding Shares. Pursuant to the Merger Agreement, the Company also may not (i) issue, deliver or sell or authorize or propose the issuance, delivery or sale of, any shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, capital stock of any class of the Company or the Company Subsidiaries other than Shares issuable pursuant to the agreements described in Section 3.3 of the Company Disclosure Schedule or (ii) repurchase, redeem or otherwise acquire, or permit any Company Subsidiary to repurchase, redeem or otherwise acquire, any shares of capital stock of the Company. The Merger Agreement prohibits the Company from taking any of the foregoing actions without the prior written consent of Purchaser. 15. CONDITIONS TO THE OFFER Notwithstanding any other provision of the Offer, Parent or Purchaser, as applicable, shall not be required to accept for payment or pay for any Shares tendered, and may terminate or amend the Offer (subject to the provisions of the Merger Agreement) and may postpone the acceptance of, and payment for, subject to Rule 14e-1(c) of the Exchange Act, any Shares tendered, if: (a) the Minimum Condition shall not have been satisfied prior to the expiration of the Offer; (b) any applicable waiting period under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer or other approvals required by the German Federal Cartel Office shall not have been obtained; or (c) at any time on or after the date of this Agreement, and prior to the expiration of the Offer, any of the following conditions shall exist: (a) there shall be threatened or pending any suit, action or proceeding brought by any Governmental Authority against the Parent, Purchaser, the Company or any Company Subsidiary (A) seeking to prohibit or impose any material limitations on Parent's or Purchaser's ownership or operation (or that of any of their respective subsidiaries or affiliates) of all or a material portion of the Company's businesses or assets, or to compel Parent or Purchaser or their respective subsidiaries or affiliates to dispose of or hold separate any material portion of the business or assets of the Company or any of the Company Subsidiaries, (B) challenging the acquisition by Parent or Purchaser of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or the performance of any of the other Transactions contemplated by 34 the Merger Agreement or the Stockholders Agreement, or seeking to obtain from the Company, Parent or Purchaser any damages that are material in relation to the Company and its subsidiaries taken as a whole, (C) seeking to impose material limitations on the ability of the Parent, or render the Parent unable, to accept for payment, pay for or purchase some or all of the Shares pursuant to the Offer and the Merger or (D) seeking to impose material limitations on the ability of Parent or Purchaser effectively to exercise full rights of ownership of the Shares, including, without limitation, the right to vote the Shares purchased by it on all matters properly presented to the Company's stockholders; or (ii) any Governmental Authority or other person or entity shall have obtained an injunction (A) prohibiting the making of the Offer, the acceptance for payment of, or payment for, any Shares by Parent, Purchaser or any other affiliate of Parent or (B) prohibiting the ownership by the Parent or any of its subsidiaries of the Company, or compelling the Company, Parent or any of their respective subsidiaries to dispose of or to hold separate all or any material portion of the business or assets of the Company, Parent or any of their respective subsidiaries, as a result of the Transactions; (b) there shall have been any law enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Parent, the Company or any subsidiary or affiliate of Parent or the Company or (ii) any Transaction, by any government or Governmental Authority other than the routine application of the waiting period provisions of the HSR Act to the Offer or the Merger, which effects any of the consequences referred to in paragraph (a) above; (c) there shall have occurred and be continuing any Company Material Adverse Effect or any event or series of events which would result in a Company Material Adverse Effect (as hereinafter defined); (d) there shall have occurred and be continuing a declaration of a banking moratorium or any suspension of payments in respect of banks in the City of New York; (e) the Board of Directors of the Company or any committee thereof shall have withdrawn, modified or changed in a manner adverse to Parent or Purchaser the approval or recommendation of the Offer, the Merger or the Agreement, or approved or recommended any Competing Transaction or any other acquisition of Shares other than the Offer or the Merger; (f) any representation and warranty of the Company shall not be true and correct as of the date of Merger Agreement or as of the expiration of the Offer except for (i) changes specifically contemplated by Merger Agreement and (ii) those representations and warranties that address matters only as of a particular date (which shall remain true and correct as of such date) and in each case except where failure of such representation and warranty to be so true and correct individually or together with failures of other representations and warranties to be true and correct would not have a Company Material Adverse Effect (other than representations and warranties that are already so qualified or that are qualified as to the prevention or delay of the consummation of any of the Transactions or as to the performance by the Company of its obligations under the Merger Agreement, which in each such case shall be true and correct as written); (g) the Company shall have failed to perform any obligation or to comply with any agreement or covenant of the Company to be performed or complied with by it under the Merger Agreement unless such failures, would not, individually or in the aggregate, have a Company Material Adverse Effect; (h) the Merger Agreement shall have been terminated in accordance with its terms; or (i) Parent and the Company shall have agreed that Parent or Purchaser, as applicable, shall terminate the Offer. The foregoing conditions (other than the Minimum Condition) may be waived by either Parent or Purchaser in its whole or in part at any time and from time to time in their sole discretion, subject in each case to the terms of the Merger Agreement. The failure by Parent or Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and 35 other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. The term "Company Material Adverse Effect" means any change in the business of the Company and the Company Subsidiaries that is materially adverse (or any group of such changes, none of which individually is materially adverse, but which in the aggregate are materially adverse) to the business, operations, properties, financial position or results of operations of the Company and its subsidiaries, taken as a whole, provided that none of the following shall constitute a Company Material Adverse Effect: (i) a decline in the ratings of any television programs distributed or produced by the Company or its subsidiaries or the cancellation of any television programs distributed or produced by the Company or its subsidiaries, (ii) the filing, initiation and subsequent prosecution, by or on behalf of stockholders of the Company, of litigation that challenges or otherwise seeks damages with respect to the Transactions, (iii) occurrences due to a disruption of the Company's or its subsidiaries' businesses as a result of the announcement of the execution of the Merger Agreement, (iv) general economic conditions or (v) any changes generally affecting the industries in which the Company and its subsidiaries operate. 16. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS General. Except as described in this Section 16, based upon a review of publicly available filings by the Company with the Commission and other publicly available information concerning the Company, neither Parent nor Purchaser is aware of any license or regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by the acquisition of Shares by Purchaser or Parent pursuant to the Offer, the Merger or otherwise or, except as set forth below, of any approval or other action by any governmental, administrative or regulatory agency or authority, domestic or foreign, that would be required prior to the acquisition of Shares by Purchaser pursuant to the Offer, the Merger or otherwise. Should any such approval or other action be required, Purchaser and Parent currently contemplate that it will be sought, except as described below under "State Takeover Statutes." While Purchaser does not currently intend to delay the acceptance for payment of Shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that adverse consequences might not result to the Company's business or that certain parts of the business of the Company or Parent might not have to be disposed of in the event that such approvals were not obtained or any other actions were not taken. Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions, including conditions relating to certain of the legal matters discussed in this Section 16. See Section 15. The Merger; Dissenters' Rights. No appraisal rights are available in connection with the Offer. However, if the Merger is consummated, stockholders of the Company would have certain rights to dissent and demand appraisal of their Shares under Section 262 of Delaware Law. Dissenting stockholders who comply with the requisite statutory procedures under Delaware Law would be entitled to a judicial determination and payment of the "fair value" of their Shares as of the close of business on the day prior to the date of stockholder authorization of the Merger, together with interest thereon, at such rate as the court finds equitable, from the date the Merger is consummated until the date of payment. Under Delaware Law, in fixing the fair value of the Shares, a court would consider the nature of the transaction giving rise to the stockholders' right to receive payment for Shares and its effects on the Company and its stockholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of Shares of a corporation engaging in a similar transaction under comparable circumstances, and all other relevant factors. Shares which are held by stockholders exercising appraisal rights under Section 262 of the Delaware Law shall be referred to herein as "Dissenting Shares". Going Private Transactions. The Commission has adopted Rule 13e-3 under the Exchange Act, which is applicable to certain "going private" transactions and which may under certain circumstances be applicable to the Merger or another business combination following the purchase of Shares pursuant to the Offer in which Purchaser seeks to acquire the remaining Shares not held by it. Purchaser believes, however, that if the Merger 36 is consummated within one year of its purchase of Shares pursuant to the Offer, Rule 13e-3 will not be applicable to the Merger. Purchaser believes that if the Merger is not consummated within one year of its purchase of Shares pursuant to the Offer, Rule 13e-3 will be applicable to the Merger. Rule 13e-3 requires, among other things, that certain financial information concerning the Company and certain information relating to the fairness of the proposed transaction and the consideration offered to minority stockholders in such transaction be filed with the Commission and disclosed to stockholders prior to consummation of the transaction. State Takeover Statutes. The Company is incorporated under the laws of the State of Delaware. In general, Section 203 of Delaware Law prevents an "interested stockholder" (generally a person who owns or has the right to acquire 15% or more of a corporation's outstanding voting stock, or an affiliate or associate thereof) from engaging in a "business combination" (defined to include mergers and certain other transactions) with a Delaware corporation for a period of three (3) years following the date such person became an interested stockholder unless, among other things, prior to such date the Board of Directors of the corporation approved either the business combination or the transaction in which the interested stockholder became an interested stockholder. In connection with the review of the proposed transaction, the Company's Board of Directors prior to the execution of the Merger Agreement (i) unanimously approved the Offer, the Merger and the transactions contemplated by the Stockholders Agreement, (ii) determined that the terms of the Offer and the Merger including the Offer price of $25.50 per Share in cash, are in the best interest of, the stockholders of the Company, and (iii) recommended that the stockholders of the Company accept the Offer and tender their Shares pursuant to the Offer. Accordingly, the Purchaser and Parent believe that Section 203 of Delaware Law is inapplicable to the Merger Agreement, the Offer, the Merger or the Stockholders Agreement because its provisions have been satisfied. A number of other states have also adopted takeover laws and regulations which purport to varying degrees to be applicable to attempts to acquire securities of corporations which are incorporated in such states or which have or whose business operations have substantial economic effects in such states, or which have substantial assets, security holders, principal executive offices or principal places of business therein. In 1982, the Supreme Court of the United States, in Edgar v. MITE Corp., invalidated on constitutional grounds the Illinois Business Takeovers Act, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court of the United States held that the State of Indiana could, as a matter of corporate law and in particular those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. Subsequently, a number of federal courts have ruled that various state takeover statutes were unconstitutional insofar as they apply to corporations incorporated outside the state of enactment. The Company, directly or through subsidiaries, conducts business in a number of states throughout the United States, some of which have enacted takeover laws. The Purchaser does not know whether any of these laws will, by their terms, apply to the Offer or the Merger and has not taken any action to comply with any such laws. Should any person seek to apply any state takeover law, the Purchaser will take reasonable efforts to resist such application, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover laws is applicable to the Offer or the Merger, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer, the Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, the Purchaser might be unable to accept for payment or pay for any Shares tendered pursuant to the Offer or be delayed in continuing or consummating the Offer and the Merger. In such case, the Purchaser may not be obligated to accept for payment, or pay for, any Shares tendered. See Section 15. Short-Form Merger. Delaware Law would permit the Merger to occur without a vote of the Company's stockholders (a "short-form merger") if the Purchaser were to acquire at least 90% of the outstanding Shares. If, however, the Purchaser does not acquire at least 90% of the then outstanding shares of each outstanding class of shares of the Company pursuant to the Offer or otherwise, and a vote of the Company's stockholders is required under Delaware Law, a longer period of time will be required to effect the Merger. 37 Antitrust. Under the provisions of the HSR Act applicable to the Offer, the acquisition of Shares under the Offer may be consummated following the expiration of a 15-calendar day waiting period following the filing by Parent of a Notification and Report Form with respect to the Offer, unless Parent receives a request for additional information or documentary material from the Antitrust Division of the Department of Justice (the "Antitrust Division") or the Federal Trade Commission (the "FTC") or unless early termination of the waiting period is granted. If, within the initial 15-calendar day waiting period, either the Antitrust Division or the FTC requests additional information or material from Parent concerning the Offer, the waiting period will be extended and would expire at 11:59 p.m., New York City time, on the tenth calendar day after the date of substantial compliance by Parent with such request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. Thereafter, such waiting period may be extended only by court order or with the consent of Parent. In practice, complying with a request for additional information or material can take a significant amount of time. The provisions of the HSR Act would similarly apply to any purchase, other than pursuant to the Offer, of the Shares subject to the Stockholders Agreement, except that the initial waiting period for any purchase of such Shares (other than purchases effected through a tender pursuant to the Offer) would expire 30 calendar days following the filing of HSR Act Notification and Report Forms by Purchaser and the Company and a request for additional information or material from Purchaser or the Company during the initial 30- day waiting period would extend the waiting period until 11:59 p.m. New York City time on the 20th calendar day after the date of substantial compliance by Purchaser and the Company with such request. If the purchase of Shares pursuant to the Stockholders Agreement is effected through a tender of such Shares pursuant to the Offer, the HSR requirements applicable to the Offer described in the prior paragraph would apply rather than the requirements described in this paragraph. The Merger would not require an additional filing under the HSR Act if the Purchaser owns 50% or more of the outstanding Shares at the time of the Merger or if the Merger occurs within one year after the HSR Act waiting period applicable to the Offer expires or is terminated. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as Purchaser's acquisition of the Shares pursuant to the Offer and the Merger Agreement. At any time before or after Purchaser's acquisition of Shares, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the acquisition of Shares pursuant to the Offer or otherwise or seeking divestiture of Shares acquired by Purchaser or divestiture of substantial assets of Parent or its subsidiaries. Private parties and state attorneys general may also bring legal action under the antitrust laws in certain circumstances. There can be no assurance that a challenge to the Offer or other acquisition of Shares by Purchaser on antitrust grounds will not be made or, if such challenge is made, of the result. See Section 15 for certain conditions to the Offer, including conditions with respect to litigation and certain governmental actions. Federal Reserve Board Regulations. The margin regulations promulgated by the Federal Reserve Board place restrictions on the amount of credit that may be extended for the purpose of purchasing margin stock (including the Shares) if such credit is secured directly or indirectly by margin stock. Purchaser and Parent believe that the financing of the acquisition of the Shares will not be subject to the margin regulations. Germany. The Company has informed the Purchaser that the Company conducts certain operations in Germany. The acquisition of the Company by the Purchaser would therefore have an effect within the area of application of the ARC pursuant to Section 98, paragraph 2 of the ARC. Consequently, the proposed acquisition constitutes a merger subject to merger control by the German Federal Cartel Office ("FCO"). As the consolidated world-wide turnover of the Purchaser in the financial year ended 31 December 1996 exceeded DM 2 billion, the proposed acquisition must be notified to the FCO prior to completion and a filing is therefore being submitted to the FCO. Under the ARC, the substantive test for clearance is whether the notified merger will create or strengthen a dominant market position and, if so, whether any such dominance is likely to be outweighed by any countervailing competitive benefits from the merger. After filing the pre-merger notification, 38 completion of the proposed acquisition will need to be suspended until either (i) the applicable waiting periods under the ARC have expired without the FCO having prohibited the acquisition, or (ii) the FCO has notified the parties that the conditions for prohibiting the proposed acquisition are not fulfilled. Other Foreign Laws. The Company has informed the Purchaser that the Company and certain of its subsidiaries conduct business in certain other foreign countries where regulatory filings or approvals may be required in connection with the consummation of the Offer. Certain of such filings, if required, may not be completed and certain of such approvals, if required, may not be obtained, prior to the expiration of the Offer. However, there is no present intention to delay the acceptance for payment of or the payment for Shares pursuant to the Offer pending the completion of such filings and the obtaining of such approvals. There is no assurance that any such approvals would be obtained or that adverse consequences to Parent's or the Company's business might not result from a failure to obtain such approvals or conditions that might be imposed in connection therewith. 17. FEES AND EXPENSES Purchaser and Parent have retained Lazard to act as the Dealer Manager and to provide certain financial advisory services in connection with the proposed acquisition of the Company. In connection with such services Parent has agreed to pay Lazard up to an aggregate fee of $3,000,000. Parent will also reimburse Lazard for certain reasonable out-of-pocket expenses, including fees and expenses of its counsel. Purchaser and Parent will also indemnify Lazard against certain liabilities and expenses in connection with its services, including certain liabilities and expenses under the federal securities laws. Parent owns beneficially approximately 8.9% of Lazard and also owns a substantial beneficial interest in a Lazard affiliate. Michel David-Weill, Chairman of Lazard, is a director of Parent and director of various companies associated with Lazard Freres el Cie, Paris which, in the aggregate, control an approximately 8.4% interest in Parent. Lazard provides general investment banking and other advisory services to Parent in consideration for an annual retainer. Purchaser and Parent have retained D.F. King & Co., Inc. to act as the Information Agent and ChaseMellon Shareholder Services to serve as the Depositary in connection with the Offer. The Information Agent and the Depositary each will receive reasonable and customary compensation for their services, be reimbursed for certain reasonable out-of-pocket expenses and be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities and expenses under the federal securities laws. Neither Purchaser nor Parent will pay any fees or commissions to any broker or dealer or other person or entity (other than the Dealer Manager and as described in the preceding paragraph) in connection with the solicitation of tenders of Shares pursuant to the Offer. Brokers, dealers, banks and trust companies will be reimbursed by Purchaser upon request for customary mailing and handling expenses incurred by them in forwarding material to their customers. 18. MISCELLANEOUS Purchaser is not aware of any jurisdiction in which the making of the Offer is not in compliance with applicable law. If Purchaser becomes aware of any jurisdiction in which the making of the Offer would not be in compliance with applicable law, Purchaser will make a good faith effort to comply with any such law. If, after such good faith effort, Purchaser cannot comply with any such law, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares residing in such jurisdiction. In those jurisdictions whose securities or blue sky laws require the Offer to be made by a licensed broker or dealer, the Offer is being made on behalf of Purchaser by one or more registered brokers or dealers which are licensed under the laws of such jurisdiction. 39 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PURCHASER NOT CONTAINED IN THIS OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. Purchaser and Parent have filed with the Commission the Tender Offer Statement on Schedule 14D-1 pursuant to Rule 14d-3 under the Exchange Act, together with exhibits, furnishing certain additional information with respect to the Offer, and may file amendments thereto. Such Schedule 14D-1 and any amendments thereto, including exhibits, should be available for inspection and copies should be obtainable in the manner set forth in Section 8 (except that such material will not be available at the regional offices of the Commission). Pearson Merger Company, Inc. October 7, 1997 40 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PEARSON MERGER COMPANY, INC.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT NAME AND BUSINESS ADDRESS OFFICE(S) HISTORY CITIZENSHIP ------------------------- --------- -------------------- ----------- David M. Veit............... Director Chairman of the Board of United States 30 Rockefeller Plaza Directors since 1987 and New York, New York 10112 President since 1985 of Pearson Inc. John G. Davis............... Director Senior Vice President United Kingdom 30 Rockefeller Plaza and Chief Financial New York, New York 10112 Officer of Pearson Inc. since 1997. Various positions at EMAP plc(1) from 1992 to 1996 including, Director of Treasury and Corporate Finance and EMAP Radio Finance Director. Thomas Wharton.............. Director Vice President--Taxation United States 30 Rockefeller Plaza and Secretary of Pearson New York, New York 10112 Inc. since 1997. Director of Tax from 1996 to 1997 of Pearson Inc. Tax Manager from 1990 to 1996 of Pearson Inc. William H. Cowan............ Assistant Secretary Partner of Cowan & United States 30 Rockefeller Plaza Minetz Chartered(2) New York, New York 10112 since 1989.
DIRECTORS AND EXECUTIVE OFFICERS OF PEARSON PLC
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT NAME AND BUSINESS ADDRESS OFFICE(S) HISTORY CITIZENSHIP ------------------------- --------- -------------------- ----------- David C.M. Bell............. Director Executive Director of United Kingdom 3 Burlington Gardens Pearson plc since 1996. London W1X 1LE Chief Executive of The England Financial Times(3) from 1993 to 1996. Director of The Financial Times from 1989 to 1993. Michel David-Weill.......... Director Non-executive Director France 30 Rockefeller Plaza of Pearson plc since New York, New York 10020 1970. Chairman and Chief Executive of Lazard Freres & Co. LLC(4) since 1995. General Partner from 1977 to 1995 in Lazard Freres & Co. General Partner in Lazard Freres et Cie. Chairman of Lazard Freres & Co., Limited. Deputy Chairman of Lazard Brothers & Co., Limited.
S-1 DIRECTORS AND EXECUTIVE OFFICERS OF PEARSON PLC (CONTINUED)
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT NAME AND BUSINESS ADDRESS OFFICE(S) HISTORY CITIZENSHIP ------------------------- -------- -------------------- ----------- Gregory Dyke................ Director Executive Director of United Kingdom 1, Stephen Street Pearson plc since 1996. London W1P 1PJ Chairman and Chief England Executive of Pearson Television since 1995. Chairman of Channel 5 Broadcasting Limited(5). Chief Executive of London Weekend Television from 1987 to 1994. Pehr Gustaf Gyllenhammar.... Director Non-executive Director Sweden 21 Moorfields of Pearson plc since London EC2P 2HT 1983. Senior Advisor to England Lazard Freres & Co. LLC(4) since 1996. Chairman of MC Securities Limited from 1994 to 1995(6). Chairman of the Board and Chief Executive Officer of AB Volvo from 1982 to 1993(7). Gillian M. Lewis............ Director Non-executive Director United Kingdom 100 Piccadilly of Pearson plc since London W1 1992. Managing Partner England of Heidrick & Struggles(8) since 1995. Senior Vice-President at Nestle SA from 1992 to 1994(9). John C. Makinson............ Director Finance Director of United Kingdom 3 Burlington Gardens Pearson plc since 1996. London W1X 1LE Managing Director of The England Financial Times Group from 1994 to 1996(3). Partner of Makinson Cowell from 1989 to 1994(10). Reuben Mark................. Director Non-executive Director United States 300 Park Avenue of Pearson plc since New York, New York 10022 1988. Chairman since Director 1986 and Chief Executive Officer since 1984 of Colgate-Palmolive Company(11). Vernon L. Sankey............ Director Non-executive Director United Kingdom One Burlington Lane of Pearson plc since London W4 2RW 1993. Chief Executive at England Reckitt & Colman plc(12) since 1991. Marjorie M. Scardino........ Director Chief Executive of United States 3 Burlington Gardens Pearson plc since 1997. London W1X 1LE Chief Executive of The England Economist Group Ltd. from 1992 to 1996(13).
S-2 DIRECTORS AND EXECUTIVE OFFICERS OF PEARSON PLC (CONTINUED)
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT NAME AND BUSINESS ADDRESS OFFICE(S) HISTORY CITIZENSHIP ------------------------- -------- -------------------- ----------- Henry Dennistoun Stevenson C.B.E...................... Chairman of the Chairman of the Board of United Kingdom 78-80 St. John's Street Board of Directors Directors of Pearson plc London EC1M 4HR since 1997. Deputy England Chairman of the Board of Directors of Pearson plc from 1996 to 1997. Non- executive Director of Pearson plc since 1986. Chairman of GPA: Aircraft Leasing Company (14) and of the Trustees of the Tate Gallery. David M. Veit............... Director Executive Director of United States 30 Rockefeller Plaza Pearson Inc since 1981. New York, New York 10112 Chairman of the Board of Directors since 1987 and President since 1985 of Pearson Inc. David J. Verey.............. Director Non-executive Director United Kingdom 21 Moorfields of Pearson plc since London EC2P 2HT 1996. Chairman of Lazard England Brothers & Co., Limited(15) since 1992. Anette V. Lawless........... Secretary Company Secretary of Denmark 3 Burlington Gardens Pearson plc since 1992. London W1X 1LE England
- ------- (1) EMAP plc has its principal office located at 1 Lincoln Court, Lincoln Road, Petersborough, London PE1 2RF, England. (2) Cowan & Minetz Chartered has its principal office located at 180 N. LaSalle No. 2901, Chicago, Illinois 60601. (3) The Financial Times has its principal office located at 1 Southwark Bridge, London SE1 9HL, England. (4) Lazard Freres & Co. LLC has its principal office located at 30 Rockefeller Plaza, New York, New York 10020. (5) Channel 5 Broadcasting Limited has its principal office located at 22 Long Acre, London WL2E 9LY, England. (6) MC Securities Limited has its principal office located at 1 Undershaft, London EC3A 8CH, England. (7) AB Volvo has its principal office located at AB Volvo, S-405 08 Goteberg, Sweden. (8) Heidrick & Struggles has its principal office located at 100 Piccadilly, London W1V 9FN, England. (9) Nestle SA has its principal office located at Avenue Nestle 55, CH-180 Vevey, Switzerland. (10) Makinson Cowell has its principal office located at 16-18 St. John Lane, London EC1M 4BS, England. (11) Colgate-Palmolive Company has its principal office at 300 Park Avenue, New York, New York 10022. (12) Reckitt & Colman plc has its principal office at One Burlington Lane, London W4 2RW, England. (13) The Economist Group Ltd. has its principal office located at 25 St. James's Street, London SW1A 1HG, England. (14) GPA: Aircraft Leasing Company has its principal office located at G.P.A. House, Shannon, Co. Clare, Ireland. (15) Lazard Brothers & Co., Limited has its principal offices located at 21 Moorfields, London EC2P 2HT, England. S-3 The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or his broker, dealer, commercial bank or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By Mail: By Overnight Delivery: By Hand: ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. Post Office Box 3305 85 Challenger Road, Mail Drop-Reorg 120 Broadway South Hackensack, NJ 07606 Ridgefield Park, NJ 07660 13th Floor Attn: Reorganization Department Attn: Reorganization Department New York, New York 10271 Attn: Reorganization Department
Facsimile Transmission Confirm Facsimile by Telephone: (For Eligible Institutions Only) (201) 296-4860 (201) 329-8936
Any questions or requests for assistance or additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone numbers and location listed below. You may also contact your broker, dealer, commercial bank or trust company or nominee for assistance concerning the Offer. The Information Agent for the Offer is: D.F. KING & CO., INC. 77 Water Street, 20th Floor New York, New York 10005 (212) 269-5550 (Call Collect) or CALL TOLL FREE: (800) 755-3105 The Dealer Manager for the Offer is: LAZARD FRERES & CO. LLC 30 Rockefeller Plaza New York, New York 10020 (212) 632-6000 (Call Collect) EX-99.(A)(2) 3 LETTER OF TRANSMITTAL EXHIBIT 99(a)(2) LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. AT $25.50 NET PER SHARE PURSUANT TO THE OFFER TO PURCHASE DATED OCTOBER 7, 1997 BY PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, NOVEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or his broker, dealer, commercial bank or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
By Mail: By Overnight Delivery: By Hand: ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. Post Office Box 3305 85 Challenger Road, Mail Drop-Reorg 120 Broadway South Hackensack, NJ 07606 Ridgefield Park, NJ 07660 13th Floor Attn: Reorganization Department Attn: Reorganization Department New York, New York 10271 Attn: Reorganization Department
Facsimile Transmission Confirm Facsimile by Telephone: (For Eligible Institutions Only) (201) 329-8936 (201) 296-4860
--------------- DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by stockholders either if certificates are to be forwarded herewith or if delivery is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC") (each, a "Book-Entry Transfer Facility" and collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in Section 3 of the Offer to Purchase (as defined below). Stockholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in the Introduction to the Offer to Purchase) or who cannot comply with the book-entry transfer procedures on a timely basis must tender their Shares according to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. See Instruction 2. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. BOXES BELOW FOR USE BY ELIGIBLE INSTITUTIONS ONLY [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE DEPOSITARY WITH ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING: Name of Tendering Institution: _____________________________________________ Check Box of Book-Entry Transfer Facility (Check one): [_] The Depository Trust Company [_] Philadelphia Depository Trust Company Account Number: ____________________________________________________________ Transaction Code Number: ___________________________________________________ [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY SENT TO THE DEPOSITARY PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s): ____________________________________________ Window Ticket Number (if any): _____________________________________________ Date of Execution of Notice of Guaranteed Delivery: ________________________ Name of Institution that Guaranteed Delivery: ______________________________ Check Box of Book-Entry Transfer Facility if Delivered by Book-Entry Transfer (check one): [_] The Depository Trust Company [_] Philadelphia Depository Trust Company Account Number (if delivered by Book-Entry Transfer):_______________________ Transaction Code Number: ___________________________________________________ 2 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Pearson Merger Company, Inc., a Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of Pearson plc, a company incorporated under the laws of England ("Parent"), the above- described shares of Common Stock, $.0001 par value per share (the "Common Stock") and/or shares of Class B Common Stock, $.0001 par value per share (the "Class B Common Stock," and together with the Common Stock, the "Shares"), of All American Communications, Inc., a Delaware corporation (the "Company"), at $25.50 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase dated October 7, 1997 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer"). The undersigned understands that Purchaser reserves the right to transfer or assign, in whole or in part from time to time to Parent or one or more direct or indirect wholly owned subsidiaries of Parent, the right to purchase Shares tendered pursuant to the Offer. Subject to and effective upon acceptance for payment of the Shares tendered herewith in accordance with the terms and subject to the conditions of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser all right, title and interest in and to all of the Shares that are being tendered hereby and all other Shares or other securities or property issued or issuable in respect thereof on or after October 1, 1997 (such other Shares, securities or property other than the Shares being referred to herein as the "Other Securities") and irrevocably appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares and all Other Securities with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver Share Certificates evidencing such Shares and all Other Securities, or transfer ownership of such Shares and all Other Securities on the account books maintained by any of the Book-Entry Transfer Facilities, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, upon receipt by the Depositary, as the undersigned's agent, of the purchase price (adjusted, if appropriate, as provided in the Offer to Purchase), (b) present such Shares and all Other Securities for transfer on the books of the Company, and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Other Securities, all in accordance with the terms of the Offer. The undersigned hereby irrevocably appoints Purchaser, its officers and designees, and each of them, the attorneys and proxies of the undersigned, each with full power of substitution, to the full extent of the undersigned's rights, including to exercise such voting and other rights as each such attorney and proxy or his (or her) substitute shall, in his (or her) sole discretion, deem proper, and otherwise act (including pursuant to written consent), with respect to all of the Shares tendered hereby which have been accepted for payment by Purchaser (and any and all Other Securities issued or issuable in respect thereof on or after October 1, 1997), which the undersigned is entitled to vote at any meeting of stockholders of the Company (whether annual or special and whether or not an adjourned meeting), or written consent in lieu of such meeting, or otherwise. This proxy and power of attorney is coupled with an interest in the Shares tendered hereby and is irrevocable and is granted in consideration of, and is effective upon, the acceptance for payment of such Shares by Purchaser in accordance with the terms of the Offer. Such acceptance for payment shall, without further action, revoke all prior proxies and consents granted by the undersigned with respect to such Shares (and all Shares and other securities issued in Other Securities in respect of such Shares), and no subsequent proxy or power of attorney or written consent shall be given (and if given or executed, shall be deemed not to be effective) with respect thereto by the undersigned. Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser is able to exercise full voting and other rights with respect to such Shares (including voting at any meeting of stockholders then scheduled or acting by written consent without a meeting). The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Other Securities, and that when such Shares are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Other Securities will be subject to any adverse claim. The undersigned, upon request, shall execute and deliver any signature guarantees or additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered 3 hereby and all Other Securities. In addition, the undersigned shall promptly remit and transfer to the Depositary for the account of Purchaser all Other Securities in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and pending such remittance or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of such Other Securities and may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by Purchaser in its sole discretion. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators and legal representatives of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase, Purchaser may not be required to accept for payment any of the Shares tendered hereby. Unless otherwise indicated herein under "Special Payment Instructions," please issue the check for the purchase price and/or return any Share Certificates evidencing Shares not tendered or not accepted for payment in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered." Similarly, unless otherwise indicated under "Special Delivery Instructions," please mail the check for the purchase price and/or return any Share Certificates evidencing Shares not tendered or accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing under "Description of Shares Tendered." If both the Special Delivery Instructions and the Special Payment Instructions are completed, please issue the check for the purchase price and/or return any Share Certificates evidencing Shares not purchased (together with accompanying documents as appropriate) in the name(s) of, and deliver said check and/or return such Share Certificates to, the person or persons so indicated. Stockholders tendering Shares by book-entry transfer may request that any Shares not accepted for payment be returned by crediting such account maintained at DTC or PDTC as such stockholder may designate by making an appropriate entry under "Special Payment Instructions." The undersigned recognizes that Purchaser has no obligation pursuant to the Special Payment Instructions to transfer any Shares from the name of the registered holder(s) thereof if Purchaser does not accept for payment any of the Shares so tendered. 4 SPECIAL PAYMENT INSTRUCTIONS (SEE SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6, AND 7) INSTRUCTIONS 5 AND 7) To be completed ONLY if the To be completed ONLY if the check for the purchase price of check for the purchase price of Shares purchased or Share Certif- Shares purchased or Share Certif- icates evidencing Shares not ten- icates evidencing Shares not ten- dered or not purchased are to be dered or not purchased are to be issued in the name of someone mailed to someone other than the other than the undersigned. undersigned, or to the under- signed at an address other than that shown under "Description of Shares Tendered."
Issue Mail [_] Check and/or [_] Certificate(s) [_] Check and/or [_] Certificate(s) To: ---------------------------------- To: ---------------------------------- ---------------------------------- NAME(S) (PLEASE PRINT) NAME (PLEASE PRINT) Address Address ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- (INCLUDE ZIP CODE) (INCLUDE ZIP CODE) ---------------------------------- (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NO.) (SEE SUBSTITUTE FORM W-9) [_]CHECK HERE IF ANY OF THE SHARE CERTIFICATES THAT YOU OWN AND WISH TO TENDER HAVE BEEN LOST, DESTROYED OR STOLEN. (SEE INSTRUCTION 11.) Number of Shares represented by lost, destroyed or stolen certificates:
STOCKHOLDERS SIGN HERE (ALSO COMPLETE SUBSTITUTE FORM W-9) X __________________________________________________________________________ X __________________________________________________________________________ SIGNATURE(S) OF STOCKHOLDER(S) Dated:_____________ 1997 (Must be signed by registered holder(s) as name(s) appear(s) on share certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustee, executor, administrator, guardian, attorney-in-fact, agent, officer of a corporation or any other person acting in a fiduciary or representative capacity, please provide the following information. See Instruction 5.) ---------------------------------------------------------------------------- (NAME(S)) ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPE) ---------------------------------------------------------------------------- CAPACITY (FULL TITLE) ---------------------------------------------------------------------------- ADDRESS ---------------------------------------------------------------------------- ZIP CODE ---------------------------------- ---------------------------------- AREA CODE AND TELEPHONE NUMBER TAX IDENTIFICATION OR SOCIAL (HOME) SECURITY NUMBER (COMPLETE SUBSTITUTE FORM W-9 BELOW) ---------------------------------- ---------------------------------- AREA CODE AND TELEPHONE NUMBER (BUSINESS) GUARANTEE OF SIGNATURE(S) (IF REQUIRED--SEE INSTRUCTIONS 1 AND 5) X __________________________________________________________________________ AUTHORIZED SIGNATURE ---------------------------------------------------------------------------- NAME (PLEASE PRINT OR TYPE) ---------------------------------- ---------------------------------- FULL TITLE NAME OF FIRM ---------------------------------------------------------------------------- ADDRESS ---------------------------------------------------------------------------- INCLUDE ZIP CODE ---------------------------------- AREA CODE AND TELEPHONE NUMBER Date_____________ 1997 6 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. Guarantee of Signatures. All signatures on this Letter of Transmittal must be guaranteed by a participant in the Security Transfer Agents Medallion Program or any other "eligible guarantor institution" as defined in Rule 17Ad- 15 under the Securities Exchange Act of 1934, as amended (each, an "Eligible Institution"), unless (i) this Letter of Transmittal is signed by the registered holder(s) of Shares (which term, for the purposes of this document, shall include any participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) tendered hereby and such holder(s) has (have) not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on this Letter of Transmittal or (ii) such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. Delivery of Letter of Transmittal and Certificates; Guaranteed Delivery Procedures. This Letter of Transmittal is to be completed by stockholders either if Share Certificates are to be forwarded herewith or if a tender of Shares is to be made pursuant to the procedures for delivery by book-entry transfer set forth in Section 3 of the Offer to Purchase. Share Certificates evidencing all physically tendered Shares, or confirmation ("Book-Entry Confirmation") of any book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility of Shares delivered by book-entry transfer as well as a properly completed and duly executed Letter of Transmittal, must be received by the Depositary, at one of the addresses set forth herein prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. Stockholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot comply with the book-entry transfer procedures on a timely basis may tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Pursuant to such procedure, (i) such tender must be made by or through an Eligible Institution, (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser, must be received by the Depositary prior to the Expiration Date and (iii) the Share Certificates evidencing all physically tendered Shares (or Book-Entry Confirmation with respect to such Shares), as well as a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and any other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, all as provided in Section 3 of the Offer to Purchase. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT SUCH CERTIFICATES AND DOCUMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted. All tendering stockholders, by execution of this Letter of Transmittal (or facsimile thereof), waive any right to receive any notice of the acceptance of their Shares for payment. 3. Inadequate Space. If the space provided herein under "Description of Shares Tendered" is inadequate, the certificate numbers and/or the number of Shares tendered should be listed on a separate signed schedule and attached hereto. 4. Partial Tenders. (Not applicable to stockholders who tender by book-entry transfer.) If fewer than all the Shares evidenced by any Share Certificate submitted are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such case, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the old Share Certificate(s) will be sent to the registered holder, unless otherwise provided in the appropriate box on this Letter of Transmittal, as soon as practicable after the Expiration Date. All Shares represented by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 7 5. Signatures on Letter of Transmittal, Stock Powers and Endorsements. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the Share Certificate(s) without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are held of record by two or more persons, all such persons must sign this Letter of Transmittal. If any tendered Shares are registered in different names on several Share Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such Shares. If this Letter of Transmittal is signed by the registered holder(s) of the Shares evidenced by Share Certificates listed and transmitted hereby, no endorsements of Share Certificates or separate stock powers are required unless payment is to be made to or Share Certificates evidencing Shares not tendered or purchased are to be issued in the name of a person other than the registered holder(s), in which case the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such certificates and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered holder or holders appear on the Share Certificate(s). Signatures on such Share Certificate(s) or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificates or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, agent, officer of a corporation or any person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Purchaser of such person's authority so to act must be submitted. 6. Stock Transfer Taxes. Except as set forth in this Instruction 6, Purchaser will pay or cause to be paid any stock transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or if Share Certificates evidencing Shares not tendered or purchased are to be registered in the name of, any person other than the registered holder(s), or if Share Certificates evidencing tendered Shares are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder(s) or such other person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATE(S) LISTED IN THIS LETTER OF TRANSMITTAL. 7. Special Payment and Delivery Instructions. If a check for the purchase price of any Shares tendered hereby is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent and/or any Share Certificates are to be returned to someone other than the signer above, or to the signer above but at an address other than that shown in the box entitled "Description of Shares Tendered" above, the appropriate boxes on this Letter of Transmittal should be completed. Stockholders tendering Shares by book- entry transfer may request that Shares not purchased be credited to such account maintained at any of the Book-Entry Transfer Facilities as such stockholder may designate under "Special Delivery Instructions." If no such instructions are given, any such Shares not purchased will be returned by crediting the account at the Book-Entry Transfer Facilities designated above. 8. Request for Assistance or Additional Copies. Requests for assistance may be directed to, or additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from, the Information Agent or the Dealer Manager at the telephone numbers and address set forth below. Stockholders may also contact their broker, dealer, commercial bank or trust company. 9. Waiver of Conditions. Except as otherwise provided in the Offer to Purchase, Purchaser reserves the right in its sole discretion to waive in whole or in part at any time or from time to time any of the specified conditions of the Offer or any defect or irregularity in tender with regard to any Shares tendered. 8 10. Substitute Form W-9. The tendering stockholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN"), generally the stockholder's social security or employer identification number, on Substitute Form W-9, which is provided under "Important Tax Information" below, and to certify, under penalties of perjury, whether he or she is subject to backup withholding of federal income tax. If a tendering stockholder is subject to backup withholding, he or she must cross out item (2) of the Certification Box on Substitute Form W-9. Failure to provide the information on Substitute Form W-9 may subject the tendering stockholder to 31% federal income tax withholding on the payment of the purchase price. If the tendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, he or she should write "Applied For" in the space provided for the TIN in Part I, sign and date the Substitute Form W-9 and sign and date the Certificate of Awaiting Taxpayer Identification Number. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of payments for surrendered Shares thereafter until a TIN is provided to the Depositary. 11. Mutilated, Lost, Stolen or Destroyed Certificates. Any holder of a Share Certificate whose certificate(s) has been mutilated, lost, stolen or destroyed should (i) complete this Letter of Transmittal and check the appropriate box on this Letter of Transmittal and (ii) complete and return to the Depositary any additional documentation, including the posting of any indemnity bond, requested by the Depositary. If required by Purchaser, the holder will be required to post a bond in such reasonable amount as Purchaser may direct as indemnity against any claim that may be made against Parent, Purchaser or any of their respective affiliates with respect to such certificate(s). IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), PROPERLY COMPLETED AND DULY EXECUTED, OR AN AGENT'S MESSAGE IN THE CASE OF A BOOK-ENTRY DELIVERY, TOGETHER WITH CERTIFICATES (OR BOOK-ENTRY CONFIRMATION) AND ALL OTHER REQUIRED DOCUMENTS OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE. 9 IMPORTANT TAX INFORMATION Under federal tax law, a stockholder whose tendered Shares are accepted for payment is required to provide the Depositary (as payor) with such stockholder's correct TIN on Substitute Form W-9 below. If such stockholder is an individual, the TIN is such stockholder's Social Security Number. If the Depositary is not provided with the correct TIN or an adequate basis for exemption, the stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such stockholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding in an amount equal to 31% of the gross proceeds resulting from the Offer. Certain stockholders (including, among others, certain corporations and foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, that stockholder must submit an IRS Form W-8, signed under penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the stockholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a stockholder with respect to Shares purchased pursuant to the Offer, the stockholder is required to notify the Depositary of his or her correct TIN by completing the Substitute Form W-9 contained herein, certifying that the TIN provided on the Substitute Form W-9 is correct (or that such stockholder is awaiting a TIN) and that (1) the stockholder is exempt from backup withholding, (2) the stockholder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of failure to report all interest or dividends, or (3) the Internal Revenue Service has notified the stockholder that he or she is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The stockholder is required to give the Depositary the social security number or employer identification number of the record owner of the Shares. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, he or she should write "Applied For" in the space provided for the TIN in Part I, sign and date the Substitute Form W-9 and sign and date the Certificate of Awaiting Taxpayer Identification Number. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of all payments of the purchase price until a TIN is provided to the Depositary. 10 PAYOR'S NAME: CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS DEPOSITARY
PART I--PLEASE PROVIDE YOUR SOCIAL SECURITY SUBSTITUTE TIN IN THE BOX AT RIGHT AND OR EMPLOYER FORM W-9 CERTIFY BY SIGNING AND IDENTIFICATION NUMBER DATING BELOW. ---------------------- DEPARTMENT OF (IF AWAITING TIN WRITE THE TREASURY "APPLIED FOR") INTERNAL REVENUE -------------------------------------------------------- SERVICE PAYER'S REQUEST FOR ------------------------------------------------------ TAXPAYER NAME (PLEASE PRINT) IDENTIFICATION NUMBER (TIN) ------------------------------------------------------ AND CERTIFICATION ADDRESS ------------------------------------------------------ CITY STATE ZIP CODE - --------------------------------------------------------------------------------
PART II--For Payees NOT subject to backup withholding, see the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 and complete as instructed therein. CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT: 1. The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and 2. I am not subject to backup withholding because either (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the enclosed Guidelines.) Signature: ______________________________ Dated: _____________ 1997 NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART I OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within sixty (60) days, 31% of all reportable payments made to me thereafter will be withheld until I provide a number. Signature(s): ___________________________ Dated: __________________________ 11 The Information Agent for the Offer is: D.F. KING & CO., INC. 77 Water Street, 20th Floor New York, New York 10005 (212) 269-5550 (collect) or Call Toll Free: (800) 755-3105 The Dealer Manager for the Offer is: LAZARD FRERES & CO. LLC 30 Rockefeller Plaza New York, New York 10020 (212) 632-6000 (Call Collect) DESCRIPTION OF SHARES TENDERED - --------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) SHARE CERTIFICATE(S) AND SHARE(S) TENDERED APPEAR(S) ON SHARE CERTIFICATE(S) AND SHARE(S) (ATTACH ADDITIONAL LIST IF NECESSARY) TENDERED) - -------------------------------------------------------------------------------------------------- TOTAL NUMBER SHARE OF SHARES NUMBER CERTIFICATE REPRESENTED OF SHARES NUMBER(S)* BY CERTIFICATES* TENDERED** - ------------------------------------------------- - ------------------------------------------------- - ------------------------------------------------- - ------------------------------------------------- - ------------------------------------------------- - ------------------------------------------------- TOTAL SHARES:
- -------------------------------------------------------------------------------- * Need not be completed by stockholders tendering by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. EX-99.(A)(3) 4 NOTICE OF GUARANTEED DELIVERY EXHIBIT 99(a)(3) NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. TO PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC As set forth in Section 3 of the Offer to Purchase (as defined below), this form, or a form substantially equivalent to this form, must be used to accept the Offer (as defined below) if the certificates representing shares of Common Stock, $.0001 par value per share (the "Common Stock") and shares of Class B Common Stock, $.0001 par value per share (the "Class B Common Stock," and together with the Common Stock, the "Shares"), of All American Communications, Inc. are not immediately available or time will not permit all required documents to reach the Depositary prior to the Expiration Date (as defined in the Offer to Purchase) or the procedures for book-entry transfer cannot be completed on a timely basis. Such form may be delivered by hand or transmitted by facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution (as defined in Section 3 of the Offer to Purchase). See Section 3 of the Offer to Purchase. THE DEPOSITARY FOR THE OFFER IS: CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
By Mail: By Overnight Delivery: By Hand: ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. Post Office Box 3305 85 Challenger Road 120 Broadway South Hackensack, NJ 07606 Mail Drop-Reorg 13th Floor Attn: Reorganization Department Ridgefield Park, NJ 07660 New York, New York 10271 Attn: Reorganization Department Attn: Reorganization Department
Facsimile Transmission Confirm Facsimile by Telephone: (For Eligible Institutions Only) (201) 296-4860 (201) 329-8936
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to Pearson Merger Company, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Pearson plc, a company incorporated under the laws of England, upon the terms and subject to the conditions set forth in the Offer to Purchase dated October 7, 1997 (the "Offer to Purchase") and the related Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer"), receipt of which is hereby acknowledged, the number of Shares indicated below pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Number of Shares: _________________ Name(s) of Record Holder(s): Share Certificate Numbers (if ___________________________________ available): ___________________________________ ___________________________________ PLEASE TYPE OR PRINT ___________________________________ Address(es): ______________________ If Shares will be delivered by ZIP CODE book-entry transfer, check one Area Code and Telephone Number: box: ___________________________________ ___________________________________ ___________________________________ [_] The Depository Trust Company ___________________________________ [_] Philadelphia Depository Trust ___________________________________ Company SIGNATURE(S) Account Dated: , 1997 Number: ___________________________ Date: ______________________ , 1997 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a participant in the Security Transfer Agents Medallion Program or any other eligible guarantor institution as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (each, an "Eligible Institution"), hereby guarantees that either the certificates representing the Shares tendered hereby in proper form for transfer, or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (pursuant to procedures set forth in Section 3 of the Offer to Purchase), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase)) and any other documents required by the Letter of Transmittal, will be received by the Depositary at one of its addresses set forth above within three (3) New York Stock Exchange trading days after the date of execution hereof. 2 The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal, certificates for Shares and any other required documents to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution. Name of Firm: Address: ______________________________________________________________________ ________________________________________________________________________ ZIP CODE Area Code and Telephone Number: _____________________________________________________________ AUTHORIZED SIGNATURE Name: _________________________________________________________________________ PLEASE TYPE OR PRINT Title: ________________________________________________________________________ Dated: ________________________________________________________________ , 1997 NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES FOR SHARES ARE TO BE DELIVERED WITH THE LETTER OF TRANSMITTAL. 3 EX-99.(A)(4) 5 LETTER TO BROKERS ET AL EXHIBIT 99(a)(4) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. BY PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC AT $25.50 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, NOVEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED. October 7, 1997 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by Pearson Merger Company, Inc., a Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of Pearson plc, a company incorporated under the laws of England ("Parent"), to act as Dealer Manager in connection with its offer to purchase all outstanding shares of Common Stock, $.0001 par value per share (the "Common Stock"), and all outstanding shares of Class B Common Stock, $.0001 par value per share (the "Class B Common Stock," and together with the Common Stock, the "Shares"), of All American Communications, Inc., a Delaware corporation (the "Company"), at $25.50 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase dated October 7, 1997 (the "Offer to Purchase") and in the related Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer"), copies of which are enclosed herewith. For your information and for forwarding to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, we are enclosing the following documents: 1. Offer to Purchase; 2. Letter of Transmittal for your use and for the information of your clients, together with Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 providing information relating to backup federal income tax withholding; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Shares and all other required documents cannot be delivered to the Depositary by the Expiration Date (as defined in the Offer to Purchase); 4. A form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; and 5. A letter to stockholders of the Company from the Company's Chairman and Chief Executive Officer together with a Solicitation/Recommendation Statement on Schedule 14D-9 issued by the Company. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of October 1, 1997 (the "Merger Agreement"), by and among Parent, Purchaser and the Company. The Merger Agreement provides that, among other things, following the consummation of the Offer and the satisfaction or (other than the Minimum Condition, as defined in the Merger Agreement) waiver of the other conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company (the "Merger"). At the effective time of the Merger, each outstanding Share (other than Shares held in the treasury of the Company, owned by Parent, Purchaser or any other wholly owned subsidiary of Parent or held by stockholders who perfect their dissenters' rights under Delaware law) will be converted into the right to receive the per Share price paid in the Offer, without interest. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE OFFER AND THE MERGER, HAS DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS ACCEPT THE OFFER, TENDER THEIR SHARES PURSUANT TO THE OFFER AND APPROVE THE MERGER. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will be deemed to have accepted for payment, and will pay for, all Shares validly tendered and not properly withdrawn by the Expiration Date (as defined in the Offer to Purchase) if, as and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance of the tenders of such Shares for payment pursuant to the Offer. Payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates evidencing such Shares or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in the Offer to Purchase), (ii) a properly completed and duly executed Letter of Transmittal (or facsimile thereof) or, in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase), and (iii) any other documents required by the Letter of Transmittal. In order to tender Shares pursuant to the Offer, a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or an Agent's Message (in the case of any book-entry transfer), and any other documents required by the Letter of Transmittal, should be sent to the Depositary, and either certificates representing the tendered Shares should be delivered or such Shares must be delivered to the Depositary pursuant to the procedures for book-entry transfers, all in accordance with the instructions set forth in the Letter of Transmittal and the Offer to Purchase. If holders of Shares wish to tender their Shares, but it is impracticable for them to deliver their certificates on or prior to the Expiration Date or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following the guaranteed delivery procedures specified in Section 3 of the Offer to Purchase. Neither Parent nor Purchaser will pay any fees or commissions to any broker, dealer or other person (other than the Dealer Manager, the Information Agent and the Depositary as described in the Offer to Purchase) in connection with the solicitation of tenders of Shares pursuant to the Offer. Purchaser will, however, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable expenses incurred by them in forwarding the enclosed materials to their customers. Purchaser will pay any stock transfer taxes applicable to its purchase of Shares pursuant to the Offer, subject to Instruction 6 of the Letter of Transmittal. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, NOVEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED. Any inquiries you may have with respect to the Offer may be addressed to the Information Agent or the undersigned at the addresses and telephone numbers set forth on the back cover page of the Offer to Purchase. Requests for additional copies of the enclosed materials may be directed to the Information Agent or the Dealer Manager. Very truly yours, LAZARD FRERES & CO. LLC NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR ANY PERSON THE AGENT OF PURCHASER, PARENT, THE COMPANY, ANY AFFILIATE OF THE COMPANY, LAZARD FRERES & CO. LLC, THE DEALER MANAGER, THE INFORMATION AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN. EX-99.(A)(5) 6 LETTER TO CLIENTS EXHIBIT 99(a)(5) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. AT $25.50 NET PER SHARE BY PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, NOVEMBER 4, 1997 UNLESS THE OFFER IS EXTENDED. To Our Clients: Enclosed for your consideration are the Offer to Purchase dated October 7, 1997 (the "Offer to Purchase") and the related Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer") and other materials relating to the Offer by Pearson Merger Company, Inc., a Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of Pearson plc, a company incorporated under the laws of England ("Parent"), to purchase all of the outstanding shares of Common Stock, $.0001 par value per share (the "Common Stock"), and all outstanding shares of Class B Common Stock, $.0001 par value per share (the "Class B Common Stock," and together with the Common Stock, the "Shares"), of All American Communications, Inc., a Delaware corporation (the "Company"), at $25.50 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer. Also enclosed is the letter to stockholders of the Company from the Chairman and Chief Executive Officer of the Company accompanied by the Company's Solicitation/Recommendation Statement on Schedule 14D-9. This material is being sent to you as the beneficial owner of Shares held by us for your account but not registered in your name. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL ACCOMPANYING THIS LETTER IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is directed to the following: 1. The tender price is $25.50 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions of the Offer. 2. The Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on Tuesday, November 4, 1997, unless the Offer is extended. 3. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of October 1, 1997 (the "Merger Agreement"), by and among Parent, Purchaser and the Company. The Merger Agreement provides that, among other things, following the consummation of the Offer and the satisfaction or (other than the Minimum Condition, as defined below) waiver of the other conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company (the "Merger"). At the effective time of the Merger, each outstanding Share (other than Shares held in the treasury of the Company, owned by Parent, Purchaser or any other wholly owned subsidiary of Parent or held by stockholders who perfect their dissenters' rights under Delaware law) will be converted into the right to receive the per Share price paid in the Offer, without interest. 4. The Board of Directors of the Company has unanimously approved the Merger Agreement, the Offer and the Merger, has determined that the Offer and the Merger are fair to and in the best interests of the stockholders of the Company and unanimously recommends that stockholders accept the Offer, tender their shares pursuant to the Offer and approve the Merger. 5. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the expiration of the Offer, that number of Shares which constitutes at least a majority of the total number of shares of Common Stock and a majority of the total number of Shares outstanding on the date of expiration of the Offer (including for purposes of such calculation all Shares issued upon exercise of all vested and unvested stock options and warrants prior to or simultaneously with the acceptance of the Offer) (the "Minimum Condition"). Subject to the terms of the Merger Agreement, the Offer is also subject to other terms and conditions, including receipt of certain regulatory approvals, set forth in the Offer to Purchase. Any or all conditions to the Offer (other than the Minimum Condition) may be waived by Purchaser. 6. Any stock transfer taxes applicable to the sale of Shares to Purchaser pursuant to the Offer will be paid by Purchaser, except as otherwise provided in Instruction 6 of the Letter of Transmittal. In order to tender Shares pursuant to the Offer, a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or (in the case of any book-entry transfer) an Agent's Message (as defined in the Offer to Purchase) and any other documents required by the Letter of Transmittal, should be sent to ChaseMellon Shareholder Services, LLC, the Depositary, and either certificates representing the tendered Shares should be delivered or such Shares must be delivered to the Depositary pursuant to the procedures for book-entry transfers, all in accordance with the instructions set forth in the Letter of Transmittal and the Offer to Purchase. The Offer is being made to all holders of Shares. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares in any jurisdiction in which the making of the Offer or acceptance thereof would not be in compliance with the laws of such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by Lazard Freres & Co. LLC or one or more registered brokers or dealers licensed under the laws of such jurisdictions. If you wish to have us tender any or all of the Shares held by us for your account, please so instruct us by completing, executing and returning to us the instruction form set forth below. Please forward your instructions to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified on the instruction form set forth below. 2 INSTRUCTIONS WITH RESPECT TO OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK AND CLASS B COMMON STOCK OF ALL AMERICAN COMMUNICATIONS, INC. BY PEARSON MERGER COMPANY, INC. A WHOLLY OWNED SUBSIDIARY OF PEARSON PLC The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase dated October 7, 1997 and the related Letter of Transmittal in connection with the offer by Pearson Merger Company, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Pearson plc, a company incorporated under the laws of England, to purchase for cash all outstanding shares of Common Stock, $.0001 par value per share, and all outstanding shares of Class B Common Stock, $.0001 par value per share (collectively, the "Shares"), of All American Communications, Inc., a Delaware corporation. This will instruct you to tender the number of Shares indicated below (or if no number is indicated below, all Shares) that are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer and the related Letter of Transmittal. Dated: , 1997 NUMBER OF SHARES TO BE TENDERED: ________________SHARES* - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Signature(s) - ------------------------------------------------------------------------------- Please Print Name(s) - ------------------------------------------------------------------------------- Please Print Address(es) - ------------------------------------------------------------------------------- Area Code and Telephone Number(s) - ------------------------------------------------------------------------------- Tax Identification or Social Security Number(s) - -------- * I (We) understand that if I (we) sign this instruction form without indicating a lesser number of Shares in the space above, all Shares held by you for my (our) account will be tendered. 3 EX-99.(A)(6) 7 SUBSTITUTE FORM W-9 EXHIBIT 99(a)(6) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer. - --------------------------------------------
GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - -------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner (joint account) of the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner account) of the account or, if joint funds, either person(1) 4. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if account) the minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor, guardian or committee or incompetent for a designated ward, person(3) minor, or incompetent person 7. a. The usual revocable The grantor- savings trust trustee(1) account (grantor is also trustee) b. So-called trust The actual account that is owner(1) not a legal or valid trust under State law 8. Sole proprietorship The owner(4) account - --------------------------------------------
- -------------------------------------------- GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - -------------------------------------------- 9. A valid trust, estate, The legal entity or pension trust (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, The organization or educational organization account 12. Partnership account The partnership held in the name of the business 13. Association, club, or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the The public Department of entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - --------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: . A corporation. . A financial institution. . An organization exempt from tax under section 501(a), or an individual retirement plan. . The United States or any agency or instrumentality thereof. . A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. . A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. . An international organization or any agency, or instrumentality thereof. . A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. . A real estate investment trust. . A common trust fund operated by a bank under section 584(a). . An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). An entity registered at all times under the Investment Company Act of 1940. . A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. . Payments of patronage dividends where the amount received is not paid in money. . Payments made by certain foreign organizations. . Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to nonresident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1993, payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING LNFORMATION.--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.(A)(7) 8 PRESS RELEASE DATED 10/01/97 EXHIBIT (a)(7) PRESS RELEASE FOR IMMEDIATE RELEASE 1 OCTOBER 1997 ACQUISITION OF ALL AMERICAN BY PEARSON TO CREATE THE WORLD'S LARGEST INTERNATIONAL TELEVISION PRODUCER Pearson television is poised to become the world's leading international producer of entertainment and serial drama following the announcement by Pearson plc today that it is to launch a recommended $25.50 per share cash tender offer worth $373m ((Pounds)233m) for All American Communications, Inc., a major international television producer and distributor. All American is the world's largest owner and distributor of game shows with more than 90 shows currently on the air in 29 countries including Blind Date, The Price is Right and Family Fortunes in the UK. In the US it owns a number of US drama series, including Baywatch, which is one of the most watched shows in the world, having been sold to more than 100 countries. All American has grown rapidly in the last few years and in 1996 achieved revenues of $237m ((Pounds)148m) and an operating profit of $40m ((Pounds)25m) on a UK GAAP basis. Pearson Television is already one of the largest producers of serial dramas with 12 shows in 6 languages in 8 different countries. It also produces well- known British programmes such as The Bill, Birds of a Feather, Wish You Were Here.........?, This is Your Life and Goodnight Sweetheart. It owns a number of production companies, including Grundy Worldwide, Alomo and Thames Television; a 24% stake in Channel 5 and an international distribution company which sells programmes worldwide. Pearson Television revenues were (Pounds)257m with an operating profit of (Pounds)45m in 1996. In addition to the acquisition of shares, Pearson will assume All American's net debt which totaled $136m at June 30,1997. Net assets, excluding net debt, are estimated to be $63m at the date of acquisition. This excludes goodwill in All American's balance sheet. After taking account of expenses, goodwill is estimated at $451m ((Pounds)282m). Pearson has received binding commitments to accept the tender offer from holders of 49% of All American's shares and the Board of All American has unanimously approved the tender offer. Pearson will be funding the acquisition from its existing cash resources. Already this year Pearson Television has raised (Pounds)134m from the sale of minority stakes in TVB, the Hong Kong broadcaster and in Flextech. Marjorie Scardino, Chief Executive of Pearson plc said: "This major expansion of our worldwide television business is absolutely in line with our strategy to own high volume, highly rated programming. We expect it to be earnings enhancing in the first year, helping us achieve our group goal of double-digit earnings growth, and it will add value for Pearson shareholders." Greg Dyke, Chairman and Chief Executive of Pearson Television said: "We have long admired All American's creative achievements and entrepreneurial culture, knowing it would make an exceptional fit with our existing businesses. The combination of the two companies will result in significant efficiencies and will strengthen our position in Europe and the USA as well as in the emerging markets of Latin America, Eastern Europe and Asia." For further information: Marjorie Scardino, Chief Executive Pearson plc 0171 411 2000 John Makinson, Finance Director Clare Chalmers, Public Affairs Greg Dyke, Chief Executive Pearson Television 0171 691 6000 Roy Addison, Communications
1 IN THE UNITED STATES Pearson plc Lucas van Praag, Brunswick Group Inc 212 333 3810 Pearson Television Dick Lippin The Lippin Group 213 965 1990
NOTES TO EDITORS BACKGROUND TO ALL AMERICAN All American consists of a number of companies around the world including Premantle (entertainment production and licensing), Goodson (entertainment production and format ownership), Baywatch (drama production and distribution) and a US domestic syndication operation. It also owns an international television programme sales company, a music business, and an international talkshow production company. Sixty per cent of All American's television profits now come from its businesses outside the US. It is a major producer and licenser in key European countries such as the UK, Germany and France as well as in emerging markets in Asia, Latin America and Eastern Europe. For example, in the UK it either produces or licenses programmes such as Blind Date, The Price Is Right, Family Fortunes, Play Your Cards Right and Strike It Rich. In Germany it is responsible for $25,000 Pyramid, The Price Is Right, Jeopardy, Card Shark and Family Fortunes, and in France The Price Is Right and Family Feud. All American owns, produces or distributes more than 50% of the television game shows now on air worldwide. Many of these formats are long-running international classics. The Price is Right first went on the air in America in 1971 and is still one of the most successful in the CBS schedule. All American is also known for productions such as Baywatch, the beach lifeguard drama series, which has been on the air in the US since 1991. Baywatch has been sold to more than 100 countries and is one of the most widely watched television programmes in the world. It is now in production for the 1997/8 season. All American is also responsible for other series such as Sinbad, Ghost Stories and for a television movie-of-the-week production operation. In addition All American has one of the largest US domestic syndication operations outside the major studios. ALL AMERICAN FINANCIAL BACKGROUND The table below summarises All American's recent financial performance, as published under US GAAP. Operating income has been shown before and after goodwill amortisation, the only material difference between US and UK GAAP which affects these figures. Also a pro forma earnings per share has been calculated which excludes goodwill amortization, an extraordinary charge for redemption of debt in 1996 and adjusts tax to a rate that is expected to be achieved under Pearson ownership. 2
YEAR ENDED 31 DECEMBER ----------------- 1994 1995 1996 ----- ----- ----- $M $M $M Sales....................................................... 114.9 228.8 236.5 Operating income before goodwill amortization............... 7.4 24.1 40.1 Operating income after goodwill amortization................ 6.5 21.7 35.5 Income before tax and extraordinary charge.................. 0.8 12.5 24.3 Net income.................................................. 0.5 7.2 12.7 EPS ($)..................................................... 0.07 0.87 1.06 Pro forma EPS ($)........................................... 0.20 1.25 1.68 (adjusted for goodwill amortisation, tax rate and extraordi- nary charge)
SIX MONTHS ENDED 30 JUNE ---------- 1996 1997 ---- ----- $M $M Sales................................................................ 87.5 104.5 Operating income before goodwill amortization........................ 11.2 16.0 Operating income after goodwill amortization......................... 9.0 13.7 Income before tax.................................................... 3.8 6.0 Net income........................................................... 2.2 3.6 EPS ($).............................................................. 0.19 0.27 Pro forma EPS ($).................................................... 0.35 0.43 (adjusted for goodwill amortization and tax rate)
PEARSON TELEVISION BACKGROUND Pearson Television already owns a number of production companies, including Grundy Worldwide, Thames Television, Alomo and Witzend, and distributes programmes worldwide through Pearson Television International. In the US it owns a small television production company and ACI, which distributes movies of the week. Pearson Television specialises, through Grundy Worldwide, in the production of serial dramas and entertainment shows. It is currently producing abound 60 programmes in 20 countries in Western and Eastern Europe, Australasia, South America and Asia. The portfolio includes long established formats still attracting large audiences in many countries and newer formats which are being adapted successfully for new territories. In the past five years, Grundy has launched four new daily drama series in Germany and, only two weeks ago, launched a German version of Prisoner Cell Block H. Neighbours, produced in Australia, is now in its twelfth year of production, and has been seen in over 120 countries worldwide, including 11 years on BBC in the UK. Grundy is producing, a new daily serial, its twelfth in the world in Hungary, for transmission in spring next year. All Grundy's productions are made in the local language. Other international successes include in Australia, Sale of the Century which recently celebrated 17 years on air and Wheel of Fortune into its sixteenth year of production. In France, Questions Pour Un Champion (Going For Gold) is in its ninth year, and is still the highest rated show in peak times. In Indonesia, Famili Seratus (Family Feud) is running daily. Night Fever which is currently Channel 5's most successful gameshow has, as a result, been launched in Italy and is being piloted in Spain and Germany. Among Pearson Television's best-known UK productions are The Bill, Birds of a Feather, Goodnight Sweetheart, Des O'Connor Tonight, This Is Your Life and Wish You Were Here..? Other productions currently 3 on air in Britain include Family Affairs, Wing and a Prayer, and a re-run of The Sweeney, all among the many Pearson Television productions on Channel 5. Part of Pearson Television's strategy is to own stakes in broadcasters to which we can sell programming or services. Pearson Television has a 24% interest in the UK broadcaster. Channel 5; 20% in UKTV, an Australian cable and satellite channel; 20% in M-RTL, a new Hungarian terrestrial channel; 45% in ECM, a joint venture with BBC; and 15% in Home TV, an Indian satellite channel. It also has investments in Flextech (3%), Phoenix Pictures (15%), a Hollywood movie producer and in SES (7.6%), the owner of the Astra satellite system. The strategic alliance between Recoletos and Antena 3, announced at the end of September, will provide new programming opportunities for Pearson Television which will be represented on the Antena 3 board. Pearson Television has a growing UK transmission business based at its London headquarters in Stephen Street, from where it transmits a dozen different channels, including Channel 5, the Disney Channels, Discovery Europe, and several Flextech channels. 4 EX-99.(B) 9 MULTICURRENCY MULT-OPTION FACILITY AGREEMENT EXHIBIT (b) Pounds 325,000,000 MULTICURRENCY MULTI-OPTION FACILITY AGREEMENT between PEARSON PLC and PEARSON INC. as Original Borrowers PEARSON PLC as Guarantor MIDLAND BANK PLC and UNION BANK OF SWITZERLAND as Arrangers SAMUEL MONTAGU & CO. LIMITED as Facility Agent and Sterling Swing-Line Agent MIDLAND BANK PLC as Dollar Swing-Line Agent and OTHERS Clifford Chance London CONTENTS
CLAUSE PAGE NO. PART 1 INTERPRETATION 1. Interpretation............................................. 1 PART 2 THE FACILITY 2. The Facility............................................... 16 3. Purpose.................................................... 16 4. Conditions Precedent....................................... 16 5. Nature of Banks' Obligations............................... 16 PART 3 UTILISATION OF THE FACILITY 6. Utilisation of the Facility................................ 17 7. Advances Option in lieu of Bills........................... 19 8. Competitive Bid Option..................................... 20 PART 4 THE BILLS 9. Acceptance and Discount of Bills........................... 24 10. Acceptance Commission...................................... 25 11. The Bills.................................................. 26 12. Payment of Bills........................................... 27 PART 5 THE ADVANCES 13. Making of Advances......................................... 28 14. Interest................................................... 29 15. Repayment and Prepayment................................... 30
PART 6 CANCELLATION 16. Cancellation............................................... 31 PART 7 CHANGES IN CIRCUMSTANCES 17. Taxes...................................................... 32 18. Tax Receipts and Tax Credits............................... 34 19. Increased Costs............................................ 34 20. Illegality and Mitigation.................................. 36 21. Market Disruption.......................................... 37 PART 8 REPRESENTATIONS, COVENANTS AND EVENTS OF DEFAULT 22. Representations............................................ 39 23. Financial Information...................................... 40 24. Financial Condition........................................ 43 25. Covenants.................................................. 43 26. Events of Default.......................................... 46 PART 9 GUARANTEE 27. Guarantee.................................................. 50 28. Preservation of Rights..................................... 50 PART 10 DEFAULT INTEREST AND INDEMNITY 29. Default Interest and Indemnity............................. 53 PART 11 PAYMENTS 30. Currency of Account and Payment............................ 55 31. Payments................................................... 55 32. Set-Off.................................................... 57 33. Redistribution of Payments................................. 57
PART 12 FEES, COSTS AND EXPENSES 34. Fees....................................................... 59 35. Costs and Expenses......................................... 59 PART 13 AGENCY PROVISIONS 36. The Agents, the Arrangers and the Banks.................... 61 PART 14 ASSIGNMENTS AND TRANSFERS 37. Benefit of Agreement....................................... 65 38. Assignments and Transfers by the Borrowers................. 65 39. Assignments and Transfers by Banks......................... 65 40. Disclosure of Information.................................. 66 PART 15 MISCELLANEOUS 41. Acceding and Seceding Borrowers............................ 67 42. Calculations and Evidence of Debt.......................... 67 43. Remedies and Waivers....................................... 68 44. Partial Invalidity......................................... 68 45. Amendments................................................. 68 46. Notices.................................................... 69 47. Counterparts............................................... 70 PART 16 LAW AND JURISDICTION 48. Law........................................................ 71 49. Jurisdiction............................................... 71
THE SCHEDULES The First Schedule Part I : The Banks Part II : The Swing-Line Banks The Second Schedule : Form of Transfer Certificate The Third Schedule : Conditions Precedent The Fourth Schedule : Form of Utilisation Request The Fifth Schedule : Timetables The Sixth Schedule : Associated Costs Rate The Seventh Schedule : Form of Borrower Accession Memorandum The Eighth Schedule : Documents to Accompany Borrower Accession Memorandum The Ninth Schedule : Form of Borrower Secession Memorandum The Tenth Schedule : Existing Encumbrances The Eleventh Schedule Part I : Form of Competitive Bid Request Part II : Form of Invitation for Competitive Bid Part III : Form of Competitive Bid Part IV : Form of Competitive Bid Utilisation Confirmation Letter The Twelfth Schedule : Form of Power of Attorney
THIS AGREEMENT is made the 25th day of August 1995 BETWEEN (1) PEARSON PLC ("PLC"); (2) PEARSON INC. (together with PLC, the "ORIGINAL BORROWERS"); (3) MIDLAND BANK PLC and UNION BANK OF SWITZERLAND as arrangers of the Facility (the "ARRANGERS"); (4) SAMUEL MONTAGU & CO. LIMITED in its capacity as facility agent for the Banks (the "FACILITY AGENT"); (5) MIDLAND BANK PLC, NEW YORK BRANCH in its capacity as dollar swing-line agent for the Banks (the "DOLLAR SWING-LINE AGENT") (6) SAMUEL MONTAGU & CO. LIMITED in its capacity as sterling swing-line agent for the Banks (the "STERLING SWING-LINE AGENT"); and (7) THE FINANCIAL INSTITUTIONS named in the First Schedule (the "BANKS"). NOW IT IS HEREBY AGREED as follows: PART 1 INTERPRETATION 1. INTERPRETATION 1.1 In this Agreement: "ACCEDING BORROWER" means any company which has executed and delivered a Borrower Accession Memorandum, and which has not subsequently ceased to be an Acceding Borrower, pursuant to Clause 41; "ACCEPTANCE COMMISSION RATE" means: (i) in the case of any Bill accepted pursuant to Clause 6 hereof: (a) at all times up to and including the fifth anniversary of the date hereof, an acceptance commission rate of 0.11 per cent. per annum; and (b) at all times after and excluding the fifth anniversary of the date hereof, an acceptance commission rate of 0.135 per cent. per annum; and 1 (ii) in the case of any Competitive Bill accepted pursuant to Clause 8 hereof, the relevant Competitive Bid Rate for such Bill; "ADVANCE" means, save as otherwise provided herein, an advance made or to be made by a Bank pursuant to the terms hereof including (unless otherwise provided), without limitation, a Swing-Line Advance and a Competitive Advance; "AGENTS" means the Dollar Swing-Line Agent, the Sterling Swing-Line Agent and the Facility Agent and "AGENT" means, as the context may require, any one of them; "APPLICABLE MARGIN" means: (i) in relation to any Advance other than a Swing-Line Advance and a Competitive Advance: (a) at all times up to and including the fifth anniversary of the date hereof, 0.11 per cent. per annum; and (b) at all times after and excluding the fifth anniversary of the date hereof, 0.135 per cent. per annum; and (ii) in relation to any Competitive Advance, the relevant Competitive Bid Rate relating thereto; "ASSOCIATED COSTS RATE" means, in relation to any Advance or unpaid sum denominated in sterling, the rate determined in accordance with the Sixth Schedule; "AVAILABLE COMMITMENT" means, in relation to a Bank at any time and save as otherwise provided herein, its Commitment at such time LESS its share of the Outstandings at such time and adjusted, for the purposes of a proposed Utilisation only, so as to take into account: (i) any reduction in the Commitment of a Bank which will occur prior to or during the Term or Tenor relating to the proposed Utilisation consequent upon a cancellation of the whole or any part of the Commitment of such Bank pursuant to the terms hereof; (ii) the aggregate Sterling Amount of any Advances and/or Bills which, pursuant to any other Utilisation, such Bank is then obliged to make or, as the case may be, accept on or before the proposed Utilisation Date relating to such proposed Utilisation; and (iii) the aggregate Sterling Amount of any Advances and/or Bills which were made or, as the case may be, accepted by such Bank pursuant hereto and which are due to be repaid or, as the case may be, mature on or before the proposed Utilisation Date relating to such Utilisation, Provided that such amount shall not be less than zero; 2 "AVAILABLE FACILITY" means at any time, the aggregate of the Commitments at such time LESS the Outstandings at such time, and adjusted, in the case of a proposed Utilisation only, so as to take into account: (i) any reduction in the Commitment of a Bank which will occur prior to or during the Term or Tenor relating to the proposed Utilisation consequent upon a cancellation of the whole or any part of the Commitment of such Bank pursuant to the terms hereof; (ii) the aggregate Sterling Amount of any Advances and/or Bills which, pursuant to any other Utilisation, any Banks are then obliged to make or, as the case may be, accept on or before the proposed Utilisation Date relating to such proposed Utilisation; and (iii) the aggregate Sterling Amount of any Advances and/or Bills which were made or, as the case may be, accepted by any Banks pursuant hereto and which are due to be repaid or, as the case may be, mature on or before the proposed Utilisation Date relating to such Utilisation; "AVAILABLE SWING-LINE COMMITMENT" means, in relation to a Swing-Line Bank at any time and save as otherwise provided herein, the lesser of (a) its Swing-Line Commitment LESS its share of the Swing-Line Outstandings at such time and (b) its Available Commitment at such time adjusted (in either case), for the purposes of a proposed Utilisation only, so as to take into account:- (i) any reduction in the Swing-Line Commitment or Commitment of a Swing- Line Bank which will occur prior to or during the Term relating to the proposed Utilisation consequent upon a cancellation of the whole or any part of the Swing-Line Commitment or Commitment of such Swing- Line Bank pursuant to the terms hereof; (ii) the aggregate Sterling Amount of any Advances or Bills which, pursuant to any other Utilisation, such Swing-Line Bank is then obliged to make or, as the case may be, accept on or before the proposed Utilisation Date relating to such proposed Utilisation; and (iii) the aggregate Sterling Amount of any Advances or Bills which were made or, as the case may be, accepted, by such Swing-Line Bank pursuant hereto and which are due to be repaid or, as the case may be, mature on or before the proposed Utilisation Date relating to such Utilisation, Provided that such amount shall not be less than zero; "AVAILABLE SWING-LINE FACILITY" means at any time, the lesser of (a) the aggregate of the Swing-Line Commitments LESS the Swing-Line Outstandings at such time and (b) the aggregate of the Available Commitments of the Swing-Line Banks at such time adjusted (in either case), in the case of a proposed Utilisation only, so as to take into account: 3 (i) any reduction in the Swing-Line Commitment or Commitment of a Swing- Line Bank which will occur prior to or during the Term or Tenor relating to the proposed Utilisation consequent upon a cancellation of the whole or any part of the Swing-Line Commitment or Commitment of such Swing-Line Bank pursuant to the terms hereof; (ii) the aggregate Sterling Amount of any Advances and/or Bills which, pursuant to any other Utilisation, any of the Swing-Line Banks are then obliged to make or, as the case may be, accept on or before the proposed Utilisation Date relating to such proposed Utilisation; and (iii) the aggregate Sterling Amount of any Advances and/or Bills which were made or, as the case may be, accepted by the Swing-Line Banks pursuant hereto and which are due to be repaid or, as the case may be, mature on or before the proposed Utilisation Date relating to such Utilisation; "AUTHORISED SIGNATORY" means, in relation to PLC or any other Borrower, any person whose name and signature appears in any of (a) a certificate referred to in paragraph 1(iii) of the Third Schedule, (b) the certificate referred to in paragraph 3 of the Eighth Schedule and (c) a certificate delivered to the Facility Agent at any time after the date hereof duly executed by a director, the Secretary or any Authorised Signatory of PLC or such Borrower (as the case may be) setting out the names and signatures of person(s) authorised to sign on behalf of PLC or that Borrower (as the case may be) any documents to be delivered by PLC or such Borrower (as the case may be) pursuant hereto or in connection herewith and to make Utilisations hereunder and whose authority has not been revoked by a certificate duly executed by two directors (or any other Authorised Signatory) of PLC or such Borrower (as the case may be) to that effect and delivered to the Facility Agent; "AUTHORISED VERIFIER" means, in relation to PLC or any other Borrower, any person described as such whose name appears in any of (a) a certificate referred to in paragraph 1(iii) of the Third Schedule, (b) the certificate referred to in paragraph 3 of the Eighth Schedule and (c) a certificate delivered to the Facility Agent at any time after the date hereof duly executed by a director, the Secretary or any Authorised Signatory of PLC or such Borrower (as the case may be) setting out the names of person(s) authorised to verify any notice or communication delivered pursuant to Clause 46.1 by PLC or that Borrower (as the case may be) and whose authority has not been revoked by a certificate duly executed by two directors (or any Authorised Signatory) of PLC or such Borrower (as the case may be) to that effect and delivered to the Facility Agent; "BILL" means a sterling bill of exchange accepted, or to be accepted, by a Bank hereunder including (unless otherwise provided), without limitation, a Competitive Bill; "BORROWER ACCESSION MEMORANDUM" means a memorandum to be delivered to the Facility Agent pursuant to Clause 41.1 by PLC and any Acceding Borrower substantially in the form set out in the Seventh Schedule; "BORROWER SECESSION MEMORANDUM" means a memorandum to be delivered to the Facility Agent pursuant to Clause 41.3 by PLC substantially in the form set out in the Ninth Schedule; 4 "BORROWERS" means each of the Original Borrowers and any Acceding Borrower and "BORROWER" means any one of them; "COMMITMENT" means, in relation to a Bank at any time and save as otherwise provided herein, the amount set opposite its name in Part I of the First Schedule; "COMPETITIVE ADVANCE" means an Advance made or to be made by a Bank pursuant to the bidding procedure described in Clause 8; "COMPETITIVE BID" means an offer by a Bank to make a Competitive Advance or, as the case may be, accept a Competitive Bill, pursuant to Clause 8 in the form of Part III of the Eleventh Schedule; "COMPETITIVE BID RATE" means, in relation to any Competitive Bid made by a Bank pursuant to Clause 8, in the case of a Competitive Advance, the applicable margin or, in the case of a Competitive Bill, the acceptance commission rate offered by the Bank making such Competitive Bid; "COMPETITIVE BID REQUEST" means a request made pursuant to Clause 8 in the form of Part I of the Eleventh Schedule; "COMPETITIVE BID UTILISATION CONFIRMATION LETTER" means a confirmation made by a Borrower pursuant to Clause 8 in the form of Part IV of the Eleventh Schedule; "COMPETITIVE BILL" means a bill accepted or to be accepted by a Bank pursuant to the bidding procedure described in Clause 8; "CONSOLIDATED INTEREST" means at any time, the net interest payable by the Group as shown in the consolidated profit and loss account included in the latest audited consolidated financial statements of PLC delivered pursuant to Clause 23.1(i) (or, if none, the Original Financial Statements); "CONSOLIDATED MARKET VALUE" means, in respect of any financial year of PLC (the "RELEVANT YEAR") the sum of A+B where: A= (OS X P) + (CS X S) where: "OS" means the aggregate number of ordinary shares in PLC in issue as at the end of the financial year of PLC immediately preceding the Relevant Year (the "PRECEDING YEAR") as shown in the audited consolidated financial statements of the Group for the Preceding Year; "P" means the mid-market closing price for ordinary shares of PLC on the last business day of the Preceding Year (as published in the Financial Times or in such other source as is agreed between PLC and the Facility Agent); "CS" means the aggregate number of securities (of whatever kind) issued by any member of the Group which are convertible into ordinary shares of PLC and which are in 5 issue as at the end of the Preceding Year as shown in the audited consolidated financial statements of the Group for the Preceding Year; and "S" means the weighted average of the mid-market closing prices of each type of convertible security referred to in the definition of "CS" above on the last business day of the Preceding Year (as published in the Financial Times or in such other source as is agreed between PLC and the Facility Agent); and B= AB - ACLF where: "AB" means the aggregate amount of borrowings (short, medium and long term) of the Group as at the end of the Preceding Year as shown in the audited consolidated balance sheet of the Group contained in the audited consolidated financial statements of the Group for the Preceding Year; and "ACLF" means the aggregate amount of cash and liquid funds of the Group as at the end of the Preceding Year as shown in the audited consolidated balance sheet of the Group contained in the audited consolidated financial statements of the Group for the Preceding Year. "CONSOLIDATED NET TANGIBLE WORTH" means at any time the sum (as determined from the latest audited consolidated financial statements of PLC delivered pursuant to Clause 23.1(i) or, if none, the Original Financial Statements) of the total amount paid up on the share capital of PLC plus or minus the aggregate amount standing to the credit or debit of the consolidated reserves of the Group (including the profit and loss account and any share premium account, but after deducting the amount of all assets of PLC and its subsidiaries which would in accordance with generally accepted accounting principles in the United Kingdom be classified as intangible assets), and (for the avoidance of doubt) excluding (a) the amount of provisions made in respect of deferred taxation on a consolidated basis and (b) any amounts attributable to minority interests in subsidiaries; "CONSOLIDATED OPERATING PROFIT" means in respect of any period the operating profit of the Group for such period (as determined from the latest audited consolidated financial statements of PLC delivered pursuant to Clause 23.1(i) or, if none, the Original Financial Statements); "DOLLAR SWING-LINE ADVANCE" means any dollar advance made or to be made by a Swing-Line Bank pursuant to a Utilisation Request under Clause 6.4; "DOLLAR SWING-LINE RATE" means at any time, the higher of:- (i) the Dollar Swing-Line Agent's Prime Rate; and (ii) the Federal Funds Rate at that time plus 0.25% per annum; "ELIGIBLE BANK" means a bank whose acceptance of a bill of exchange would, if such bill of exchange was otherwise so eligible, make such bill of exchange eligible for rediscount at the Bank of England; 6 "ELIGIBLE BILL" means a sterling bill of exchange eligible for rediscount at the Bank of England; "ELIGIBLE BILL DISCOUNT RATE" means, in respect of any Utilisation Date, the rate (as conclusively determined by the Facility Agent (in the absence of manifest error) at or about 11.00 a.m. on such Utilisation Date) at which Eligible Bills of an equivalent aggregate face amount and a tenor equivalent to the Tenor of the Bills to be discounted by the Facility Agent pursuant to Clause 9.2 can be discounted in the London Discount Market on such Utilisation Date; "EVENT OF DEFAULT" means any of those events specified in Clause 26.1; "EXISTING ENCUMBRANCE" means an encumbrance listed in the Tenth Schedule hereto; "FACILITY" means the multicurrency multi-option facility granted to the Borrowers in this Agreement; "FACILITY OFFICE" means: (i) in relation to the Facility Agent or any Bank (other than in such Bank's capacity as a Swing-Line Bank), each office identified in Part I of the First Schedule (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) or such other office as it may from time to time select; and (ii) in relation to the Dollar Swing-Line Agent or any Swing-Line Bank (in relation to a Utilisation by means of Dollar Swing-Line Advances), its office in the United States of America (or the associated offshore office of its office in the United States of America) in the same time zone as New York City identified in Part II of the First Schedule (or in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee), or such other office in the United States of America (or associated offshore office) in the same time zone as New York City as it may from time to time select; and (iii) in relation to the Sterling Swing-Line Agent or any Swing-Line Bank (in relation to a Utilisation by means of Sterling Swing-Line Advances), its office in the United Kingdom identified in Part II of the First Schedule (or in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) or such other office in the United Kingdom as it may from time to time select; "FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to: (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers as published for such day (or, if such day is not a business day, for the next preceding business day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a business day, the average of the quotations for such transactions received by the Dollar Swing-Line Agent from three federal funds brokers of recognised standing selected by it; 7 "FINANCE DOCUMENTS" means each of this Agreement, the Bills and any Borrower Accession Memorandum; "GROUP" means PLC and its subsidiaries from time to time; "INDICATIVE AMOUNT" means, in relation to any Competitive Bid Request, the aggregate principal amount of the Advances or, as the case may be, the aggregate face amount of the Bills therein requested; "INSTRUCTING GROUP" means: (i) for the purposes of Clauses 26.2 and 26.3 at any time when there are no Advances or Bills outstanding other than Competitive Advances and/or Competitive Bills and an Event of Default has occurred, a Bank or group of Banks to whom an amount in excess of 66 2/3% of the Outstandings is then due or to become due; and (ii) at all other times, and save as otherwise provided herein, a Bank or group of Banks whose Commitments amount (or, if each Bank's Commitment has been reduced to zero, did immediately before such reduction to zero, amount) in aggregate to more than 66 2/3% of the Total Commitments; "INVITATION FOR COMPETITIVE BIDS" means an invitation for competitive bids made by a Borrower pursuant to Clause 8 in the form of Part II of the Eleventh Schedule; "LIBOR" means, in relation to any Advance (other than a Dollar Swing-Line Advance) or unpaid sum, the rate per annum determined by the Facility Agent to be (i) the Screen Rate for the specified period or (ii) (in the event that LIBOR cannot be determined by reference to the Screen Rate) the rate per annum determined by the Facility Agent to be equal to the arithmetic mean (rounded upwards, if not already such a multiple, to the nearest 0.00001 per cent.) of the rates (as notified to the Facility Agent) at which each of the Reference Banks was offering to prime banks in the London Interbank Market deposits in the currency in which such Advance or unpaid sum is to be denominated and for the specified period at or about 11.00 a.m. on the Quotation Date therefor and, for the purposes of this definition, "SPECIFIED PERIOD" means the Term of such Advance or, as the case may be, the relevant period in respect of which LIBOR falls to be determined in relation to such unpaid sum; "LIMITED RECOURSE LOAN" means any moneys borrowed or raised for the purpose of financing expenditure on or in connection with any project forming part of the business of any member of the Group, such moneys borrowed or raised not being guaranteed by any member of the Group and only being secured on the assets forming part of, or constituting, the relevant project on terms which provide, inter alia, that:- (i) in the event of any default thereunder the creditor(s) shall not be entitled to have recourse for the payment or recovery of any moneys owing thereunder or in respect thereof, to any present or future assets of the member(s) of the Group borrowing or raising such moneys not forming part of the assets so secured; and 8 (ii) except for enforcing such security the creditor(s) shall not have any right to take any action against the member(s) of the Group borrowing or raising such moneys or in relation to such member's assets, by proceedings in any court or otherwise, to recover any amounts owing thereunder or in respect thereof; "MATURITY DATE" means, in relation to any Bill, the last day of the Tenor thereof; "OPTIONAL CURRENCY" means, any currency (other than sterling and the european currency unit) which is freely transferable and freely convertible into sterling and is available to banks in the London Interbank Market; "ORIGINAL FINANCIAL STATEMENTS" means, the audited consolidated financial statements of PLC for its financial year ended 31st December 1994; "OUTSTANDINGS" means, at any time, the aggregate of the Sterling Amounts of: (i) each outstanding Advance; and (ii) each outstanding Bill; "PERMITTED ENCUMBRANCE" means any Existing Encumbrance and any other encumbrance: (i) created after the date hereof by a member of the Group incorporated outside the United Kingdom over any property of such member outside the United Kingdom solely for the purpose of securing financial indebtedness incurred by such member for the purpose of its business or that of its subsidiaries but only if the amount of such borrowings (or the equivalent thereof in sterling at the relevant time) when aggregated with the total amount secured by any other subsisting encumbrances permitted by this sub-paragraph (i) does not exceed Pounds 50,000,000; (ii) created by a member of the Group to secure any Limited Recourse Loan made to such member or any other member of the Group; (iii) created by a member of the Group in respect of which the prior written consent of an Instructing Group has been obtained; (iv) arising by virtue of any right on the part of any bank to apply any part of any credit balance(s) representing any moneys standing to the credit of any bank account of any member of the Group in the books of such bank in discharge or satisfaction of any part of any debit balance(s) of any bank account of any member of the Group in the books of such bank; (v) any encumbrance:- (a) created by a member of the Group prior to its becoming a member of the Group; or 9 (b) created over an asset acquired by a member of the Group prior to its acquisition and subject to which such acquisition was made Provided that (1) such encumbrance was not created in contemplation of such company becoming a member of the Group or, as the case may be, the acquisition of such asset and (2) the amount thereby secured was not increased in contemplation of such company becoming a member of the Group or, as the case may be, the acquisition of such asset; and (vi) any other encumbrance created after 31st December, 1994 over any property of a member of the Group but only if the amount of financial indebtedness secured thereby (or its equivalent in sterling at the relevant time) when aggregated with the total amount secured by any other subsisting encumbrances permitted by this sub-paragraph (vi) does not exceed the greater of:- (a) 15% of Consolidated Net Tangible Worth; and (b) Pounds 75,000,000; "POTENTIAL EVENT OF DEFAULT" means, any event which would become (with the passage of time, the giving of notice, the making of any determination hereunder or any combination thereof), if not remedied or waived within any applicable time limit, an Event of Default; "PRIME RATE" means, for any day, the rate per annum which is the prime rate of the Dollar Swing-Line Agent in New York City, from time to time, in force on such date; "PRINCIPAL SUBSIDIARY" means at any time:- (i) any subsidiary of PLC whose unconsolidated profit before interest, tax and extraordinary items (as determined by reference to the latest audited financial statements of that subsidiary) is not less than five per cent (5%) of Consolidated Operating Profit; and (ii) Pearson Inc; "PROPORTION" means, in relation to a Bank either:- (i) the proportion borne by its Commitment to the Total Commitments; or (ii) at any time when the Total Commitments are zero, the proportion borne by its share of the Outstandings to the Outstandings; "QUALIFYING BANK" means a person which is recognised by the Inland Revenue as carrying on a bona fide banking business in the United Kingdom for the purposes of Section 349 of the Income and Corporation Taxes Act 1988; 10 "QUOTATION DATE" means, in relation to any period for which an interest rate is to be determined hereunder, the day on which quotations would ordinarily be given by prime banks in the London Interbank Market for deposits in the currency in relation to which such rate is to be determined for delivery on the first day of that period Provided that, if for any such period quotations would ordinarily be given on more than one date, the Quotation Date for that period shall be the last of those dates; "REFERENCE BANKS" means the principal London offices of Midland Bank PLC, Union Bank of Switzerland and Deutsche Bank AG or such other bank or banks as may from time to time be agreed between PLC and an Instructing Group; "REPAYMENT DATE" means, in relation to any Advance, the last day of the Term thereof; "REQUESTED AMOUNT" means, in relation to any Utilisation Request or Competitive Bid Utilisation Confirmation Letter, the aggregate principal amount of the Advances or, as the case may be, the aggregate face amount of the Bills therein requested; "SCREEN RATE" means either (i) the arithmetic mean (rounded upwards if not already such a multiple, to the nearest 0.00001 per cent.) of the offered rates (if any) appearing on page 3740 or page 3750 of the Telerate Screen (or such other page or service as may replace such pages on such system for this purpose) which displays British Bankers Association Interest Settlement Rates for deposits in the currency in which the relevant Advance or unpaid sum is to be denominated at or about 11.00 a.m. on the Quotation Date therefor or (ii) (in the case of an Advance or unpaid sum denominated in Hong Kong Dollars) the arithmetic mean (rounded upwards if not already such a multiple, to the nearest 0.00001 per cent.) of the offered rates (if any) appearing on page HIBO of the Reuters Screen (or such other page or service as may replace such page on such system for this purpose) which displays Hong Kong Interbank Offered Rates for deposits in Hong Kong dollars at or about 11.00 a.m. on the Quotation Date therefor; "STERLING AMOUNT" means: (i) in relation to any Advance, Indicative Amount or Requested Amount, the principal amount thereof or, if such Advance, Indicative Amount or Requested Amount is not denominated in sterling, the equivalent of such amount in sterling calculated as at the date of the relevant Utilisation Request, Competitive Bid Request or, as the case may be, Competitive Bid Utilisation Letter; and (ii) in relation to any Bill, the face amount thereof; "STERLING SWING-LINE ADVANCE" means any sterling advance made or to be made by a Sterling Swing-Line Bank pursuant to a Utilisation Request under Clause 6.4; "STERLING SWING-LINE RATE" means, at any time, the aggregate of: (i) LIBOR; (ii) 0.25% per annum; and 11 (iii) the Associated Costs Rate applicable thereto; "SWING-LINE ADVANCE" means a Dollar Swing-Line Advance or a Sterling Swing-Line Advance as the context may require; "SWING-LINE BANK" means a Bank whose name appears in Part II of the First Schedule; "SWING-LINE COMMITMENT" means, in relation to a Swing-Line Bank at any time and save as otherwise provided herein, the amount set opposite its name in Part II of the First Schedule; "SWING-LINE OUTSTANDINGS" means, at any time, the aggregate of the Sterling Amounts of the outstanding Swing-Line Advances; "SWING-LINE RATE" means the Dollar Swing-Line Rate or the Sterling Swing-Line Rate as the context may require; "TENOR" means, in relation to any Bill, the period from the Utilisation Date on which it is accepted until its maturity as specified in the Utilisation Request or Competitive Bid Request relating thereto; "TERM" means, save as otherwise provided herein, in relation to any Advance, the period for which such Advance is borrowed as specified in the Utilisation Request or Competitive Bid Request relating thereto; "TERMINATION DATE" means the seventh anniversary of the date hereof; "TOTAL COMMITMENTS" means, at any time, the aggregate of the Banks' Commitments at such time; "TRANSFER CERTIFICATE" means a certificate substantially in the form set out in the Second Schedule signed by a Bank and a Transferee whereby: (i) such Bank seeks to procure the transfer to such Transferee of all or a part of such Bank's rights and obligations hereunder upon and subject to the terms and conditions set out in Clause 39; and (ii) such Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Facility Agent as is contemplated in Clause 39.3; "TRANSFER DATE" means, in relation to any Transfer Certificate, the date for the making of the transfer as specified in the schedule to such Transfer Certificate; "TRANSFEREE" means a bank or other financial institution to which a Bank seeks to transfer all or part of such Bank's rights and obligations hereunder in accordance with Clause 39; "UTILISATION" means a utilisation of the Facility hereunder; "UTILISATION DATE" means the date of a Utilisation being the date on which the Advances in respect thereof are to be made or the Bills in respect thereof are to be accepted; 12 "UTILISATION REQUEST" means a notice given to the Facility Agent pursuant to Clause 6.1 or, as the case may be, Clause 6.4 substantially in the form set out in the Fourth Schedule; and "1988 FACILITY" means the transferable multi-option facility agreement dated 10th February, 1988 between Pearson plc and Pearson Inc. as borrowers, Samuel Montagu & Co. Limited as agent and others. 1.2 Any reference in this Agreement to: an "AGENT", an "ARRANGER" or any "BANK" shall be construed so as to include its and any subsequent successors, Transferees and assigns in accordance with their respective interests; a "BUSINESS DAY" shall be construed as a reference to a day (other than a Saturday or Sunday) on which banks are generally open for business in London or, in the case of any Dollar Swing-Line Advance, in London and New York City or if such reference relates to a date for the payment or purchase of any sum denominated in an Optional Currency, in London and the principal financial centre of the country of such Optional Currency; a "CLAUSE" shall, subject to any contrary indication, be construed as a reference to a clause hereof; an "ENCUMBRANCE" shall be construed as a reference to a mortgage, charge, pledge, lien (other than a lien arising by operation of law), security interest, conditional sale or other title retention agreement or other encumbrance securing any obligation of any person; the "EQUIVALENT" on any given date in one currency (the "FIRST CURRENCY") of an amount denominated in another currency (the "SECOND CURRENCY") is a reference to the amount of the first currency which could be purchased with the amount of the second currency at the spot rate of exchange quoted by the Facility Agent at or about 9.15 a.m. on such date for the purchase of the first currency with the second currency; "FINANCIAL INDEBTEDNESS" shall be construed as a reference to any indebtedness for or in respect of moneys borrowed or raised by whatever means (including, without limitation, by means of acceptances, deposits and finance leases and any liability evidenced by bonds, debentures, notes or similar instruments); a "HOLDING COMPANY" of a company or corporation shall be construed as a reference to any company or corporation of which the first-mentioned company or corporation is a subsidiary; "INDEBTEDNESS" shall be construed so as to include any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent; a "MONTH" is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a non-business day, it shall end on the next business day unless that day falls in the calendar month succeeding that in which it would otherwise have ended, in which case it shall end on the preceding business day Provided that, if a period starts on the last business day 13 in a calendar month or if there is no numerically corresponding day in the calendar month in which that period ends, that period shall end on the last business day in that later month; a "PART" shall, subject to any contrary indication, be construed as a reference to a part hereof; a "PERSON" shall be construed as a reference to any person, firm, company, corporation, government, state or agency of a state or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing; a "SCHEDULE" shall, subject to any contrary indication, be construed as a reference to a schedule hereto; a "SUBSIDIARY" of a person means any other person which: (a) is a subsidiary of that person within the meaning of Section 736 of the Companies Act 1985; and (b) for the purposes of Clauses 22.1(vii), 23 and 24, the defined terms used therein and all other references herein to the Original Financial Statements or any other financial statements of PLC and its subsidiaries or of the Group, is a subsidiary undertaking of that person within the meaning of Section 258 of the Companies Act 1985; "TAX" shall be construed so as to include any tax, levy, impost, duty or other charge of a similar nature (including, without limitation, any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same); "VAT" shall be construed as a reference to value added tax including any similar tax which may be imposed in place thereof from time to time; a "WHOLLY-OWNED SUBSIDIARY" of a company or corporation shall be construed as a reference to any company or corporation which has no other members except that other company or corporation and that other company's or corporation's wholly- owned subsidiaries or persons acting on behalf of that other company or corporation or its wholly-owned subsidiaries; and the "WINDING-UP", "DISSOLUTION", "ADMINISTRATION" or "ADMINISTRATIVE RECEIVERSHIP" of a company or corporation shall be construed so as to include any equivalent or analogous proceedings under the law of the jurisdiction in which such company or corporation is incorporated or any jurisdiction in which such company or corporation carries on business. 1.3 "$" and "DOLLARS" denote lawful currency of the United States of America, "(Pounds)" and "STERLING" denote lawful currency of the United Kingdom. 14 1.4 Save where the contrary is indicated, any reference in this Agreement to: (i) this Agreement or any other agreement or document shall be construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented; (ii) a statute shall be construed as a reference to such statute as the same may have been, or may from time to time be, amended or re-enacted; and (iii) a time of day shall be construed as a reference to London time. 1.5 Clause, Part and Schedule headings are for ease of reference only. 1.6 There are set out in the Fifth Schedule timetables of certain of the procedures provided for in this Agreement. For the purpose of construction, any reference herein to a "specified time" shall be construed as a reference to the relevant time set forth in the relevant timetable. 1.7 All expressions used in the definitions contained in Clause 24 which are not otherwise defined herein shall be construed in accordance with generally accepted accounting principles in the United Kingdom (as used in the Group's latest audited consolidated financial statements delivered pursuant to Clause 23.1(i) hereof, or, if none, the Original Financial Statements). 15 PART 2 THE FACILITY 2. THE FACILITY The Banks grant to the Borrowers, upon the terms and subject to the conditions hereof, a multicurrency multi-option facility (incorporating a competitive bid option) in an aggregate amount of (Pounds)325,000,000 or its equivalent from time to time in Optional Currencies, a maximum amount of (Pounds)150,000,000 (or its equivalent) of which is available as dollar swing-line advances or sterling swing-line advances. 3. PURPOSE 3.1 The Facility is intended for general corporate purposes including (without limitation) the refinancing of amounts outstanding under existing facilities (including the 1988 Facility) and the provision of back-up financing in relation to dollar and sterling commercial paper facilities and accordingly, each of the Borrowers shall apply all amounts raised by it hereunder in or towards satisfaction of such general corporate purposes. 3.2 Without prejudice to the obligations of the Borrowers under Clause 3.1, none of the Agents, the Arrangers and the Banks shall be obliged to concern themselves with the application of amounts raised by any of the Borrowers hereunder. 4. CONDITIONS PRECEDENT None of the Borrowers may deliver any Utilisation Request or Competitive Bid Request hereunder unless the Facility Agent has confirmed to PLC and the Banks that it has received all of the documents and other evidence listed in the Third Schedule and that each is, in form and substance, satisfactory to the Facility Agent. 5. NATURE OF BANKS' OBLIGATIONS 5.1 The obligations of each Bank hereunder are several. 5.2 The failure by a Bank to perform its obligations hereunder shall not affect the rights of any Borrower against such Bank in relation to such failure or the obligations of PLC or any of the other Borrowers towards any other party hereto nor shall any other party be liable for the failure by such Bank to perform that Bank's obligations hereunder. 16 PART 3 UTILISATION OF THE FACILITY 6. UTILISATION OF THE FACILITY 6.1 Save as otherwise provided herein, any Borrower (being, in the case of a Utilisation by means of Bills, incorporated in the United Kingdom) may from time to time utilise the Facility by means of Advances (other than Swing-Line Advances which are dealt with in Clause 6.4 and Competitive Advances which are dealt with in Clause 8) or Bills (other than Competitive Bills which are dealt with in Clause 8) by delivering to the Facility Agent by no later than the specified time a duly completed Utilisation Request therefor. 6.2 Each Utilisation Request delivered to the Facility Agent pursuant to Clause 6.1 shall be irrevocable and shall specify: (i) whether the Utilisation is to be by means of Advances or Bills; (ii) the proposed Utilisation Date which shall be a business day; (iii) in the case of a Utilisation Request for Advances, the currency of denomination of the proposed Advances, which shall be sterling or an Optional Currency; (iv) the Requested Amount which shall be: (a) in the case of a Utilisation by means of Advances denominated in sterling or Bills, an amount which does not exceed the Available Facility for such Utilisation and which, if less than the Available Facility for such Utilisation, is a minimum amount of (Pounds)10,000,000 and an integral multiple of (Pounds)1,000,000 (or such other integral multiple as PLC and the Facility Agent may agree); and (b) in the case of a Utilisation by means of Advances denominated in an Optional Currency, an amount in such Optional Currency, the Sterling Amount of which does not exceed the Available Facility for such Utilisation, and which, if the Sterling Amount is less than the Available Facility for such Utilisation, is in a minimum Sterling Amount of (Pounds)10,000,000 and is an integral multiple of 1,000,000 of the largest currency unit of such Optional Currency (or such other integral multiple as PLC and the Facility Agent may agree); (v) the Term or Tenor in question, being: (a) in respect of Advances (and subject to Clause 7.2), a period of 14 days, one, two, three, four, five or six months (or such other period as may be agreed between the Banks and the relevant Borrower); 17 (b) in respect of Bills, a period of between 7 days and 187 days, which will begin on the proposed Utilisation Date and end on a business day which is or precedes the Termination Date; and (vi) the account to which the proceeds of the proposed Utilisation are to be paid. 6.3 If and whenever, on the occasion of a Utilisation, the Banks are required to make Advances or accept Bills pursuant to the foregoing Clauses of this Clause 6, the aggregate principal Sterling Amount of the Advances to be so made or, as the case may be, the aggregate face amount of the Bills to be so accepted shall be allocated to, and apportioned among, the Banks rateably to their respective Available Commitments for such Utilisation. 6.4 Save as otherwise provided herein, any Borrower may from time to time request the making of a Dollar Swing-Line Advance or a Sterling Swing-Line Advance under the Facility by delivering to the Facility Agent (with a copy to the Dollar Swing-Line Agent or, as the case may be, the Sterling Swing-Line Agent) a duly completed Utilisation Request therefor by no later than the specified time. 6.5 Each Utilisation Request delivered pursuant to Clause 6.4 shall be irrevocable and shall specify: (i) whether the Utilisation is to be by means of Dollar Swing-Line Advances or Sterling Swing-Line Advances; (ii) the proposed Utilisation Date which shall be a business day; (iii) the Requested Amount (a) the Sterling Amount of which shall be an amount which does not exceed the Available Swing-Line Facility for such Utilisation and (b) which shall be a minimum of Pounds 10,000,000 (or, in the case of a Dollar Swing-Line Advance, $10,000,000) and an integral multiple of Pounds 1,000,000 (or, in the case of a Dollar Swing-Line Advance, $1,000,000) (or, in each case, such other integral multiple as PLC and the Facility Agent may agree); (iv) the Term (which shall not exceed 7 days and which shall begin on the proposed Utilisation Date and end on a business day which is or which precedes the Termination Date); and (v) the account to which the proceeds of the proposed Utilisation are to be paid. 6.6 In respect of each Utilisation by means of Dollar Swing-Line Advances, each Swing-Line Bank shall (subject as provided in Clause 13), no later than the specified time on the Utilisation Date relating thereto: (i) through its Facility Office make, or procure to be made, its Dollar Swing-Line Advance available to the Dollar Swing-Line Agent in accordance with Clause 6.8; and 18 (ii) advise the Dollar Swing-Line Agent by telephone or telex of the Federal Reserve Bank wire number effecting the transfer required by (i) above. 6.7 In respect of each Utilisation by means of Sterling Swing-Line Advances, each Swing-Line Bank shall (subject as provided in Clause 13), no later than the specified time on the Utilisation Date relating thereto through its Facility Office make, or procure to be made, its Sterling Swing-Line Advance available to the Sterling Swing-Line Agent in accordance with Clause 6.8. 6.8 Each Swing-Line Bank will participate through its Facility Office in each Swing-Line Advance made pursuant to this Clause 6 in the proportion borne by its Available Swing-Line Commitment to the Available Swing-Line Facility immediately prior to making the Swing-Line Advance. 6.9 Each Bank shall in respect of any Utilisation hereunder, subject to the terms hereof, be obliged, through its Facility Office, to make an Advance or, subject to Clause 7, accept a Bill on the proposed Utilisation Date in a principal amount or, as the case may be, a face amount equal to the amount allocated to it pursuant to this Clause 6. 6.10 The Facility Agent in the case of Advances (other than Swing-Line Advances) and Bills, the Dollar Swing-Line Agent in the case of Dollar Swing-Line Advances and the Sterling Swing-Line Agent in the case of Sterling Swing-Line Advances, shall not later than the specified time notify each Bank of the principal amount or, as the case may be, the face amount allocated to it pursuant to this Clause 6. 6.11 If a Bank has been notified pursuant to Clause 6.10 that it is to accept Bills, it may, no later than the specified time, notify the Facility Agent that it does not wish the Facility Agent to arrange for the discounting of the Bills in question. 6.12 If a Bank's Commitment or Swing-Line Commitment is reduced, in accordance with the terms hereof, after the Facility Agent has received a Utilisation Request or made an allocation hereunder then such part of the proposed Utilisation as is attributable to that Bank and exceeds its Available Commitment or, as the case may be, its Available Swing-Line Commitment, (as so reduced) shall not be made and the amount of such Utilisation shall be reduced accordingly. 7. ADVANCES OPTION IN LIEU OF BILLS 7.1 Notwithstanding that any Borrower has in any Utilisation Request delivered pursuant to Clause 6 made a request for a Utilisation by means of Bills, any Bank may by no later than the specified time notify the Facility Agent by telephone (to be confirmed no later than the specified time by telex, telefax or letter) that it is unable to accept such Bills by virtue of any Bank of England restriction relating to the acceptance of bills of exchange placed on it and, as a result, wishes to elect to make an Advance instead, in which case it shall, if it would otherwise be required to accept Bills pursuant to Clause 9, not be obliged to do so, but instead be required to make an Advance (other than a Swing-Line Advance) in accordance with Clause 7.2. If the Facility Agent is not so notified by any Bank by the specified time then such Bank shall (and the Facility Agent may assume that it shall), if required to do so under Clause 9, be obliged to accept Bills in respect of the Utilisation in question. 19 7.2 A Bank required to make an Advance under Clause 7.1 shall make such Advance in an amount equal to the aggregate face amount of the Bills which it would, except for Clause 7.1, be required to accept hereunder and having a Term equal to the Tenor of such Bills. 8. COMPETITIVE BID OPTION 8.1 In addition to Advances and Bills requested under Clause 6.1, a Borrower (being in the case of a Utilisation by means of Competitive Bills, incorporated in the United Kingdom) may, as set forth in this Clause 8 request the Banks to make offers to make Competitive Advances or to accept Competitive Bills. The Banks may, but shall have no obligation to, make such offers, and the relevant Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in the following provisions of this Clause 8 (and may, by notice to the Banks through the Facility Agent given by the specified time as provided in Clause 8.9, require the Banks to make Advances and/or accept Bills in lieu of any Competitive Advances or Competitive Bills requested). 8.2 If a Borrower wishes to request offers to make Competitive Advances or to accept Competitive Bills under this Clause 8, it shall deliver a Competitive Bid Request to the Facility Agent, to be received by the Facility Agent no later than the specified time, specifying: (i) whether the request relates to Competitive Advances or Competitive Bills; (ii) the proposed Utilisation Date, which shall be a business day; (iii) in the case of a request relating to Competitive Advances, the currency of denomination of the proposed Competitive Advances, which shall be sterling or an Optional Currency; (iv) the Indicative Amount which shall be: (a) in the case of Competitive Advances denominated in sterling or Bills, an amount which does not exceed the Available Facility for such Utilisation and which, if less than the Available Facility for such Utilisation is a minimum amount of Pounds 10,000,000 and an integral multiple of Pounds 1,000,000 (or such other integral multiple as PLC and the Facility Agent may agree); and (b) in the case of a Utilisation by means of Competitive Advances denominated in an Optional Currency, an amount in such Optional Currency the Sterling Amount of which does not exceed the Available Facility for such Utilisation, and which, if the Sterling Amount is less than the Available Facility for such Utilisation, is in a minimum Sterling Amount of Pounds 10,000,000 and is an integral multiple of 1,000,000 of the largest currency unit of such Optional Currency (or such other integral multiple as PLC and the Facility Agent may agree); and 20 (v) the Term or Tenor in question being: (a) in respect of Competitive Advances, a period of 14 days, one, two, three, four, five or six months or such other period as may be required; and (b) in respect of Competitive Bills, a period of between 7 days and 187 days; which will begin on the proposed Utilisation Date and end on a business day which is or which precedes the Termination Date. 8.3 Promptly after its receipt of a Competitive Bid Request conforming to the requirements of Clause 8.2 (but, in any event, no later than the specified time) the Facility Agent shall send to each of the Banks an Invitation for Competitive Bids which shall constitute an invitation by the relevant Borrower to each such Bank to bid, on the terms and conditions of this Agreement, to make Competitive Advances or, as the case may be, accept Competitive Bills pursuant to the Competitive Bid Request. 8.4 Each Bank may submit a Competitive Bid containing an offer to make Competitive Advances or, as the case may be, accept Competitive Bills in response to such Invitation for Competitive Bids. Each Competitive Bid must comply with the requirements of this Clause 8.4 and must be submitted to the Facility Agent not later than the specified time PROVIDED that any Competitive Bid submitted by the Facility Agent in its capacity as a Bank may only be submitted if the Facility Agent notifies the relevant Borrower of the terms of the offer contained therein not later than the close of business on the business day preceding the deadline for the other Banks. A Competitive Bid submitted by a Bank pursuant to this Clause 8.4 shall be irrevocable and shall specify:- (i) the date of the proposed Utilisation; (ii) the aggregate principal amount of the Competitive Advances or, as the case may be, Competitive Bills for which such offer is being made, which principal amount (a) may be an amount the Sterling Amount of which is greater than the Available Commitment of the bidding Bank but may not be greater than the Indicative Amount and (b) must be in a minimum principal amount of Pounds 1,000,000 or a multiple of Pounds 1,000,000 in excess thereof (or, in the case of a Utilisation by means of Competitive Advances denominated in an Optional Currency, must be in a minimum Sterling Amount of Pounds 1,000,000 and be an integral multiple of 1,000,000 of the largest currency unit of such Optional Currency (or such other integral multiple as PLC and the Facility Agent may agree)); (iii) the Competitive Bid Rate offered for the relevant Competitive Advance or Competitive Bills; and (iv) the identity of the bidding Bank. 26 8.5 The Facility Agent shall promptly (and, in any event, by no later than the specified time) notify the relevant Borrower, by telephone (confirmed by telefax), whether or not any Competitive Bids have been received and of all of the valid Competitive Bids (if any) made in response to such Invitation for Competitive Bids (excluding any bids disregarded by reason of not complying with Clause 8.4), listing the Competitive Bid Rate and the principal amount of each Competitive Advance or, as the case may be, the Competitive Bid Rate and the face amount of each Competitive Bill in respect of which a Competitive Bid was made and the identity of the Bank that made each bid. 8.6 The relevant Borrower shall at its sole discretion and after it has received the information referred to in Clause 8.5 notify the Facility Agent no later than the specified time by telephone confirmed immediately thereafter by telefax in the form of a Competitive Bid Utilisation Confirmation Letter, whether or not it wishes to proceed with a Utilisation in respect of the relevant Competitive Bid Request and if so the Requested Amount thereof provided that: (i) if the relevant Borrower fails to give such notice by the specified time it shall be deemed to have elected not to proceed with a Utilisation in respect of the relevant Competitive Bid Request and to have rejected all the bids referred to in Clause 8.5; and (ii) the Requested Amount specified in any Competitive Bid Utilisation Confirmation Letter shall be an amount which complies with the requirements of Clause 8.2(iv) and may not exceed the Indicative Amount specified in the relevant Competitive Bid Request. A notice given by a Borrower pursuant to this Clause 8.6 shall be irrevocable. 8.7 After receipt of a Competitive Bid Utilisation Confirmation Letter indicating that the relevant Borrower wishes to proceed with a Utilisation in respect of the relevant Competitive Bid Request, Competitive Bids (if any) made by the Banks whose Competitive Bid Rates are less than or equal to the Applicable Margin or, as the case may be, the Acceptance Commission Rate shall be accepted by the Facility Agent on behalf of the relevant Borrower in ascending order of the Competitive Bid Rates bid for the Competitive Bills or Competitive Advances (as the case may be) the subject of the relevant Competitive Bid Request up to an aggregate amount equal to the Requested Amount specified in the relevant Competitive Bid Utilisation Confirmation Letter Provided that: (i) if there is a Competitive Bid which would not on this basis be accepted in full then such Competitive Bid shall be partially accepted in an amount which when aggregated with the amount of all other Competitive Bids accepted is equal to the Requested Amount or, where such partially accepted Competitive Bid relates to Competitive Bills, in such other amount as the Facility Agent considers necessary to ensure that the face amount of each such Competitive Bill is not less than Pounds 250,000 (or such lesser amount as PLC and the Facility Agent may agree), an integral multiple of Pounds 50,000 (or such other amount as PLC and the Facility Agent may agree) and does not exceed Pounds 1,000,000; or (ii) if there are two or more Competitive Bids with the same Competitive Bid Rates which would not on this basis be accepted in full then each such Competitive Bid 22 shall be partially accepted by the Facility Agent on behalf of the relevant Borrower in the proportion which the Competitive Bid in question bears to the aggregate of such Competitive Bids and, where such partially accepted Competitive Bids relate to Competitive Bills, with such rounding upwards or downwards as the Facility Agent considers necessary in order to ensure that the face amount of each Competitive Bill is not less than Pounds 250,000 (or such other amount as PLC and the Facility Agent may agree), an integral multiple of Pounds 50,000 (or such other amount as PLC and the Facility Agent may agree) and does not exceed Pounds 1,000,000. 8.8 The Facility Agent shall promptly (and, in any event, by no later than the specified time) notify each bidding Bank whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate), and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Advance or, as the case may be, to accept the Competitive Bills in respect of which its bid has been accepted. 8.9 In the event that no Competitive Bids are accepted under Clause 8.7 or the aggregate amount of the Competitive Bids accepted under Clause 8.7 is less than the Requested Amount specified in such Competitive Bid Utilisation Confirmation Letter, such Competitive Bid Utilisation Confirmation Letter shall automatically and without the requirement for any further action by the relevant Borrower be deemed to constitute a Utilisation Request made by the relevant Borrower requiring the Banks to make Advances or, as the case may be, to accept Bills (with the same Utilisation Date, currency and Term or Tenor as specified in the relevant Competitive Bid Request) in an aggregate amount equal to the shortfall between such Requested Amount and the aggregate of the principal or face amounts of the Competitive Advances or, as the case may be, the Competitive Bills in respect of which Competitive Bids have been accepted under Clause 8.7 (or, in such lesser amount in the case of Bills, as the Facility Agent considers necessary to ensure that the face amount of each such Bill is not less than Pounds 250,000 (or such lesser amounts as PLC and the Facility Agent may agree), an integral multiple of Pounds 50,000 (or such other amount as PLC and the Facility Agent may agree) and does not exceed Pounds 1,000,000). Such a Utilisation Request shall be treated as if it were delivered in accordance with the provisions of Clause 6.1 and the making of such Advances or the acceptance of such Bills (as the case may be) shall accordingly proceed as provided for in Clause 6 provided that the provisions of Clause 6.2(iv) relating to minimum amounts and integral multiples shall not apply thereto. 23 PART 4 THE BILLS 9. ACCEPTANCE AND DISCOUNT OF BILLS 9.1 If the Facility Agent notifies any Bank in accordance with Clause 6.10 or Clause 8.8 that it is to accept any Bills (and such Bank does not elect to make an Advance pursuant to Clause 7), the Facility Agent shall, by the specified time, deliver to such Bank Bills in the requisite amount duly drawn by the Borrower whose Bills are to be accepted and duly completed on behalf of such Borrower in accordance with Clause 11. Such Bank shall endorse and accept such Bills and shall, subject to Clause 9.4, return the same to the Facility Agent (or, if so specified by the Facility Agent, to the Facility Agent's account with the Central Moneymarkets Office) at such Bank's own risk by the specified time. 9.2 If on the proposed Utilisation Date relating to any Bills: (i) sterling bills of exchange drawn on and accepted by Eligible Banks can then be discounted in the London Discount Market; (ii) the Facility Agent has been able to determine the Eligible Bill Discount Rate applicable thereto or, if applicable, an alternative basis rate in substitution therefor pursuant to Clause 21.1(c); (iii) no Event of Default or Potential Event of Default has occurred which has not been remedied or waived pursuant to Clause 45; (iv) the representations set out in Clause 22 are true on and as of such Utilisation Date; and (v) the proposed Utilisation would not result in there being Advances and Bills outstanding which have been made or accepted pursuant to fifteen (15) or more Utilisations under the Facility, the Facility Agent shall, subject to Clauses 9.3 and 9.4, either offer such Bills for discount in the London Discount Market at the Eligible Bill Discount Rate for such Utilisation Date or, at the Facility Agent's discretion, elect, no later than the specified time, to purchase all or any of such Bills as principal for an amount equal to the amount which it would have received had it arranged for the discounting of such Bills at such Eligible Bill Discount Rate. The Facility Agent will notify such Eligible Bill Discount Rate by no later than the specified time to the Borrower whose Bills are being accepted and each Bank which is to discount Bills pursuant to Clause 9.3 or 9.4. If, on any proposed Utilisation Date, the conditions set forth in Clause 9.2(i) to (v) have not been complied with, then the proposed Utilisation shall not be made and any Bills accepted by the Banks in respect of such proposed Utilisation shall be cancelled and the respective obligations of the parties in relation thereto shall be terminated. 24 9.3 If, on any occasion, the Facility Agent does not exercise its discretion to purchase any or all of the Bills accepted by any Bank and it is unable to arrange for such Bills to be discounted in the London Discount Market at the Eligible Bill Discount Rate, it shall promptly notify such Bank to such effect and with an accompanying notice to such Bank, it will instruct the Central Moneymarkets Office at the Bank of England to transfer such Bills to the account of such Bank or such Bank's agent and return such Bills to such Bank, whereupon: (i) such Bank shall itself discount or arrange for the discounting of such Bills and such Bills shall be deemed to have been so discounted at the Eligible Bill Discount Rate notified by the Facility Agent pursuant to Clause 9.2 (whether or not such Bank is able so to discount such Bills); and (ii) such Bank shall, in relation to such Bills, pay to the Facility Agent on the relevant Utilisation Date an amount equal to the amount which the Facility Agent would have received had the Facility Agent itself arranged for the discounting of such Bills at such rate (but after deducting and retaining for its own account all acceptance commission payable by the relevant Borrower to such Bank pursuant to Clause 10). 9.4 If, on any occasion, a Bank has specified in a notice given by it to the Facility Agent pursuant to Clause 6.11 that it does not wish the Facility Agent to arrange for the discounting of the Bills in question, such Bank shall not return such Bills to the Facility Agent in accordance with Clause 9.1 and, if the conditions set forth in Clause 9.2(i) to (v) have been complied with: (i) such Bills shall be deemed to have been so discounted at the Eligible Bill Discount Rate notified pursuant to Clause 9.2 (whether or not such Bank is able so to discount such Bills); and (ii) such Bank shall, in relation to such Bills, pay to the Facility Agent on the relevant Utilisation Date an amount equal to the amount which the Facility Agent would have received had the Facility Agent itself arranged for the discounting of such Bills at such Eligible Bill Discount Rate (but after deducting and retaining for its own account all acceptance commission payable by the relevant Borrower to the Facility Agent for the account of such Bank pursuant to Clause 10). 9.5 The Facility Agent will account to the relevant Borrower for all proceeds of deemed discounting or discounting received by it pursuant to Clauses 9.2, 9.3 and 9.4 and, if applicable, the purchase price payable by the Facility Agent as principal pursuant to Clause 9.2 but after deducting and paying to the Banks the acceptance commission payable to them pursuant to Clause 10 (to the extent not already deducted and retained by them pursuant to Clause 9.3 or Clause 9.4). 10. ACCEPTANCE COMMISSION The relevant Borrower whose Bills are accepted hereunder shall be obliged, on the day such Bills are accepted, to pay to the Facility Agent for the account of each Bank which accepts its Bills under Clause 9.1 an acceptance commission in sterling at the Acceptance Commission Rate on the face amount thereof and for the Tenor thereof. 25 11. THE BILLS 11.1 The relevant Borrower shall ensure upon delivery of any Utilisation Request for a Utilisation by means of Bills that the Facility Agent has a sufficient stock of blank unsigned Bills to enable it to proceed with such Utilisation. Such Borrower shall also, prior to delivery by it of its first Utilisation Request for Bills, provide the Facility Agent with a power of attorney in the form of the Twelfth Schedule or in such other form as the Facility Agent may require authorising the Facility Agent to prepare, complete and sign Bills consistently with any proposed Utilisation (subject as provided herein) and on such Borrower's behalf to present the same to the Banks for acceptance. 11.2 Each Bill supplied to the Facility Agent by the relevant Borrower for the purpose set out in Clause 11.1 shall: (i) be claused in such manner as to comply with the Bank of England's requirements for Eligible Bills current at the time; (ii) be undated; and (iii) have the maturity date, amount and drawee left blank. 11.3 The Facility Agent shall (i) prepare and complete Bills on behalf of the relevant Borrower by (a) dating such Bills with the issue and maturity dates, (b) signing such Bills on behalf of such Borrower, (c) inserting the name of the relevant Bank as drawee and (d) inserting the face amount of each Bill in a manner consistent with allocations under Clause 6 or Clause 8, as the case may be, and (ii) deliver the same to Banks for acceptance Provided that the face amount of each Bill shall not exceed Pounds 1,000,000. 11.4 The relevant Borrower shall give to the Facility Agent and each Bank which has accepted a Bill on its request such information relating to the underlying trade transaction to which such Bill relates as the Facility Agent or such Bank, through the Facility Agent, may reasonably request to confirm that such Bill is an Eligible Bill. 11.5 The Facility Agent hereby agrees:- (i) only to prepare, complete and sign the Bills in accordance with Clause 11.3; and (ii) to indemnify each Borrower and hold it harmless against all or any proceedings, actions, claims and demands which may be brought or made against such Borrower and all losses, costs, charges, damages and expenses which such Borrower may incur or sustain or for which such Borrower may become liable by reason of the completion by the Facility Agent of Bills otherwise than in accordance with Clause 11.3. 26 12. PAYMENT OF BILLS On the Maturity Date of each Bill the Borrower which drew such Bill shall pay to the Facility Agent, for account of the Bank which accepted such Bill, an amount in sterling equal to the face amount of such Bill. 27 PART 5 THE ADVANCES 13. MAKING OF ADVANCES 13.1 If any of the Facility Agent, the Dollar Swing-Line Agent or the Sterling Swing-Line Agent notifies any Bank in accordance with Clause 6 or Clause 8.8 that it is to make any Advance (or if any Bank notifies the Facility Agent in accordance with Clause 7 that it wishes to make an Advance), and if on the proposed Utilisation Date relating to such an Advance: (i) the event mentioned in Clause 21.1(i) has not occurred or an alternative basis rate in substitution for LIBOR has been determined pursuant to Clause 21.1(c); (ii) no Event of Default or Potential Event of Default has occurred which has not been remedied or waived pursuant to Clause 45; (iii) the representations set out in Clause 22 are true on and as of such Utilisation Date; (iv) the proposed Utilisation would not result in there being Advances and Bills outstanding which have been made or accepted pursuant to fifteen (15) or more Utilisations under the Facility; and (v) in the case of a Dollar Swing-Line Advance, no other Utilisation Request has been delivered to the Dollar Swing-Line Agent for a Utilisation on that Utilisation Date, then, on such Utilisation Date, such Bank shall, save as otherwise provided herein, make such Advance through its Facility Office to the Borrower that requested such Advance. 13.2 If on the proposed Utilisation Date on which any Advances are to be made to any Borrower by any of the Banks, any Bank does not wish to make an Advance to such Borrower by reason of such Borrower being incorporated in a jurisdiction other than within the United Kingdom where such Borrower would be obliged to make a payment hereunder after making a deduction or withholding for or on account of tax, and where in the reasonable opinion of such Bank it would be unlawful for such Borrower to comply fully with the provisions of Clause 17.1 hereof, such Bank may by no later than 5.00 p.m. on the day prior to the Quotation Date for such Advance notify the Facility Agent by telephone (to be confirmed no later than 9.30 a.m. on the Quotation Date by telex, telefax or letter) that it does not wish to do so, in which case it shall not be obliged to do so, but instead shall be required to make an Advance to PLC in accordance with Clause 13.3. 13.3 A Bank required to make an Advance to PLC under Clause 13.2 shall make such Advance in otherwise identical terms (as to amount, currency and duration), to the Advance to such other Borrower which it would, except for Clause 13.2, be required to make. 28 14. INTEREST 14.1 On the Repayment Date relating to each Advance (and, in the case of an Advance which has a Term in excess of six months, on the expiry of each period of six months during such Term) the Borrower to which such Advance has been made shall pay accrued interest on that Advance. 14.2 The rate of interest applicable to an Advance (other than a Swing-Line Advance) made by a Bank hereunder during the Term of such Advance shall be the rate per annum determined by the Facility Agent to be the sum of: (i) LIBOR for such Advance; (ii) the Applicable Margin; and (iii) if the Advance is to be denominated in sterling, the Associated Costs Rate applicable thereto. 14.3 The rate of interest applicable to a Dollar Swing-Line Advance shall be the rate per annum determined by the Dollar Swing-Line Agent in accordance with this Agreement to be the Dollar Swing-Line Rate from time to time during its Term. 14.4 The rate of interest applicable to a Sterling Swing-Line Advance shall be the rate per annum determined by the Sterling Swing-Line Agent in accordance with this Agreement to be the Sterling Swing-Line Rate from time to time during its Term. 14.5 Each Agent shall promptly notify the relevant Borrower and the relevant Banks of each determination of LIBOR or a Swing-Line Rate made by it pursuant to this Clause 14. 14.6 (i) If any Bank which is actually required to maintain reserves with respect to Eurocurrency Liabilities (as defined in Regulation D of the Board of Governors of the Federal Reserve System, or any successor thereto ("Regulation D") in connection with any Advance, the related Borrower with respect to such Advance shall pay to such Bank additional interest on the unpaid principal amount of such Advance of such Bank from the date of such Advance until such principal amount is paid in full, payable as provided in paragraph (ii) of this Clause 14.6, at an interest rate per annum equal to the excess of (a)(1) LIBOR as calculated in respect of such Advance, divided by (2) 1.00 minus the Reserve Percentage during the Term of such Advance over (b) the rate specified in (a)(1). For the purposes of the preceding sentence, "Reserve Percentage" means, for each day of the Term, that percentage (expressed as a decimal) which is in effect on such day, for determining the maximum reserve requirement for such Bank under Regulation D for Eurocurrency Liabilities. 29 (ii) A certificate of any Bank entitled to payment under paragraph (i) of this Clause 14.6 setting forth such amount as shall be necessary to compensate such Bank in accordance with such Clause and identifying with reasonable specificity the basis for calculating such amount shall be delivered through the Facility Agent to the appropriate Borrower within six months after the last day of the Term of the Advance with respect to which such compensation is requested. Such Borrower shall pay to the Facility Agent for account of such Bank the amount shown as due on such certificate within ten days after such Borrower's receipt thereof Provided however, that such Borrower shall not be obliged to pay any such amount with respect to such Term if such Borrower shall have received such certificate more than six months after the last day of such Term. 15. REPAYMENT AND PREPAYMENT 15.1 Each Borrower shall repay each Advance made to it in full on the Repayment Date relating thereto. 15.2 If: (a) PLC gives notice of cancellation pursuant to Clause 16.3 it may at the same time give notice to the Facility Agent of the intention of the Borrowers to prepay all outstanding Advances made by such Bank together with accrued interest thereon and/or to comply prematurely with their obligations under Clause 12 in respect of all outstanding Bills accepted by such Bank in either case upon such date as may be specified in such notice; or (b) PLC so elects it may at any time give not less than 10 business days' notice to the Facility Agent of the intention of the Borrowers to prepay all outstanding Advances made by the Banks or any part of outstanding Advances made by the Banks together with accrued interest thereon and/or to comply prematurely with their obligations under Clause 12 in respect of all outstanding Bills accepted by the Banks or any part of outstanding Bills accepted by the Banks in each case upon such date as may be specified in such notice Provided that (i) any prepayment of part shall be an amount such that the Sterling Amount of such Advances and/or Bills shall be reduced by a minimum amount of Pounds 10,000,000 and an integral multiple of Pounds 1,000,000 and (ii) any prepayment shall reduce the Outstandings of the Banks rateably. Any such notice shall be irrevocable and shall oblige each Borrower to make the repayments or payments in question on the date specified therein together with all other sums due from it under any of the Finance Documents in respect of the Advances or Bills in question. If a Bank receives an amount pursuant to this Clause 15.2 or Clause 20.1 in relation to a Bill then, on the Maturity Date of such Bill, such Bank shall account to the Borrower which made such payment for an amount equal to interest thereon for the period from and including the date of such payment to but excluding such maturity date at the rate (as determined by such Bank) at which it pays interest to its corporate customers for time deposits of comparable term and amount in the relevant currency. 30 PART 6 CANCELLATION 16. CANCELLATION 16.1 PLC may, by giving to the Facility Agent (copied to the Dollar Swing-Line Agent and the Sterling Swing-Line Agent) not less than ten (10) days' prior notice to that effect, cancel the whole or any part (if part, being a minimum amount of Pounds 10,000,000 and integral multiple of Pounds 1,000,000) of the Available Facility. Any such cancellation shall reduce the Available Commitment and Available Swing-Line Commitment of each Bank in the proportion which its Commitment bears to the Total Commitments. 16.2 Any notice of cancellation given by PLC pursuant to Clause 16.1 shall be irrevocable and shall specify the date upon which such cancellation is to be made and the amount of such cancellation. 16.3 If (i) by reason of (a) any change after the date hereof in law (including any modification or revocation of an applicable tax treaty) or in its interpretation or administration and/or (b) compliance with any request from or requirement of any central bank or other fiscal, monetary or other authority which is of a general nature and compliance with which is in accordance with the reasonable practice of banks to which it applies and which request or requirement is made, imposed, renewed or modified at any time after the date hereof (including, without limitation, a change, request or requirement which affects the manner in which a Bank allocates capital resources to underwriting commitments in compliance with any such change, request or requirement):- (1) the amount of any payment to be made to or for the account of any Bank by any Borrower is increased under Clause 17.1; or (2) it becomes apparent that any such payment will be required to be so increased; or (ii) any representation made by a Bank pursuant to Clause 17.7 is untrue; or would at any time, if it were to be repeated at such time, be untrue; or (iii) any Bank claims indemnification from any Borrower under Clauses 17.8 or 19.1, then PLC may, within sixty days thereafter and by not less than ten (10) days' prior written notice to the Facility Agent, cancel such Bank's Available Commitment whereupon such Bank shall cease to be obliged to accept any further Bills or to make Advances hereunder and its Available Commitment shall be reduced to zero. 31 PART 7 CHANGES IN CIRCUMSTANCES 17. TAXES 17.1 All payments to be made by any of the Borrowers to any person hereunder shall be made free and clear of and without deduction for or on account of tax unless such Borrower is required to make such a payment subject to the deduction or withholding of tax, in which case (subject only to Clauses 17.2, 17.6 and 19.3) the sum payable by such Borrower in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of the required deduction or withholding, such person receives and retains (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or required to be made. If, on behalf of the relevant Borrower, the Facility Agent or any Bank pays any amount in respect of any tax which the relevant Borrower has agreed to pay pursuant to this Clause 17.1, the relevant Borrower shall reimburse the Facility Agent or such Bank (as the case may be) for such payment on demand. 17.2 No Borrower resident in the United Kingdom for United Kingdom tax purposes shall be obliged to make any additional payment pursuant to Clause 17.1 to any Bank if the obligation to make such an additional payment has arisen (i) by reason of such Bank (acting through a Facility Office for the purpose of Utilisations by that Borrower) not being a Qualifying Bank otherwise than by reason of any change in any law or regulation or in its interpretation or administration or any change in any extra-statutory or Inland Revenue concession or (ii) by reason of the failure by such Bank to bring into account payments of interest made to that Facility Office by such Borrower as trading receipts of a bona fide banking business carried on by such Bank in the United Kingdom. 17.3 Each Bank that is not a US Person (as such term is defined in Section 7701(a) (30) of the United States Internal Revenue Code of 1986, as amended) shall submit to PLC, within 60 days of becoming a party to this Agreement (but in no event later than the earliest date on which payments are to be made to such Bank under this Agreement by a Borrower organised in or under the laws of the United States of America), two duly completed and signed copies of either US Internal Revenue Service Form 1001, entitling it to complete exemption from withholding (or such reduced rate of withholding as may be available to it) on all amounts to be received by such Bank hereunder from any Borrower that is organised in the United States of America, or US Internal Revenue Service Form 4224 entitling it to complete exemption from withholding on all amounts to be received by such Bank hereunder from any such Borrower. Thereafter and from time to time, each such Bank shall submit to PLC such additional duly completed and signed copies of one or the other of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may be notified by PLC to such Bank and required under then current United States law or regulations to avoid or reduce United States withholding taxes on payments in respect of all amounts to be received by such Bank hereunder. Within 60 days after becoming a party to this Agreement (but in no event later than the earliest date on which payments are to be made to such Bank under this Agreement by a Borrower organised in or under the laws of the United States of America), each Bank that is a US Person (as such term is defined in Section 7701(a)(30) of the United States Internal Revenue Code of 1986, as amended) shall submit to PLC a certificate to the effect that it is such a 32 US Person. Notwithstanding the foregoing, no Bank shall be required to submit any such forms or certificates if such Bank is not allowed validly to file any of such forms or certificates and has taken reasonable steps to obtain such United States withholding tax exemption (if any) as is available to it in the circumstances. 17.4 Each Bank shall use reasonable endeavours to enable any Borrower to make payments hereunder without withholding or deduction for or on account of tax (such action to include the giving of any direction or certificate as may be required by the Facility Agent to enable it to effect any payment without such withholding or deduction) except that nothing herein shall oblige any Bank to take any action which within the sole opinion of such Bank is prejudicial to its interests. 17.5 If any Bank determines, as a result of any change in any law, regulation or treaty or in its official application or interpretation, that it is unable to submit to PLC any form or certificate that such Bank is obliged to submit pursuant to Clause 17.3, or that such Bank is required to withdraw or cancel any such form or certificate previously submitted, such Bank shall promptly notify PLC of such fact. 17.6 No Borrower that is organised in the United States of America shall be obliged to make any additional payment pursuant to Clause 17.1 to any Bank (i) to the extent that such obligation existed on the date hereof, (ii) to the extent that any Bank has failed to provide the forms or certificates, as the case may be, described in Clause 17.3 (except where such Bank is not allowed validly to file any of such forms or certificates, and has taken reasonable steps to obtain such United States withholding tax exemption (if any) as is available to it in the circumstances), or (iii) if any amount of interest payable to it under this Agreement is not beneficially owned by it, in each case for a reason that is not related to a change in United States federal income tax law, including any regulations, amendments thereto, or official interpretation thereof, any modification or revocation of an applicable tax treaty or any change in the official position regarding the application or interpretation thereof, occurring after the date hereof. No such Borrower shall be obligated to make any additional payment pursuant to Clause 17.1 to any Bank that is organised in the United States of America or any political subdivision or taxing authority thereof or therein. 17.7 Each Bank represents to each Borrower resident in the United Kingdom for tax purposes that, as at the date hereof, such Bank is, acting through its Facility Office for the purpose of Utilisations (other than by way of Dollar Swing-Line Advances) by that Borrower, a Qualifying Bank and that it presently intends that all amounts of interest payable to that Facility Office under this Agreement by that Borrower will be brought into account as a trading receipt of a bona fide banking business carried on by it in the United Kingdom. Each Bank undertakes that it will, as soon as reasonably practicable after it becomes aware of the same, inform PLC if such representation was untrue at the time it was made or if it ceases to be a Qualifying Bank at any time after the date hereof. 17.8 Without prejudice to the provisions of Clause 17.1 but subject to the provisions of Clause 19.3, if any Bank or any Agent on its behalf is required by law or otherwise to make any payment on account of tax on or in relation to any sum received or receivable hereunder by such Bank or an Agent on its behalf (including, without limitation, any sum received or receivable under this Clause 17) or any liability in respect of any such payment is imposed, levied or assessed against such Bank or the Facility Agent on its behalf, it shall deliver to PLC through the Facility Agent a certificate to that effect setting out in reasonable detail the basis and computation of such claim. PLC 33 will, upon demand of the Facility Agent (made by it promptly after delivery by it to PLC of such certificate) promptly indemnify such Bank or Agent (as the case may be) against such payment or liability, together with any interest, penalties and expenses payable or incurred in connection therewith. 18. TAX RECEIPTS AND TAX CREDITS 18.1 If, at any time, any of the Borrowers is required by law to make any deduction or withholding from any sum payable by it hereunder (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), such Borrower shall promptly notify the Facility Agent of such requirement. 18.2 If any of the Borrowers makes any payment hereunder in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and promptly (if such is obtainable) shall deliver to the Facility Agent for each Bank an original receipt (or a certified copy thereof) evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of that Bank's share of such payment. 18.3 If any Borrower makes a payment under Clause 17.1 for account of any person and such person, in its sole opinion, determines that it has received or been granted a credit against or relief or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, such person shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to such Borrower such amount as such person shall, in its sole opinion, have determined to be attributable to such deduction or withholding and which will leave such person (after such payment) in no better or worse position that it would have been in if such Borrower had not been required to make such deduction or withholding. Any payment made by a person under this Clause 18.3 shall be conclusive evidence of the amount due to such Borrower hereunder and shall be accepted by such Borrower in full and final settlement of its rights of reimbursement hereunder in respect of the relevant deduction or withholding. Nothing herein contained shall interfere with the right of a person to arrange its tax affairs in whatever manner it thinks fit nor oblige any person to disclose any information relating to its tax affairs or any computations in respect hereof. 19. INCREASED COSTS 19.1 Subject to Clause 19.3 if, by reason of (i) any change after the date hereof in law or in its interpretation or administration and/or (ii) compliance with any request from or requirement of any central bank or other fiscal, monetary or other authority which is of a general nature and compliance with which is in accordance with the reasonable practice of banks to which it applies and which request or requirement is made, imposed, reviewed or modified at any time after the date hereof (including, without limitation, a change, request or requirement which affects the manner in which a Bank is required to or does maintain capital resources to underwriting commitments in compliance with any such change, request or requirement): (a) a Bank suffers a cost (including, without limitation, the cost of complying with any reserve, special deposit, liquidity, cash ratio or other requirement) as a result of its 34 having entered into and/or performing its obligations under this Agreement and/or maintaining its Commitment hereunder and/or its accepting one or more Bills and/or its having outstanding to it one or more Advances or unpaid sums hereunder; (b) a Bank suffers a reduction in the rate of return on its overall capital as a result of a change in the manner in which such Bank is required to allocate resources to its obligations hereunder; (c) there is any increase in the cost to a Bank of funding or maintaining all or any of the advances comprised in a class of advances formed by or including the Advances made or to be made by such Bank hereunder; (d) a Bank becomes liable to make any payment on or calculated by reference to the amount of any acceptances made or to be made by it hereunder and/or any Advances or unpaid sums owed to it and/or to any sum received or receivable by it hereunder, then and in any such event, PLC shall, from time to time within ten (10) days of receipt by it of a demand by the Facility Agent, pay to the Facility Agent for the account of that Bank amounts sufficient to indemnify that Bank against, as the case may be: (i) such cost (or such proportion of such cost as is in the reasonable opinion of such Bank attributable to this Agreement); (ii) such proportion of such reduction as is in the reasonable opinion of such Bank attributable to this Agreement; (iii) such increased cost (or such proportion of such increased cost as is in the reasonable opinion of that Bank attributable to its funding or maintaining such Advances or unpaid sums hereunder); or (iv) such liability, Provided that any such demand by the Facility Agent shall not be made more than six months after such cost, reduction, increased cost or liability in respect of which such claim is made is actually suffered by such Bank. 19.2 A Bank intending to make a claim pursuant to Clause 19.1 shall notify the Facility Agent of the event by reason of which it is entitled to do so setting out in reasonable detail the computation of such claim whereupon the Facility Agent shall notify PLC thereof Provided that nothing herein shall require such Bank to disclose any confidential information relating to the funding of its obligations hereunder or generally. 35 19.3 Clauses 17.1, 17.8 and 19.1 shall not apply to:- (i) any cost or amount included in the Associated Costs Rate or payable pursuant to Clause 14.6; or (ii) any amount attributable to any Bank complying with any law, regulation, treaty or official directive or request (whether or not having the force of law) in existence at the date such Bank first became a party to this Agreement, where such Bank was not in compliance with the same at such date and was required to be in compliance with the same at such date; or (iii) any cost that is a tax based on, or computed by reference to, (a) the overall profit or net income (or any part thereof) of any Bank or the Facility Office through which it is acting, or any tax imposed on branch profits under section 884 of the United States Internal Revenue Code of 1986 or (b) the capital of any Bank. 20. ILLEGALITY AND MITIGATION 20.1 If, at any time, it is unlawful or contrary to any request from, or requirement of, any fiscal, monetary or other authority (which request or requirement is of a general nature and compliance with which is the normal practice of banks to which it applies) for a Bank to make, fund or allow to remain outstanding all or any of the Advances made or to be made by it hereunder or to accept or allow to remain outstanding all or any of the Bills accepted or to be accepted by it hereunder, then that Bank shall, promptly after becoming aware of the same, deliver to PLC through the Facility Agent a certificate to that effect and, unless such illegality is avoided in accordance with Clause 20.2: (i) such Bank shall not thereafter be obliged to make any Advances or to accept any Bills and the amount of its Available Commitment shall be immediately reduced to zero; and (ii) if the Facility Agent on behalf of such Bank so requires, PLC shall procure that the relevant Borrower or Borrowers shall on such date as the Facility Agent shall have specified (being the latest date on which the relevant law requires that the same be repaid): (a) repay each outstanding Advance together with accrued interest thereon and all other amounts owing to such Bank hereunder; and/or (b) comply prematurely with its obligations under Clause 12 in respect of any Bills drawn by it and accepted by such Bank. 20.2 If, in respect of any Bank, circumstances arise which would or would upon the giving of notice result in:- (i) the reduction of its Commitment to zero pursuant to Clause 20.1; (ii) an increase in the amount of any payment to be made to it or for its account pursuant to Clause 17.1; or (iii) a claim for indemnification pursuant to Clauses 17.8 or 19.1, then, without in any way limiting, reducing or otherwise qualifying the obligations of any of the Borrowers under any of the Clauses referred to in (i), (ii) or (iii) above, such Bank shall promptly upon becoming aware of the same notify the Facility Agent thereof and, in consultation with the Facility Agent and PLC take such reasonable steps as may be reasonably open to it to mitigate the effects of such circumstances including the transfer of its Facility Office or the transfer of its rights and obligations hereunder to another financial institution acceptable to PLC and willing to participate in the Facility Provided that such Bank shall be under no obligation to take any such action if, in the reasonable opinion of such Bank, to do so would have an adverse effect upon its (or any part of its) business, operations or financial condition. 21. MARKET DISRUPTION 21.1 If, in relation to any Utilisation: (i) by way of Advances (other than Dollar Swing-Line Advances) the Facility Agent determines that at or about 11.00 a.m. on the Quotation Date in respect of such Advances, LIBOR cannot be determined (by reason of the failure of all the Reference Banks to supply the quotations necessary to make such determination); or (ii) by way of Advances denominated in Hong Kong Dollars, the Facility Agent is notified by a group of Banks whose Commitments together amount to 50% or more of the Total Commitments at or about 11.00 a.m. on the Quotation Date in respect of such Advances that the Screen Rate is materially different to the cost to such Banks of funding such Advances; or (iii) in relation to any Utilisation by way of Bills, the Facility Agent is unable to make any determination of an applicable Eligible Bill Discount Rate, then, notwithstanding the provisions of Clause 13: (a) the Facility Agent shall promptly notify the other parties hereto of such event; (b) such Advances or such Bills (as the case may be) shall not be made or accepted (as the case may be) unless a substitute basis has been agreed pursuant to Clause 21.1(c); and (c) the Facility Agent shall, if so required by PLC, enter into negotiations with PLC in good faith with a view to agreeing an alternative means for determining a basis rate in substitution for LIBOR (in the case of Clause 21.1(i)), the Screen Rate (in the case of Clause 21.1(ii)) or, as the case may be, the Eligible Bill Discount Rate (in the case of Clause 21.1(iii)) for in the future and if such a substitute basis is 37 agreed by PLC the Facility Agent and an Instructing Group, it shall take effect in accordance with its terms. 21.2 If, in relation to any Utilisation by way of Dollar Swing-Line Advances, the Dollar Swing-Line Agent determines that the Federal Funds Rate cannot be determined on the first day of the Term of such Advance, the Dollar Swing-Line Agent shall notify the other parties hereto of that event and each Swing-Line Bank's proportion of such Dollar Swing-Line Advance shall bear interest during its Term at the higher of (i) the Prime Rate and (ii) the rate per annum determined by the Dollar Swing-Line Agent to be the sum of the cost to such Swing-Line Bank of funding such portion of such Dollar Swing-Line Advance from whatever sources it may reasonably select and 0.25 per cent. per annum. 38 PART 8 REPRESENTATIONS, COVENANTS AND EVENTS OF DEFAULT 22. REPRESENTATIONS 22.1 Each of the Borrowers represents that, subject to the same reservations (but not the assumptions) stated in the legal opinions of English and U.S. counsel referred to in the Third Schedule when and as actually delivered: (i) it is duly incorporated and validly existing under the laws of the country in which it is incorporated and has power, and is able lawfully, to execute and deliver each of the Finance Documents to which it is or is to be party and to exercise its rights and perform its obligations thereunder and all corporate or other action required to authorise the execution and delivery of each such Finance Document by it and the performance by it of its obligations thereunder has been duly taken; (ii) each of the Finance Documents to which it is or is to be party constitutes (or will, when completed, executed and delivered in the manner contemplated hereby, constitute) its legal, valid, binding and enforceable obligation; (iii) the execution and delivery by it of the Finance Documents and the performance by it of its obligations thereunder will not: (a) contravene any provisions of any law, statute, decree, rule or regulation to which it or any of its assets or revenues is subject, or of any order, judgment, injunction, decree, resolution, determination or award of any court or other judicial, administrative or other governmental authority or organisation having applicability to it or any of its assets or revenues; (b) violate any provision of its constitutive documents; (c) contravene the provisions of any agreement, indenture, mortgage, deed of trust, bond or other obligation to which it is a party or by which it or any of its assets or revenues may be bound or affected; or (d) oblige it to create any encumbrance other than a Permitted Encumbrance over all or any of its present or future revenues or assets, in circumstances where (in the case of (a) or (c)) such contravention would reasonably be expected to have a material adverse effect on such Borrower's ability to meet its obligations under the Finance Documents to which it is a party; 39 (iv) it has obtained (and there are in full force and effect) all governmental or other authorisations, approvals or consents required by it for the execution and delivery by it of any of the Finance Documents, for the exercise by it of its rights and the observance and performance by it of all of its obligations and duties thereunder and for all other matters and things therein contemplated; (v) no utilisation of the Facility by it will cause any limit or restriction on its borrowing or other powers (whether imposed by law, decree, rule, regulation, agreement, its corporate constitutional documents or otherwise howsoever) or on the right or ability of its directors to exercise any such powers to be exceeded or breached; (vi) no Event of Default or Potential Event of Default has occurred and is continuing; (vii) the Original Financial Statements and (if different) the most recently published annual consolidated financial statements of PLC give a true and fair view of the state of affairs of PLC and the Group as at the dates as of which the same were prepared and, since the date as at which the Original Financial Statements were prepared, there has been no change in the financial condition of the Group taken as a whole as would materially and adversely affect the ability of PLC to meet its payment obligations under the Finance Documents; (viii) no litigation or dispute is current, pending or to its knowledge threatened against it or any of its subsidiaries, or any of their respective assets, which would reasonably be expected to have a material adverse effect upon the ability of PLC to perform its payment obligations under the Finance Documents; and (ix) none of the transactions contemplated in this Agreement (including, without limitation, the borrowings hereunder and the use of the proceeds thereof) will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934 (or any regulations issued pursuant thereto, including, without limitation, Regulations G, U and X of the Board of Governors of the Federal Reserve System). 22.2 Each of the representations contained in Clause 22.1 shall be deemed to be repeated by PLC and the Borrower making the relevant Utilisation on and as of each Utilisation Date by reference to the facts and circumstances then existing. 23. FINANCIAL INFORMATION 23.1 PLC shall: 40 (i) as soon as the same become available, but in any event within 180 days after the end of each of its financial years, deliver to the Facility Agent in sufficient copies for the Facility Agent, the Dollar Swing-Line Agent and the Sterling Swing-Line Agent and the Banks the audited consolidated financial statements of the Group for such financial year; (ii) as soon as the same become available, but in any event within 180 days after the end of each financial year of each Borrower (other than PLC) in respect of which the Facility Agent shall have so requested, deliver to the Facility Agent sufficient copies for the Facility Agent and the Banks of the audited financial statements of such Borrower; (iii) as soon as practicable but in any event within 30 days of the same becoming available deliver to the Facility Agent in sufficient copies for the Facility Agent and the Banks the interim financial statements (whether audited or not and whether consolidated or not) provided by PLC to its shareholders; (iv) supply such other information concerning the business, operations and condition (financial or otherwise) of it and its subsidiaries as the Facility Agent or any Bank, through the Facility Agent, may from time to time reasonably request, but so that all information provided to the Facility Agent or any Bank pursuant to this sub-paragraph (iv) shall be confidential to the Facility Agent and the Banks, their servants and their legal advisers and other consultants and auditors except: (a) to the extent to which disclosure is required by law or any other official directive or request (whether or not having the force of law); (b) where such information is generally available; or (c) where and to the extent that disclosure is necessary in connection with the enforcement, or preservation, of any rights hereunder; and (v) promptly upon receipt of a written request from the Facility Agent confirm to the Facility Agent that during the Tenor of any Bills accepted under the Facility the value of such items as may from time to time be specified in the clausing of Bills pursuant to Clause 11.2 (excluding such goods which were the subject of any other financing arrangement) exceeded the aggregate face amount of such Bills drawn against such items. 23.2 PLC shall ensure that each set of financial statements delivered by it pursuant to Clauses 23.1(i), 23.1(ii) and 23.1(iii) is prepared (subject to Clause 23.3) on the same basis as was used in the preparation of its Original Financial Statements and in accordance with accounting principles generally accepted in the United Kingdom in the case of PLC and the Group or, in relation to any other Borrower, accounting principles generally accepted in the jurisdiction of incorporation of that Borrower. 41 23.3 If, at any time, there is a change in accounting principles generally accepted in the United Kingdom or PLC changes, or PLC's Board of Directors resolves to change, the basis, or one or more of the accounting policies, upon which its audited annual consolidated financial statements are prepared (in circumstances where any such change would have a material effect on such financial statements) or its Accounting Reference Date then: (i) PLC shall promptly notify the Facility Agent of such change or proposed change; (ii) PLC and the Facility Agent shall enter into negotiations in good faith with a view to agreeing: (a) whether or not such change or proposed change might result in any material alteration in the compliance by PLC with the financial ratios set out herein or the determination of which of PLC's subsidiaries is a Principal Subsidiary; (b) if so, any amendments to this Agreement which may be necessary in order to ensure that such change or proposed change does not result in any material alteration in such matters, and, if any such amendments are agreed, they shall take effect and be binding upon the parties hereto in accordance with their terms; and (iii) if within a period of 60 days after such notification PLC and the Facility Agent have failed to reach agreement then: (a) PLC shall procure that within a further period of 60 days its auditors certify to the Facility Agent what changes to the provisions referred to in sub-paragraph (ii) (a) above are, in the opinion of the auditors, necessary to ensure that any test imposed by those provisions (as amended) by reference to the financial statements prepared on the new basis shall be substantially similar (and, in so far as practicable, identical) in effect to the relevant test imposed by the existing provisions by reference to financial statements prepared on the old basis; any change certified by the auditors pursuant to this sub- paragraph (iii) (a) shall, if circumstances permit, consist of an adjustment to the percentage, figure or ratio contained in the relevant test proportionate to the change in the results or financial position disclosed on the new basis compared to those prepared on the old basis; (b) the Banks may, at their own cost, appoint a firm of independent accountants to produce a certificate to the same effect, such certificate to be produced no later than three months after the certificate of PLC's auditors; (c) such amendments shall thereafter be made to this Agreement as may be necessary to reflect: (1) the amendments certified by PLC's auditors; or 42 (2) if a further certificate has been produced pursuant to (b) above and there is a discrepancy between the two certificates, the mid-point between the two certificates; and (d) pending the finalisation of such amendments PLC shall procure that each set of financial statements prepared on the new basis is accompanied by a certificate of its auditors certifying the information necessary to enable the Facility Agent to determine whether, if such financial statements had been prepared on the old basis, the provisions of this Agreement are being complied with and the provisions of this Agreement shall, in such event, be applied by reference to the financial statements prepared on the new basis, Provided that the Facility Agent shall not be entitled to agree any of the matters referred to in (ii) above without the prior consent of all the Banks. 24. FINANCIAL CONDITION PLC shall ensure that, at all times: (i) either Consolidated Net Tangible Worth is equal to or greater than Pounds 250,000,000 or (in the event that Consolidated Net Tangible Worth is less than Pounds 250,000,000) that the ratio of Consolidated Operating Profit to Consolidated Interest is not less than 3:1; and (ii) the ratio of Consolidated Operating Profit to Consolidated Interest is equal to or greater than 2:1. 25. COVENANTS 25.1 PLC shall: (i) comply, and ensure that its subsidiaries comply, with the requirements of all applicable laws, rules, regulations, orders and decrees of any administrative or governmental authority or organisation, non-compliance with which would materially and adversely affect the ability of any Borrower to perform its obligations under any of the Finance Documents; (ii) give to the Facility Agent at least 28 days' prior written notice in reasonable detail of any corporate action or other steps which are intended to be taken by it or its subsidiaries, or of any legal proceedings intended to be taken by it or its subsidiaries, in either case for (a) the liquidation or winding-up or dissolution of any of its Principal Subsidiaries or (b) for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer to any Principal Subsidiary or any of its revenues or assets (other than, in each case, for the purposes of an amalgamation or reconstruction); 43 (iii) promptly inform the Facility Agent of the occurrence of any Event of Default or Potential Event of Default and, upon receipt of a written request to that effect from the Facility Agent, confirm to the Facility Agent that, save as previously notified to the Facility Agent or as notified in such confirmation, no Event of Default or Potential Event of Default has occurred; and (iv) ensure that (save to the extent provided by general law in relation to the rights of creditors generally) at all times the claims of the Banks against each Borrower under each of the Finance Documents rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors. 25.2 PLC shall ensure that no member of the Group shall: (i) create or allow to subsist over all or any of its present or future revenues or assets any encumbrance (other than a Permitted Encumbrance) to secure borrowings which are shown as such in the consolidated balance sheet of PLC included in the latest audited consolidated financial statements of PLC delivered pursuant to Clause 23.1(i) (or, if none, the Original Financial Statements) or which would, if such borrowings remained outstanding at the relevant time, fall to be included in the next such balance sheet Provided, however, that this Clause 25.2(i) shall not apply to any encumbrance with respect to Margin Stock (as such term is defined in Regulation U of the United States Board of Governors of the Federal Reserve System) to the extent such Margin Stock represents more than 25% of the value (determined with reference to the latest audited consolidated financial statements of PLC delivered pursuant to Clause 23.1(i)) or, if none, the Original Financial Statements) of the assets subject to this Clause; (ii) (either in a single transaction or in a series of transactions, whether related or not) sell, convey, transfer or otherwise dispose of the whole or any part of its undertaking or assets, (including any of its subsidiaries) if to do so would cause the sum of the aggregate consideration received in respect of all assets of the Group so disposed of in the then current financial year of PLC and the aggregate net debt (being borrowings, short, medium and long term, less cash and liquid funds) for which the Group ceases at the time of such disposals to be liable as a result of such disposals during such financial year to exceed the higher of (Pounds)500,000,000 or 15% of Consolidated Market Value in respect of such financial year. For the purposes of determining the amount of aggregate net debt attributable to such disposals in any financial year, the Facility Agent may request and PLC, shall if so requested, provide the Facility Agent with the contract of sale entered into by any member of the Group in connection with such disposal or the management accounts of PLC prepared at or around the time of such disposal or such other information or records as may be agreed between the Facility Agent and PLC. This Clause 25.2(ii) shall not apply with respect to sales, conveyances, transfers or other dispositions of Margin Stock (as such term is defined in Regulation U of the United States Board of Governors of the Federal Reserve System) to the extent such Margin Stock represents more than 25% of the value (determined with reference to 44 the then most recent audited consolidated financial statements delivered pursuant to Clause 23.1 or, if none, the Original Financial Statements) of the assets subject to this Clause 25.2(ii) and Provided Further that: (a) neither disposals by members of the Group to other members of the Group nor disposals in the ordinary course of business at market value shall be taken into account in determining if the terms of this Clause 25.2(ii) are breached; and (b) for the purposes of this Clause 25.2(ii), none of the following shall be deemed to be a sale, conveyance, transfer or disposal:- (i) the exchange of assets for assets of a similar nature and of approximately equal value; (ii) the payment of cash howsoever acquired (other than the proceeds of sale falling within Clauses 25.2(ii)(b)(iv) or (v)) by any member of the Group in the ordinary course of business of such member or as consideration or part consideration for the acquisition (whether by way of subscription, purchase, loan or otherwise) of any undertaking or business or part of any undertaking or business or any assets; (iii) the temporary application of funds not immediately required for the purposes of the business of any member of the Group in the purchase of investments and the subsequent sale thereof; (iv) the sale of assets (other than companies or businesses) for cash and the application within a period of one year (or such longer period as the Banks may agree), of a sum approximately equal to the net proceeds less the expenses relating thereto (after taking into account any taxation arising as a consequence of such sale except in so far as this would result in such sum being less than the book value as at 31st December, 1994, or when the asset was first acquired if later, of the assets being sold) in the acquisition of assets of a similar nature or immovable property whether or not to be employed in the same type of business Provided that in the case of a sale of immovable property the end proceeds are reinvested in the acquisition of immovable property of a similar nature; (v) the sale of a company or business for cash and the application within a period of one year (or such longer period as the Banks may agree) of a sum approximately equal to the net proceeds of sale less the expenses relating thereto (after taking into account any taxation as described in Clause 25.2(ii)(b)(iv)) in the acquisition of a company or business of a similar nature thereto; (vi) the sale of shares or securities in bodies corporate in which PLC and/or any of its subsidiaries is interested but which are not subsidiaries of PLC; 45 (vii) the application of the proceeds of an issue of share or loan capital for the purpose for which such issue is intended; (viii) the distribution in a winding up of a subsidiary of any of its assets to minority shareholders in accordance with their rights; (ix) the repayment of any loan; and (x) the payment of dividends in the ordinary course of business. 25.3 For the purposes of determining the shares of Margin Stock, if any, to which Clause 25.2 is not applicable, shares of Margin Stock shall be allocated such that the shares most recently acquired by PLC or any of its subsidiaries are the shares, if any, to which Clause 25.2 is not applicable. 26. EVENTS OF DEFAULT 26.1 Each of the events set out below is an Event of Default (whether or not caused by any reason whatsoever outside the control of PLC, any other Borrower or any other person): (i) any Borrower does not pay for value within four (4) business days of the relevant due date any amount of interest or principal payable by it under any of the Finance Documents at the place and in the currency expressed to be payable; or (ii) any Borrower fails to comply with any other provision of any of the Finance Documents and does not remedy such failure (if capable of remedy within twenty-one (21) days in the opinion of the Facility Agent) within twenty-one (21) days of notice to remedy such failure from the Facility Agent; or (iii) any representation, warranty or statement made, deemed to be made, or repeated under any of the Finance Documents or in any accounts, certificate, notice, instrument, written statement or opinion delivered by any Borrower under any of the Finance Documents or in connection therewith is incorrect in any material adverse respect when made, deemed to be made or repeated; or (iv) either (i) any financial indebtedness in excess of (Pounds)15,000,000 (whether singularly or in aggregate) of members of the Group becomes prematurely due and payable as a result of a default thereunder (and such prepayment or default is not waived by the creditor in respect thereof or a trustee for such creditor) and is not paid by such company or any other person; or (ii) any such financial indebtedness or any sum payable in respect thereof is not paid when due or within any applicable period of grace provided for by agreement prior to the due date for such payment; or (v) PLC, any of its Principal Subsidiaries or any other Borrower: (a) is unable, deemed by applicable statute to be unable or admits its inability to pay its debts as they mature; or 46 (b) makes a general assignment for the benefit of creditors; or (c) becomes insolvent; or (d) files a petition for liquidation or a petition or an answer seeking reorganisation or an arrangement with creditors Provided that this sub-paragraph (d) shall not apply to (1) any reconstruction or amalgamation on terms previously approved by an Instructing Group (such approval not to be unreasonably withheld) or (2) any liquidation of a solvent subsidiary of PLC where the assets are distributed to PLC, any of its Principal Subsidiaries or any other Borrower to the extent of such company's interest therein immediately prior to such liquidation; or (vi) PLC or any of its Principal Subsidiaries or any Borrower applies for or consents to the appointment of a receiver, official manager, administrator, trustee, liquidator or similar officer of itself or of all or a substantial part of its undertaking, assets or revenues (including uncalled capital), or any such receiver, official manager, administrator, trustee, liquidator or similar officer is appointed, or any order is made or resolution passed for the liquidation, winding-up or dissolution of PLC, any of its Principal Subsidiaries or any Borrower Provided that this paragraph (vi) shall not apply to (1) any reconstruction or amalgamation on terms previously approved by any Instructing Group (such approval not to be unreasonably withheld), or (2) any liquidation of a solvent subsidiary of PLC where the assets are distributed to PLC, any of its Principal Subsidiaries or any Borrower to the extent of such company's interest therein immediately prior to such liquidation; or (vii) any distress, execution, attachment, sequestration or other process directly attaches or applies to any asset of PLC, any of its Principal Subsidiaries or any Borrower and remains undischarged and not stayed for a period of twenty-one (21) days; or (viii) anything analogous to or having a substantially similar effect to any of the events specified in paragraphs (v) to (vii) inclusive shall occur under the laws of any applicable jurisdiction; or (ix) except with the prior written consent of an Instructing Group, PLC or any of its Principal Subsidiaries ceases to carry on all or substantially all of its business otherwise than (a) as a result of a transfer of all or any part of its business to PLC or to any other member of the Group which, at the time of such transfer is, or upon such transfer becomes, a Principal Subsidiary or (b) in accordance with the provisions of Clause 25.2(ii); or (x) any authorisation, approval, consent, licence, exemption, filing, registration or notarisation or other requirement necessary to enable any Borrower to comply with any of its obligations under any of the Finance Documents is modified in any manner which could adversely affect the ability of any Borrower or PLC to perform its 47 obligations hereunder, revoked or withheld or does not remain in full force and effect; or (xi) at any time it is unlawful for any Borrower to perform any of its obligations under any of the Finance Documents; or (xii) the authority of PLC or any Principal Subsidiary in the conduct of its business is wholly or substantially curtailed by any seizure or intervention by or on behalf of any authority, Provided that, except in the case of: (1) paragraph (i); or (2) (insofar as such paragraphs apply to PLC) paragraphs (v), (vi), (viii) (insofar as it incorporates paragraphs (v) and (vi)) and (ix), an Instructing Group has determined that such event may have a material adverse effect on the ability of PLC to comply with all or any of its obligations hereunder. 26.2 If an Event of Default occurs, then, and in any such case and at any time thereafter, the Facility Agent may (and, if so instructed by an Instructing Group, shall) by written notice to the Borrowers: (i) declare the Advances to be immediately due and payable (whereupon the same shall become so payable together with accrued interest thereon and any other sums then owed by the relevant Borrower or Borrowers hereunder) or declare the Advances to be due and payable on demand of the Facility Agent; and/or (ii) declare that an amount equal to the aggregate face amount of all outstanding Bills shall become immediately due and payable by the relevant Borrower or Borrowers (whereupon such Borrower or Borrowers shall be obliged to pay such amount to the Facility Agent for the account of the Banks which accepted such Bills forthwith instead of on the dates provided for in Clause 12) or declare that such an amount be due and payable on demand of the Facility Agent; and/or (iii) declare that the Facility shall be cancelled, whereupon the same shall be cancelled and the Commitment of each Bank shall be reduced to zero. 26.3 If, pursuant to Clause 26.2, the Facility Agent declares the Advances and/or the aggregate face amount of the Bills to be due and payable on demand of the Facility Agent, then, and at any time thereafter, the Facility Agent may (and, if so instructed by an Instructing Group, shall) by written notice to the Borrowers: (i) call for repayment of the Advances on such date as it may specify in such notice (whereupon the same shall become due and payable on such date together with accrued interest thereon and any other sums then owed by the relevant Borrower or 48 Borrowers hereunder) or withdraw its declaration with effect from such date as it may specify in such notice; and/or (ii) call for payment of an amount equal to the aggregate face amount of all outstanding Bills on such date as it may specify in such notice (whereupon the same shall become due and payable on such date). 26.4 If, pursuant to Clause 26.2, the Facility Agent declares the Advances to be due and payable on demand of the Agent, the Term in respect of any such Advance shall, if the Facility Agent subsequently demands payment before the scheduled Repayment Date in respect of such Advance, be deemed (except for the purposes of Clause 29.4) to be of such length that it ends on the date that such demand is made. 26.5 If an Event of Default occurs and the Facility Agent has notified the Banks of the occurrence of such Event of Default and within a period of three business days thereafter the relevant Instructing Group shall not have instructed the Facility Agent to take the actions referred to in paragraphs (i) and (ii) of Clause 26.2, the Facility Agent shall thereupon notify the Banks to that effect and, at any time thereafter and so long as the Event of Default in question is continuing, the Facility Agent shall (without prejudice to Clauses 26.2 or 26.3) take the actions referred to in those paragraphs if so instructed by a Bank or group of Banks to whom an amount in excess of 50% of the Outstandings is then due or to become due hereunder. 26.6 If any Bank receives an amount pursuant to Clause 26.3(ii) in relation to a Bill accepted by it, then on the Maturity Date of such Bill such Bank shall pay to the Borrower which made such payment an amount equal to interest thereon for the period from and including the date of such payment to but excluding such Maturity Date at the rate (as determined by such Bank) at which it pays interest to its corporate customers for time deposits of comparable term and amount in the relevant currency. 49 PART 9 GUARANTEE 27. GUARANTEE PLC hereby irrevocably and unconditionally: (i) guarantees to the Agents and the Banks the due and punctual observance and performance of all the terms, conditions and covenants on the part of each Borrower (other than PLC) contained in any of the Finance Documents and agrees to pay on demand to any Agent any and every sum or sums of money which any such Borrower shall at any time be liable to pay to the Agents, the Arrangers and the Banks or any of them under or pursuant to any of the Finance Documents and which are not duly and punctually paid in accordance with the terms thereof; and (ii) agrees as a primary obligation to indemnify the Agents and the Banks from time to time on demand by any Agent from and against any loss incurred by the Agents, the Arrangers and the Banks or any of them as a result of any of the obligations of any Borrower under or pursuant to any of the Finance Documents being or becoming void, voidable, unenforceable or ineffective as against such Borrower for any reason whatsoever, whether or not known to the Agents, the Arrangers and the Banks or any of them or any other person, the amount of such loss being the amount which the person or persons suffering it would otherwise have been entitled to recover from such Borrower. 28. PRESERVATION OF RIGHTS 28.1 The obligations of PLC herein contained shall be in addition to and independent of every other security which the Agents, the Arrangers and the Banks or any of them may at any time hold in respect of any obligations of any Borrower under any of the Finance Documents. 28.2 The obligations of PLC herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever, and in particular but without limitation, shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the obligations of any Borrower under any of the Finance Documents and shall continue in full force and effect until final payment in full of all amounts owing by any Borrower thereunder and total satisfaction of all the Borrowers' actual and contingent obligations thereunder. 28.3 Neither the obligations of PLC herein contained nor the rights, powers and remedies conferred in respect of PLC upon the Agents, the Arrangers and the Banks or any of them by any of the Finance Documents or by law shall be discharged, impaired or otherwise affected by: (i) the winding-up, dissolution, administration or re-organisation of any Borrower or any other person or any change in its status, function, control or ownership; 50 (ii) any of the obligations of any Borrower or any other person under any of the Finance Documents or under any other security taken in respect of any of its obligations thereunder being or becoming illegal, invalid, unenforceable or ineffective in any respect; (iii) time or other indulgence being granted or agreed to be granted to any Borrower in respect of its obligations under any of the Finance Documents or under any such other security; (iv) any amendment to, or any variation, waiver or release of, any obligation of any Borrower under any of the Finance Documents or under any such other security whether pursuant to Clause 45 or otherwise; (v) any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of any Borrower's obligations under any of the Finance Documents; (vi) any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of any Borrower's obligations under any of the Finance Documents; or (vii) any other act, event or omission (including, without limitation, any amendment, waiver, supplement or modification to this Agreement made pursuant to Clause 45) which, but for this Clause 28.3, might operate to discharge, impair or otherwise affect any of the obligations of PLC herein contained or any of the rights, powers or remedies conferred upon the Agents, the Arrangers and the Banks or any of them by this Agreement or by law. 28.4 Any settlement or discharge between PLC and the Agents, the Arrangers and the Banks or any of them shall be conditional upon no security or payment to the Agents, the Arrangers and the Banks or any of them by any Borrower or any other person on behalf of such Borrower being avoided or reduced by virtue of any provisions or enactments relating to bankruptcy, insolvency, liquidation or similar laws of general application for the time being in force and, if any such security or payment is so avoided or reduced, the Agents, the Arrangers and the Banks shall each be entitled to recover the value or amount of such security or payment from PLC subsequently as if such settlement or discharge had not occurred. 28.5 No Agent, Arranger or Bank shall be obliged before exercising any of the rights, powers or remedies conferred upon it in respect of PLC by this Agreement or by law: (i) to make any demand of any Borrower; (ii) to take any action or obtain judgment in any court against any Borrower; (iii) to make or file any claim or proof in a winding-up or dissolution of any Borrower; or 51 (iv) to enforce or seek to enforce any other security taken in respect of any of the obligations of any Borrower under any of the Finance Documents. 28.6 PLC agrees that, so long as any amounts are or may be owed by any Borrower under any of the Finance Documents or any Borrower is under any actual or contingent obligations thereunder, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations hereunder: (i) to be indemnified by any Borrower; and/or (ii) to claim any contribution from any other guarantor of any such Borrower's obligations under any of the Finance Documents; and/or (iii) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Agents, the Arrangers and the Banks under any of the Finance Documents or of any other security taken pursuant to, or in connection with, any of the Finance Documents by all or any of the Agents, the Arrangers and the Banks. 52 PART 10 DEFAULT INTEREST AND INDEMNITY 29. DEFAULT INTEREST AND INDEMNITY 29.1 If any sum due and payable by any of the Borrowers under any of the Finance Documents is not paid on the due date therefor in accordance with the provisions of Clause 31 or if any sum due and payable by any of the Borrowers under any judgment of any court in connection herewith is not paid on the date of such judgment, the period beginning on such due date or, as the case may be, the date of such judgment and ending on the date upon which the obligation of such Borrower to pay such sum (the balance thereof for the time being unpaid being herein referred to as an "UNPAID SUM") is discharged shall be divided into successive periods, each of which (other than the first) shall start on the last day of the preceding such period and the duration of each of which shall (except as otherwise provided in this Clause 29) be selected by the Facility Agent but which shall not exceed three months. 29.2 During each such period relating thereto as is mentioned in Clause 29.1 an unpaid sum shall bear interest at the rate per annum which is the sum from time to time of one per cent., the Applicable Margin at such time (and, in the case of any such sum denominated in sterling, the Associated Costs Rate in respect thereof at such time) and LIBOR on the first day of the Term thereof Provided that: (i) if, for any such period, LIBOR cannot be determined, the rate of interest applicable to such unpaid sum shall be the sum from time to time of one per cent., the Applicable Margin at such time (and, in the case of any such sum denominated in sterling, the Associated Costs Rate in respect thereof at such time) and the rate per annum determined by the Facility Agent to be the arithmetic mean (rounded upwards, if not already such a multiple, to the nearest 0.00001 per cent.) of the rates notified by each Reference Bank to the Facility Agent before the last day of such period to be those which express as a percentage rate per annum the cost to it of funding from whatever sources it may select its portion of such unpaid sum for such period; and (ii) if such unpaid sum is all or part of an Advance which became due and payable on a day other than the last day of the Term thereof, the first such period applicable thereto shall be of a duration equal to the unexpired portion of that Term and the rate of interest applicable thereto from time to time during such period shall be that which exceeds by one per cent. the rate which would have been applicable to it had it not so fallen due, and (iii) if such unpaid sum is all or part of a Dollar Swing-Line Advance or any interest which shall have accrued hereunder in relation thereto, then each Swing-Line Bank's portion of such unpaid sum shall bear interest at the rate per annum determined by the Facility Agent to be the sum of one per cent. and the Dollar Swing-Line Rate (or, if the Federal Funds Rate cannot be determined, the higher of the cost to such Swing-Line Bank of funding its portion of such unpaid sum from whatever sources it may reasonably select and the Prime Rate) from time to time. 53 29.3 Any interest which shall have accrued under Clause 29.2 in respect of an unpaid sum shall be due and payable and shall be paid by the Borrower owing such unpaid sum at the end of the period by reference to which it is calculated or on such other date or dates as the Facility Agent may specify by written notice to such Borrower. 29.4 If any Bank or an Agent on its behalf receives or recovers all or any part of an Advance made by such Bank otherwise than on the last day of the Term thereof, the Borrower to which such Advance was made shall pay to the Facility Agent on demand for account of such Bank an amount equal to the amount (if any) by which (i) the additional interest which would have been payable on the amount so received or recovered had it been received or recovered on the last day of the Term thereof exceeds (ii) the amount of interest which in the reasonable opinion of the Facility Agent would have been payable to the Facility Agent on the last day of the Term thereof in respect of a deposit in the currency of the amount so received or recovered equal to the amount so received or recovered placed by it with a prime bank in London for a period starting on the business day (or, in the case of an Optional Currency, the second business day) following the date of such receipt or recovery and ending on the last day of the Term thereof. 29.5 PLC undertakes to indemnify: (i) each of the Agents, the Arrangers and the Banks against any cost, loss or expense (including, without limitation, legal fees) together with any VAT thereon, which any of them may properly sustain or incur as a consequence of the occurrence of any Event of Default or any default by any of the Borrowers in the performance of any of the obligations expressed to be assumed by it in the Finance Documents; (ii) any Agent against any loss it may suffer as a result of its entering into, or performing, any foreign exchange contract for the purposes of, and in accordance with, Part 11; and (iii) each Bank against any loss it may suffer as a result of its funding an Advance or accepting Bills requested by any of the Borrowers hereunder but not made or, as the case may be, discounted or deemed to be discounted by reason of the operation of any one or more of the provisions hereof other than as a result of a breach by such Bank of its obligations hereunder. 29.6 Any unpaid sum shall (for the purposes of this Clause 29, Clause 19.1 and the Sixth Schedule) be treated as an advance and accordingly in this Clause 29, Clause 19.1 and the Sixth Schedule the term "Advance" includes any unpaid sum and "Term", in relation to an unpaid sum, includes each such period relating thereto as is mentioned in Clause 29.1. 54 PART 11 PAYMENTS 30. CURRENCY OF ACCOUNT AND PAYMENT 30.1 Sterling is the currency of account and payment for each and every sum at any time due from any of the Borrowers under the Finance Documents Provided that: (i) each repayment of an Advance or a part thereof shall be made in the currency in which such Advance is denominated at the time of that repayment; (ii) each payment of interest shall be made in the currency in which the sum in respect of which such interest is payable is denominated; (iii) each payment in respect of costs and expenses shall be made in the currency in which the same were incurred; (iv) each payment pursuant to Clause 17.8 or Clause 19.1 shall be made in the currency in which the relevant loss, cost, reduction, increased cost or liability (as the case may be) was suffered or incurred by the Bank; and (v) any amount expressed to be payable in a currency other than sterling shall be paid in that other currency. 30.2 If any sum due from any of the Borrowers under the Finance Documents or any order or judgment given or made in relation thereto has to be converted from the currency (the "FIRST CURRENCY") in which the same is payable thereunder or under such order or judgment into another currency (the "SECOND CURRENCY") for the purpose of (i) making or filing a claim or proof against such Borrower, (ii) obtaining an order or judgment in any court or other tribunal or (iii) enforcing any order or judgment given or made in relation thereto, PLC shall indemnify and hold harmless each of the persons to whom such sum is due from and against any loss suffered as a result of any discrepancy between (a) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (b) the rate or rates of exchange at which such person may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof. 31. PAYMENTS 31.1 On each date on which this Agreement requires an amount to be paid by any of the Borrowers or any of the Banks under any of the Finance Documents, such Borrower or, as the case may be, such Bank shall make the same available to the Facility Agent or, as the case may be the relevant Swing-Line Agent: (i) in relation to Advances (other than Swing-Line Advances); and where such amount is denominated in sterling, by payment in sterling and in immediately available, 55 freely transferable, cleared funds to the account of Samuel Montagu & Co. Limited, 10 Lower Thames Street, London EC3R 6AE, CHAPS Sort Code 40-48-05 (or such other account or bank as the Facility Agent may have specified for this purpose); or (ii) in the case of a Sterling Swing-Line Advance, by payment in sterling and immediately available, freely transferable, cleared funds to the account of Samuel Montagu & Co. Limited, 10 Lower Thames Street, London EC3R 6AE, CHAPS Sort Code 40-48-05 (or such other account or bank as the Sterling Swing-Line Agent may have specified for this purpose); or (iii) in the case of a Dollar Swing-Line Advance, by payment in dollars and in same day funds (or such other funds as may for the time being be customary in New York City for the settlement in New York City of international banking transactions in dollars) to the Dollar Swing- Line Agent's account with such bank in New York as the Dollar Swing- Line Agent may have specified for this purpose); or (iv) where such amount is denominated in an Optional Currency, by payment in such Optional Currency and in immediately available, freely transferable, cleared funds to such account with such bank in the principal financial centre of the country of such Optional Currency as the Facility Agent shall have specified for this purpose. 31.2 If, at any time, it shall become impracticable (by reason of any action of any governmental authority or any change in law, exchange control regulations or any similar event) for any or all of the Borrowers to make any payments hereunder in the manner specified in Clause 31.1, then such Borrower may agree with each or any of the Banks alternative arrangements for the payment direct to such Bank of amounts due to such Bank hereunder Provided that, in the absence of any such agreement with any Bank, such Borrower shall be obliged to make all payments due to such Bank in the manner specified herein. Upon reaching such agreement such Borrower and such Bank shall immediately notify the Facility Agent or, as the case may be, the relevant Swing-Line Agent thereof and shall promptly thereafter notify the Facility Agent, or as the case may be, the relevant Swing-Line Agent of all payments made direct to such Bank. 31.3 Save as otherwise provided herein, each payment received by an Agent for the account of another person pursuant to Clause 31.1 shall: (i) in the case of a payment received for the account of any Borrower, be made available by the relevant Agent to such Borrower by application: (a) first, in or towards payment (on the date, and in the currency and funds, of receipt) of any amount then due from such Borrower hereunder to the person from whom the amount was so received or in or towards the purchase of any amount of any currency to be so applied; and (b) secondly, in or towards payment (on the date, and in the currency and funds, of receipt) to such account with such bank in the principal financial 56 centre of the country of the currency of such payment as such Borrower shall have previously notified to the relevant Agent for this purpose; and (ii) in the case of any other payment, be made available by an Agent to the person for whose account such payment was received (in the case of a Bank, for the account of its Facility Office) for value the same day by transfer to such account of such person with such bank in the principal financial centre of the country of the currency of such payment as such person shall have previously notified to the relevant Agent. 31.4 All payments required to be made by any of the Borrowers under the Finance Documents shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim. 31.5 All moneys received, recovered or realised by a Bank by virtue of Clause 27 may, in that Bank's discretion, be credited to a suspense or impersonal account bearing interest and may be held in such account for so long as such Bank thinks fit pending the application from time to time (as such Bank may think fit) of such moneys in or towards the payment and discharge of any amounts owing by any of the Borrowers to such Bank hereunder. 31.6 Where a sum is to be paid hereunder to an Agent for account of another person, the relevant Agent shall not be obliged to make the same available to that other person or to enter into or perform any exchange contract in connection therewith until it has been able to establish to its satisfaction that it has actually received such sum, but if it does so and it proves to be the case that it had not actually received such sum, then the person to whom such sum or the proceeds of such exchange contract was so made available shall on request refund the same to the relevant Agent, together with an amount sufficient to indemnify the relevant Agent against any cost or loss it may have suffered or incurred by reason of its having paid out such sum or the proceeds of such exchange contract prior to its having received such sum. 32. SET-OFF Each of the Borrowers authorises each Bank to apply any credit balance to which such Borrower is entitled on any account of such Borrower with that Bank in satisfaction of any sum due and payable from such Borrower to such Bank hereunder but unpaid; for this purpose, each Bank is authorised to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect such application. No Bank shall be obliged to exercise any right given to it by this Clause 32 but any Bank which does so shall promptly notify the Facility Agent thereof. Nothing in this Clause 32 shall confer on any Bank a security interest over any property of any Borrower. 33. REDISTRIBUTION OF PAYMENTS 33.1 If, at any time, the proportion which any Bank (a "RECOVERING BANK") has received or recovered (whether by payment, the exercise of a right of set-off or combination of accounts or otherwise) in respect of its portion of any payment (a "RELEVANT PAYMENT") to be made under this Agreement by any of the Borrowers for account of such Recovering Bank and one or more other Banks is greater (the portion of such receipt or recovery giving rise to such excess proportion being 57 herein called an "EXCESS AMOUNT") than the proportion thereof so received or recovered by the Bank or Banks so receiving or recovering the smallest proportion thereof, then: (i) such Recovering Bank shall pay to the Facility Agent an amount equal to such excess amount; (ii) there shall thereupon fall due from such Borrower to such Recovering Bank an amount equal to the amount paid out by such Recovering Bank pursuant to paragraph (i) above, the amount so due being, for the purposes hereof, treated as if it were an unpaid part of such Recovering Bank's portion of such relevant payment; and (iii) the Facility Agent shall treat the amount received by it from such Recovering Bank pursuant to paragraph (i) above as if such amount had been received by it from such Borrower in respect of such relevant payment and shall pay the same to the persons entitled thereto (including such Recovering Bank) pro rata to their respective entitlements thereto, Provided that to the extent that any excess amount is attributable to a payment to a Bank pursuant to Clause 31.3(i)(a) such portion of such excess amount as is so attributable shall not be required to be shared pursuant hereto. 33.2 Nothing in this Clause 33 shall confer on any Bank a security interest over any property of any Borrower and the obligations and liabilities of each Borrower arising under this Clause 33 shall have effect accordingly. 33.3 If any sum (a "RELEVANT SUM") received or recovered by a Recovering Bank in respect of any amount owing to it by any of the Borrowers becomes repayable and is repaid by such Recovering Bank, then: (i) each Bank which has received a share of such relevant sum by reason of the implementation of Clause 33.1 shall, upon request of the Facility Agent pay to the Facility Agent for account of such Recovering Bank an amount equal to its share of such relevant sum; and (ii) there shall thereupon fall due from such Borrower to each such Bank an amount equal to the amount paid out by it pursuant to paragraph (i) above, the amount so due being, for the purposes hereof, treated as if it were the sum payable to such Bank against which such Bank's share of such relevant sum was applied. 33.4 Without prejudice to the preceding provisions of this Clause 33, if the Facility Agent shall receive from PLC or any other Borrower hereunder funds which are insufficient to satisfy in full the obligations of such person under the Finance Documents then due to be discharged, the Facility Agent shall allocate the funds so received in or towards discharging the amounts then so due from such person pro rata to the amounts of such obligations and each party hereto irrevocably authorises and directs the Facility Agent so to act. 58 PART 12 FEES, COSTS AND EXPENSES 34. FEES 34.1 PLC shall pay to the Facility Agent for account of each Bank a facility fee on the amount of such Bank's Commitment from day to day during the period beginning on the date on which the Facility Agent has confirmed to PLC that it has received all of the documents and other evidence listed in the Third Schedule and that each is, in form and substance, satisfactory to it and ending on the Termination Date, such facility fee to be calculated at the rate of 0.09 per cent. per annum and payable in arrear on the last day of each successive period of three months which ends during such period and on the Termination Date. 34.2 PLC shall pay to each of the Arrangers the fees specified in the letters of even date herewith from each Arranger to PLC at the time, and in the amount, specified in such letters. 34.3 PLC shall pay to: (i) each Agent for its own account the agency fees specified in the letter of even date herewith from the Facility Agent on behalf of the Agents to PLC at the times, and in the amounts specified in such letter; and (ii) the Facility Agent, on behalf of the Banks, the participation fees specified in the letter of even date herewith from the Facility Agent to PLC at the times and in the amounts specified in such letter. 35. COSTS AND EXPENSES 35.1 PLC shall, from time to time on demand of any Agent, reimburse that Agent and each of the Arrangers for all reasonable costs and expenses (including, without limitation, legal fees) subject to any limitations specified in a letter of even date from the Facility Agent to PLC together with any VAT thereon incurred by it in connection with the negotiation, preparation and execution of the Finance Documents and the completion of the transactions therein contemplated. 35.2 PLC shall, from time to time on demand of any Agent, reimburse that Agent, the Arrangers and the Banks for all reasonable costs and expenses (including, without limitation, legal fees) together with any VAT thereon incurred in or in connection with the preservation and/or enforcement of any of the rights of that Agent, the Arrangers and the Banks under any of the Finance Documents. 35.3 PLC shall pay all stamp, registration and other taxes to which any of the Finance Documents or any judgment given in connection therewith is or at any time may be subject and shall, from time to time on demand of any Agent, indemnify the Agents, the Arrangers and the Banks against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax. 59 35.4 If PLC fails to perform any of its obligations under this Clause 35, each Bank shall, in its Proportion, indemnify the Agents and the Arrangers against any loss incurred by any of them as a result of such failure and PLC shall forthwith reimburse each Bank for any payment made by it pursuant to this Clause 35.4. 60 PART 13 AGENCY PROVISIONS 36. THE AGENTS, THE ARRANGERS AND THE BANKS 36.1 Each Bank hereby appoints each of the Agents to act as its agent in connection with the Finance Documents and authorises the Agents to exercise such rights, powers, authorities and discretions as are specifically delegated to the Agents by the terms of any of the Finance Documents together with all such rights, powers, authorities and discretions as are reasonably incidental thereto. 36.2 Each Agent may: (i) assume that: (a) any representation made by any of the Borrowers in connection with any of the Finance Documents is true; (b) no Event of Default or Potential Event of Default has occurred; (c) none of the Borrowers is in breach of or default under its obligations under any of the Finance Documents; and (d) any right, power, authority or discretion vested in any of the Finance Documents upon an Instructing Group, the Banks or any other person or group of persons has not been exercised, unless it has, in its capacity as agent for the Banks, received notice to the contrary from any other party hereto; (ii) assume that the relevant Facility Office of each Bank is that identified with its signature below (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from such Bank a notice designating some other office of such Bank to replace its Facility Office and act upon any such notice until the same is superseded by a further such notice; (iii) engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained; (iv) rely as to any matters of fact which might reasonably be expected to be within the knowledge of any of the Borrowers upon a certificate signed by or on behalf of such Borrower; (v) rely upon any communication or document believed by it to be genuine; 61 (vi) refrain from exercising any right, power or discretion vested in it as agent under any of the Finance Documents unless and until instructed by an Instructing Group as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised; and (vii) refrain from acting in accordance with any instructions of an Instructing Group to begin any legal action or proceeding arising out of or in connection with any of the Finance Documents until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, losses, expenses (including, without limitation, legal fees) and liabilities together with any VAT thereon which it will or may expend or incur in complying with such instructions. 36.3 Each Agent shall: (i) promptly inform each Bank of the contents of any notice or document received by it in its capacity as an Agent from any of the Borrowers hereunder; (ii) promptly notify each Bank of the occurrence of any Event of Default or any default by any of the Borrowers in the due performance of or compliance with its obligations under any of the Finance Documents of which it has notice in its capacity as an Agent hereunder from any other party hereto; (iii) save as otherwise provided herein, act in accordance with any instructions given to it by an Instructing Group, which instructions shall be binding on all of the Arrangers and the Banks; and (iv) if so instructed by an Instructing Group, refrain from exercising any right, power or discretion vested in it as agent under any of the Finance Documents. 36.4 Notwithstanding anything to the contrary expressed or implied herein, neither the Agents nor any of the Arrangers shall: (i) be bound to enquire as to: (a) whether or not any representation made by any of the Borrowers in connection with any of the Finance Documents is true; (b) the occurrence or otherwise of any Event of Default or Potential Event of Default; (c) the performance by any of the Borrowers of its obligations under any of the Finance Documents; or (d) any breach of or default by any of the Borrowers of or under its obligations under any Finance Document; 62 (ii) be bound to account to any Bank for any sum or the profit element of any sum received by it for its own account (including without limitation any sum received by it in respect of any Bills purchased by it pursuant to Clause 9.2); (iii) be bound to disclose to any other person any information relating to any member of the Group if such disclosure would or might in its opinion constitute a breach of any law or regulation or be otherwise actionable at the suit of any person; or (iv) be under any obligations other than those for which express provision is made in any of the Finance Documents. 36.5 Each Bank shall, in its Proportion, from time to time on demand by any Agent, indemnify that Agent, against any and all costs, claims, losses, expenses (including, without limitation, legal fees) and liabilities together with any VAT thereon which that Agent may incur, otherwise than by reason of its own fraud, gross negligence or wilful misconduct, in acting in its capacity as agent under the Finance Documents. 36.6 No Agent or Arranger accepts any responsibility for the accuracy and/or completeness of any information supplied by any of the Borrowers in connection herewith or for the legality, validity, effectiveness, adequacy or enforceability of any of the Finance Documents and no Agent or Arranger shall be under any liability as a result of taking or omitting to take any action in relation to any of the Finance Documents, save in the case of fraud, gross negligence or wilful misconduct. 36.7 Each of the Banks agrees that it will not assert or seek to assert against any director, officer or employee of any Agent or any Arranger any claim it might have against any of them in respect of the matters referred to in Clause 36.6. 36.8 Any Agent and each of the Arrangers may accept deposits from, lend money to and generally engage in any kind of banking or other business with any member of the Group. 36.9 Any Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty days' prior written notice to that effect to each of the other parties hereto, in which case an Instructing Group (or, in the circumstances referred to in Clause 26.5, such group as is referred to therein), subject always to PLC's consent (not to be unreasonably withheld or delayed), may appoint a successor during such period but if none does so the relevant Agent shall appoint as its successor a reputable and experienced financial institution with offices in London (in the case of the Facility Agent or the Sterling Swing-Line Agent) or New York (in the case of the Dollar Swing-Line Agent). Any such appointment shall take effect upon notice thereof (and, in the case of the Facility Agent and the Sterling Swing-Line Agent, upon notice of the bank in London to which payments to the Facility Agent should thereafter be made, being given to PLC and each Bank, subject always to PLC's consent (not to be unreasonably withheld or delayed) Provided that no such resignation shall be effective until a successor for the relevant Agent is appointed in accordance with the provisions of this Clause 36. 63 36.10 If a successor to an Agent is appointed under the provisions of Clause 36.9, then (i) the relevant retiring Agent shall be discharged from any further obligations hereunder but shall remain entitled to the benefit of the provisions of this Clause 36 and (ii) its successor and each of the other parties hereto shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party hereto. 36.11 It is understood and agreed by each Bank that it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigations into the financial condition, creditworthiness, condition, affairs, status and nature of each member of the Group and, accordingly, each Bank warrants to the Agents and the Arrangers that it has not relied on and will not hereafter rely on any Agent or Arranger: (i) to check or enquire on its behalf into the adequacy, accuracy or completeness of any information provided by any of the Borrowers in connection with this Agreement or the transactions herein contemplated (whether or not such information has been or is hereafter circulated to such Bank by the Facility Agent and the Arrangers or any of them); or (ii) to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of any member of the Group. 36.12 In acting as agent and/or Arrangers for the Banks, the agency division of each Agent and each Arranger shall be treated as a separate entity from any other of its divisions or departments and, notwithstanding the foregoing provisions of this Clause 36, in the event that an Agent or, as the case may be, any Arranger should act for any member of the Group in any capacity in relation to any other matter, any information given by such member of the Group to that Agent or, as the case may be, such Arranger in such other capacity may be treated as confidential by that Agent or, as the case may be, such Arranger. 36.13 Each Agent shall supply such information to each other Agent as is necessary or desirable for the purposes of this Agreement. In particular, the Facility Agent shall provide each other Agent with copies of all financial statements delivered to it pursuant to Clause 23.1 promptly after receipt of the same and shall notify each other Agent of any breach of Clause 25 or the occurrence of any Event of Default promptly upon becoming aware of the same. 64 PART 14 ASSIGNMENTS AND TRANSFERS 37. BENEFIT OF AGREEMENT This Agreement shall be binding upon and enure to the benefit of each party hereto and its or any subsequent successors, Transferees and assigns. 38. ASSIGNMENTS AND TRANSFERS BY THE BORROWERS None of the Borrowers shall be entitled to assign or transfer all or any of its rights, benefits and obligations hereunder. 39. ASSIGNMENTS AND TRANSFERS BY BANKS 39.1 Any Bank may, at any time, assign all or any of its rights and benefits hereunder or transfer in accordance with Clause 39.3 all or any of its rights, benefits and obligations hereunder. Provided that the transferee is a Qualifying Bank and an Eligible Bank and (save in the case of an assignment of rights and benefits, or a transfer, to (i) any subsidiary or holding company, or to any subsidiary of any holding company, of such Bank or (ii) any other Bank) no such assignment or transfer may be made without the prior written consent of PLC. No Bank may enter into a sub-participation agreement in relation to any of its rights and/or obligations under any Finance Document without the prior written consent of PLC thereto. 39.2 If any Bank assigns all or any of its rights and benefits hereunder in accordance with Clause 39.1, then, unless and until the assignee has undertaken in favour of the Agents, the Arrangers and the other Banks that it shall be under the same obligations towards each of them as it would have been under if it had been an original party hereto as a Bank, the Agents, the Arrangers and the other Banks shall not be obliged to recognise such assignee as having the rights against each of them which it would have had if it had been such a party hereto. 39.3 If any Bank wishes to transfer all or any of its rights, benefits and/or obligations hereunder as contemplated in Clause 39.1, then such transfer may be effected by the delivery to the Facility Agent (copied to PLC, the Dollar Swing- Line Agent and the Sterling Swing-Line Agent) of a duly completed and duly executed Transfer Certificate in which event, on the later of the Transfer Date specified in such Transfer Certificate and the fifth business day after (or such earlier business day endorsed by the Facility Agent on such Transfer Certificate falling on or after) the date of delivery of such Transfer Certificate to the Facility Agent: (i) to the extent that in such Transfer Certificate the Bank party thereto seeks to transfer its rights, benefits and obligations hereunder, each of the Borrowers and such Bank shall be released from further obligations towards one another hereunder and their respective rights and benefits against one another shall be cancelled (such rights, benefits and obligations being referred to in this Clause 39.3 as "DISCHARGED RIGHTS AND OBLIGATIONS"); 65 (ii) each of the Borrowers and the Transferee party thereto shall assume obligations towards one another and/or acquire rights and benefits against one another which differ from such discharged rights and obligations only insofar as such Borrower and such Transferee have assumed and/or acquired the same in place of such Borrower and such Bank; and (iii) the Agents, the Arrangers, such Transferee and the other Banks shall acquire the same rights and benefits and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto as a Bank with the rights, benefits and/or obligations acquired or assumed by it as a result of such transfer. 39.4 On the date upon which a transfer takes effect pursuant to Clause 39.3, the Transferee in respect of such transfer shall pay to the Facility Agent for its own account a transfer fee of (Pounds)300. 40. DISCLOSURE OF INFORMATION No Bank may disclose to a proposed assignee or Transferee or other person proposing to enter or having entered into a contract with such Bank in relation to this Agreement any information in the possession of such Bank relating to PLC and its subsidiaries except: (i) information which is generally available; or (ii) information which has been approved by PLC for the purpose of such disclosure; or (iii) to a proposed assignee or Transferee named in a consent of PLC to an assignment or transfer contemplated by Clause 39, where such disclosure is in connection with the proposed assignment or transfer. 66 PART 15 MISCELLANEOUS 41. ACCEDING AND SECEDING BORROWERS 41.1 If the Facility Agent has confirmed to PLC that the conditions set forth in the Third Schedule have been satisfied, PLC may request that any of its wholly- owned subsidiaries becomes an Acceding Borrower for the purposes of utilising the Facility by delivering, or procuring the delivery to, the Facility Agent (copied to the Dollar Swing-Line Agent and the Sterling Swing-Line Agent) of a Borrower Accession Memorandum duly executed by PLC and such subsidiary. 41.2 Upon delivery of a Borrower Accession Memorandum, the Acceding Borrower shall, subject to the terms and conditions of this Agreement, acquire all the rights and assume all the obligations of a Borrower hereunder Provided that the Facility Agent has confirmed to PLC that it has received, in a form satisfactory to it, all the documents set out in the Eighth Schedule. 41.3 If at any time a Borrower (other than PLC) is under no actual or contingent obligation under or pursuant to any Finance Document, PLC may declare that such Borrower shall cease to be a Borrower hereunder by delivering to the Facility Agent a Borrower Secession Memorandum to that effect in which event such Borrower shall forthwith cease to be a Borrower upon receipt by the Facility Agent of such notice. 42. CALCULATIONS AND EVIDENCE OF DEBT 42.1 Interest and facility fees shall accrue from day to day and shall be calculated on the basis of a year of 365 days (or, in the case of any Advance denominated in an Optional Currency (other than Hong Kong dollars and Belgian francs) 360 days) and the actual number of days elapsed (or, in any case where market practice differs, in accordance with market practice). 42.2 Acceptance commission in respect of any Bill shall be calculated on the basis of a year of 365 days and the actual number of days in the Tenor thereof (or, in any case where market practice differs, in accordance with market practice). 42.3 If on any occasion a Reference Bank or Bank fails to supply any Agent with a quotation required of it under the foregoing provisions of this Agreement, the rate for which such quotation was required shall be determined from those quotations which are supplied to such Agent. 42.4 Each Bank shall maintain in accordance with its usual practice accounts evidencing the amounts from time to time lent by and owing to it hereunder. 42.5 The Facility Agent shall maintain on its books a control account or accounts in which shall be recorded (i) the amount of any Advance made or arising hereunder and the face amount of any Bill accepted and, in each case, the name of the Bank to which such sum relates, (ii) the amount of all principal, interest and other sums due or to become due from any of the Borrowers to any of the Banks hereunder and each Bank's share therein and (iii) the amount of any sum received or recovered by the Agents hereunder and each Bank's share therein. 67 42.6 In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained pursuant to Clauses 42.4 and 42.5 shall be prima facie evidence of the existence and amounts of the obligations of the Borrowers therein recorded. 42.7 A certificate of a Bank as to (i) the amount by which a sum payable to it hereunder is to be increased under Clause 17.1 or (ii) the amount for the time being required to indemnify it against any such cost, reduction, increased cost, payment or liability as is mentioned in Clause 17.8 or 19.1 shall, in the absence of manifest error, be conclusive for the purposes of this Agreement and prima facie evidence in any legal action or proceeding arising out of or in connection with this Agreement. 42.8 A certificate of any Agent as to the amount at any time due from any Borrower hereunder or the amount which, but for any of the obligations of any Borrower hereunder being or becoming void, voidable, unenforceable or ineffective, at any time would have been due from such Borrower hereunder shall, in the absence of manifest error, be conclusive for the purposes of Part 9 and prima facie evidence in any legal action or proceeding arising out of or in connection with this Agreement. 43. REMEDIES AND WAIVERS No failure to exercise, nor any delay in exercising, on the part of the Agents, the Arrangers and the Banks or any of them, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 44. PARTIAL INVALIDITY If, at any time, any provision of any Finance Document is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of the Finance Documents nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 45. AMENDMENTS 45.1 Any amendment, waiver, modification, variation or consent in respect hereof which is agreed to in writing by PLC on behalf of the Borrowers, the Agents and an Instructing Group (or, in the circumstances referred to in Clause 26.5, such group as is referred to therein) shall be binding upon all the other parties hereto Provided that: (i) any amendment, waiver, modification or variation of Clause 46 agreed to in writing by PLC on behalf of the Borrowers and any Agent in respect of their respective rights and obligations to each other under such Clause shall be binding on all the other parties hereto; (ii) this Clause 45 shall not authorise (without the prior written consent of all the Banks) any amendment, waiver, modification, variation or consent which would have the effect of:- 68 (a) changing the rate at which interest is payable under this Agreement; (b) extending the date for, or altering the amount or currency of, any payment of principal, interest, fee, commission or any other amount payable under this Agreement; (c) increasing any Bank's participation in the Facility, the Available Facility or the Available Swing-Line Facility; (d) changing the Termination Date; (e) waiving or changing any of the conditions under which a Competitive Advance or Competitive Bill is to be made or accepted hereunder; or (f) varying (i) the definition of Instructing Group; (ii) any of Clauses 26.5, 27 and 28; (ii) this Clause 45; or (iv) any other provision of this Agreement which requires the consent of all the Banks; and (iii) notwithstanding any other provision hereof, none of the Agents shall be obliged to agree any such amendment, waiver, modification, variation or consent if the same would otherwise have the effect of amending, modifying, or waiving any of the Agents' rights under this Agreement or subjecting any of the Agents to any additional obligations hereunder. 45.2 If PLC requests any amendment, waiver, modification, variation or consent in accordance with Clause 45.1, then PLC shall, within five business days of demand of any Agent, reimburse that Agent for all costs and expenses (including, without limitation, legal fees) together with any VAT thereon incurred by that Agent in the negotiation, preparation and execution of any written instrument contemplated by Clause 45.1. 46. NOTICES 46.1 Each communication to be made hereunder shall, unless otherwise stated, be made in writing by telex, telefax or letter. Communications made by telefax by PLC or any other Borrower to any Agent shall be confirmed by a telephone call from the relevant Agent to an Authorised Verifier of PLC or such other Borrower (as the case may be) (and if not so confirmed, the original telefax communication will be void) and by letter. A failure to confirm such telefax communication by letter will not affect the validity of the original telefax communication. Communications made by telefax to any Agent by any person other than PLC or any other Borrower shall be confirmed by letter, but a failure to do so will not affect the validity of the original telefax communication. 46.2 Any communication or document to be made or delivered by one person to another pursuant to this Agreement shall (unless that other person has by fifteen days' written notice to the Facility Agent specified otherwise) be made or delivered to that other person at the address (in the case of a letter), telefax number (in the case of a telefax), telex number (in the case of a telex) and if applicable, to the person and department identified with its signature below (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee or, in the case 69 of an Acceding Borrower, in the Borrower Accession Memorandum to which it is a party). Any communication or document to be made or delivered under this Agreement shall be effective only when received at the address, letter or telefax number and, if applicable, person and department, to which it is to be sent pursuant to Clause 46.2. 46.3 Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation thereof into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 47. COUNTERPARTS This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts each of which, when executed and delivered, shall constitute an original, but all the counterparts shall together constitute but one and the same instrument. 70 PART 16 LAW AND JURISDICTION 48. LAW This Agreement shall be governed by, and shall be construed in accordance with, English law. 49. JURISDICTION 49.1 Each of the parties hereto irrevocably agrees for the benefit of the Agents, the Arrangers and the Banks that the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with the Finance Documents and, for such purposes, irrevocably submits to the jurisdiction of such courts. 49.2 Without prejudice to Clause 49.1, each Borrower further irrevocably agrees for the benefit of the Agents, the Arrangers and the Banks that any proceedings arising out of or in connection with this Agreement may be brought in the New York State Supreme Court, First Department, or the United States District Court for the Southern District of New York, in each case sitting in the Borough of Manhattan, the City of New York, State of New York and for such purposes irrevocably submits to the non-exclusive jurisdiction of such courts. 49.3 Each of the Borrowers irrevocably waives any objection which it might now or hereafter have to the courts referred to in Clause 49.1 or 49.2 being nominated as the forum to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and agrees not to claim that any such court is not a convenient or appropriate forum. 49.4 Each of the Borrowers which is not incorporated in England and Wales agrees that the process by which any suit, action or proceeding is begun in England may be served on it by being delivered to Pearson plc at 3 Burlington Gardens, London W1X 1LE or other its registered office for the time being. Each of the Borrowers which is not incorporated in New York agrees that the process by which any suit, action or proceedings begin in New York may be served on it by being delivered to Pearson Inc. at One Rockefeller Plaza, New York, NY 10020, USA or other its principal place of business in New York for the time being. If the appointment of the person mentioned in this Clause 49.4 ceases to be effective in respect of any or all of the Borrowers, such Borrower or Borrowers shall immediately appoint a further person in England or, New York, as the case may be, to accept service of process on its behalf in England and, failing such appointment within 15 days, the Facility Agent shall be entitled to appoint such a person by notice to such Borrower or Borrowers. Nothing contained herein shall affect the right to serve process in any other manner permitted by law. 49.5 The submission to the jurisdiction of the courts referred to in Clauses 49.1 and 49.2 shall not (and shall not be construed so as to) limit the right of the Agents, the Arrangers and the Banks or any of them to take proceedings against any of the Borrowers in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by applicable law. 71 49.6 Each of the Borrowers hereby consents generally in respect of any legal action or proceeding arising out of or in connection with this Agreement to the giving of any relief or the issue of any process in connection with such action or proceeding including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which may be made or given in such action or proceeding. AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written. 72 THE FIRST SCHEDULE PART I THE BANKS
BANK FACILITY OFFICE(S) COMMITMENT (Pounds) Midland Bank plc Midland Bank plc 27,500,000 27-32 Poultry London EC2P 2BX Tel: 0171 260 8000 Fax: 0171 260 4800 Telex: 8954744 Union Bank of Switzerland Union Bank of Switzerland 27,500,000 P O Box 428 100 Liverpool Street London EC2M 2RH Tel: 0171 901 3333 Fax: 0171 901 3903 Telex: 941 3848/3944 UBS COR G
73 Australia and New Zealand Banking Group Limited Australia and New Zealand Banking Group Limited 27,000,000 Minerva House P O Box 7 Montague Close London SE1 9DH Tel: 0171 378 2121 Fax: 0171 378 2880/2378 Telex: 8812741 Anzbka g 885043-6 Grndly g Banque Nationale de Paris, Banque Nationale de Paris, London Branch 27,000,000 London Branch P O Box 781 8-13 King William Street London EC4N 7QJ Tel: 0171 895 7070 Fax: 0171 929 0310 Telex: 883412 BNPLNX G
74 Barclays Bank PLC Barclays Bank PLC 27,000,000 Murray House 1 Royal Mint Court London EC3N 4HH Tel: 0171 488 1144 Fax: 0171 696 3048 Telex: 934148 BBSAIO G Credit Lyonnais Credit Lyonnais 27,000,000 P O Box 81 84-94 Queen Victoria Street London EC4P 4LX Tel: 0171 634 8000 Fax: 0171 489 1559/1909 Telex: 885479
75 Deutsche Bank AG, London Deutsche Bank AG, London 27,000,000 6 Bishopsgate London EC2P 2AT Tel: 0171 971 7000 Fax: 0171 971 7455 Telex: 9401 5555 National Westminster Bank Plc National Westminster Bank Plc 27,000,000 135 Bishopsgate London EC2M 3UR Tel: 0171 334 1000 Fax: 0171 375 5524 Telex: 882121
76 Royal Bank of Canada Royal Bank of Canada Royal Bank of Canada 27,000,000 71 Queen Victoria Street Grand Cayman London (North America No. 1) EC4V 4DE Branch c/o New York Branch Financial Square 23rd Floor New York NY 10005-3531 Tel: 0171 489 1188 Tel: 00 1 212 428 6200 Fax: 0171 248 6322 Fax: 00 1 212 428 2372 Telex: 929111 RBCCTY Telex: MCT 625219 ROYBAN The Sumitomo Bank, Limited The Sumitomo Bank, Limited 27,000,000 Temple Court 11 Queen Victoria Street London EC4N 4TA Tel: 0171 786 1000 Fax: 0171 236 0049 Telex: 887667
77 Toronto-Dominion Bank Toronto-Dominion Bank 27,000,000 Triton Court 14/18 Finsbury Square London EC2A 1DB Tel: 0171 920 0272 Fax: 0171 638 0006 Telex: 886142 Westdeutsche Landesbank Girozentrale Westdeutsche Landesbank Girozentrale, London Branch 27,000,000 51 Moorgate London EC2R 6AE Tel: 0171 638 6141 Fax: 0171 374 8546 Telex: 887984/5 TOTAL 325,000,000
78 PART II THE SWING-LINE BANKS
BANK FACILITY OFFICE SWING-LINE COMMITMENT (STERLING) (DOLLARS) EXPRESSED AS A PERCENTAGE OF THE TOTAL SWING-LINE COMMITMENTS OF Pounds 150,000,000 Midland Bank plc 27-32 Poultry 140 Broadway 8.4615 London New York EC2P 2BX NY 10005 USA Tel: 0171 260 8000 Tel: 00 1 212 658 2700 Fax: 0171 260 4800 Fax: 00 1 212 658 1344 Telex: 8954744 Telex: 62390 Union Bank of Switzerlan Union Bank of Switzerland Union Bank of Switzerland 8.3077 P O Box 428 299 Park Avenue 100 Liverpool Street New York London NY 10171 EC2M 2RH USA Tel: 0171 901 3333 Tel: 00 1 212 230 4000 Fax: 0171 901 3903 Fax: 00 1 212 821 3891 Telex: 941 3848/3944 Telex: 620 317 COR G
79 Australia and New Zealand Australia and New Zealand Australia and New Zealand 8.3077 Banking Group Limited Banking Group Limited Banking Group Limited Minerva House 1177 Avenue of the Americas P O Box 7 New York Montague Close New York 10036-2798 London USA SE1 9DH Tel: 0171 378 2121 Tel: 00 1 212 801 9800 Fax: 0171 378 2880/2378 Fax: 00 1 212 801 9131 Telex: 8812741 Anzbka g Telex: 667 559 885043-6 Grndly g Banque Nationale de Paris, Banque Nationale de Paris, Banque Nationale de Paris 8.3077 London Branch London Branch 499 Park Avenue P O Box 781 New York 8-13 King William Street NY 10022 London USA EC4N 7QJ Tel: 0171 895 7070 Tel: 00 1 212 415 9700 Fax: 0171 929 0310 Fax: 00 1 212 415 9696 Telex: 883412 BNPLNX G Telex: 824209 ABNPWFC UF
80 Barclays Bank PLC Barclays Bank PLC Barclays Bank PLC 8.3077 Murray House Murray House 1 Royal Mint Court 1 Royal Mint Court London London EC3N 4HH EC3N 4HH Tel: 0171 488 1144 Tel: 0171 488 1144 Fax: 0171 696 3048 Fax: 0171 696 3048 Telex: 934148 BBSAIO G Telex: 934148 BBSAIO G Credit Lyonnais Credit Lyonnais Credit Lyonnais P O Box 81 1301 Avenue of the 8.3077 84-94 Queen Victoria Street Americas London New York 10019 EC4P 4LX USA Tel: 0171 634 8000 Tel: 00 1 212 261 7150 Fax: 0171 489 1559/1909 Fax: 00 1 212 459 3174 Telex: 885479 Telex: 62410
81 Deutsche Bank AG, Deutsche Bank AG, London Deutsche Bank AG, 8.3077 London 6 Bishopsgate New York Branch London 31 West 52nd Street EC2P 2AT New York NY 10019 USA Tel: 0171 971 7000 Tel: 00 1 212 474 8000 Fax: 0171 971 7455 Fax: 00 1 212 474 8115 Telex: 9401 5555 Telex: 429166 National Westminster Bank Plc National Westminster National Westminster 8.3077 Bank Plc Bank Plc 135 Bishopsgate New York Branch London 175 Water Street EC2M 3UR New York NY 10038 USA Tel: 0171 334 1000 Tel: 00 1 212 602 4000 Fax: 0171 375 5524 Fax: 00 1 212 602 4118 Telex: 882121 Telex: 232222 NWB KUR
82 Royal Bank of Canada Royal Bank of Canada Royal Bank of Canada 8.3077 71 Queen Victoria Street Grand Cayman London (North America No. 1) EC4V 4DE Branch c/o New York Branch Financial Square 23rd Floor New York NY 10005-3531 USA Tel: 0171 489 1188 Tel: 00 1 212 428 6200 Fax: 0171 248 6322 Fax: 00 1 212 428 2372 Telex: 929111 RBCCTY Telex: MCT 625219 ROYBAN The Sumitomo Bank, Limited The Sumitomo Bank, Limited The Sumitomo Bank, Limited 8.3077 Temple Court 277 Park Avenue 11 Queen Victoria Street New York London NY 10172 EC4N 4TA USA Tel: 0171 786 1000 Tel: 00 1 212 224 4441 Fax: 0171 236 0049 Fax: 00 1 212 539 9522 Telex: 887667 Telex: 420515
83 Toronto-Dominion Bank Toronto-Dominion Bank Toronto-Dominion Bank 8.3077 Triton Court Houston Agency 14/18 Finsbury Square 909 Fannin Street London 17th Floor EC2A 1DB Houston Texas 77010 Tel: 0171 920 0272 Tel: 00 1 713 653 8208 Fax: 0171 638 0006 Fax: 00 1 713 951 9921 Telex: 886142 Telex: N/A Westdeutsche Landesbank Westdeutsche Landesbank Westdeutsche Landesbank 8.3077 Girozentrale Girozentrale, Girozentrale, London Branch New York Branch 51 Moorgate 1211 Avenue of the Americas London New York EC2R 6AE NY 10036 USA Tel: 0171 638 6141 Tel: 00 1 212 852 6000 Fax: 0171 374 8546 Fax: 00 1 212 852 6300 Telex: 887984/5 Telex: N/A TOTAL 100.00
84 THE SECOND SCHEDULE FORM OF TRANSFER CERTIFICATE To: [Facility Agent] as Facility Agent for the Banks and on behalf of the Borrowers cc: [Dollar Swing-Line Agent and Sterling Swing-Line Agent] TRANSFER CERTIFICATE relating to the agreement (as from time to time amended, varied, novated or supplemented, the "Facility Agreement") dated [ ] 199[ ] whereby a Pounds 325,000,000 multicurrency multi-option credit facility was made available to Pearson plc ("PLC") and Pearson Inc as original borrowers under the guarantee of PLC as guarantor by a group of banks on whose behalf Samuel Montagu & Co. Limited acted as facility agent in connection therewith. 1. Terms defined in the Facility Agreement shall, subject to any contrary indication, have the same meanings herein. The terms Bank and Transferee are defined in the schedule hereto. 2. The Bank (i) confirms that the details in the schedule hereto under the heading "BANK'S COMMITMENT" or "ADVANCE(S)" accurately summarises its Commitment and/or, as the case may be, the Term and Repayment Date of one or more existing Advances made by it and (ii) requests the Transferee to accept and procure the transfer to the Transferee of the portion specified in the schedule hereto of, as the case may be, its Commitment and/or such Advance(s) by counter-signing and delivering this Transfer Certificate to the Facility Agent at its address for the service of notices specified in the Facility Agreement. 3. The Transferee hereby requests the Facility Agent to accept this Transfer Certificate as being delivered to the Facility Agent pursuant to and for the purposes of Clause 39.3 of the Facility Agreement so as to take effect in accordance with the terms thereof on the Transfer Date or on such later date as may be determined in accordance with the terms thereof. 4. The Transferee confirms that it has received a copy of the Facility Agreement together with such other information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Bank to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such information and further agrees that it has not relied and will not rely on the Bank to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of any of the Borrowers. 5. Execution of this Transfer Certificate by the Transferee constitutes: (i) its representation to the Transferor and/or other parties to the Facility Agreement that it has power to become a party to the Facility Agreement as a Bank on the terms herein and therein set out and has taken all necessary steps to authorise execution and delivery of this transfer certificate; and 85 (ii) a representation to each Borrower resident in the United Kingdom for tax purposes that, as at the date hereof, such Bank is, acting through its Facility Office for the purpose of Utilisations (other than by way of Dollar Swing-Line Advances) by that Borrower, a Qualifying Bank and that it presently intends that all amounts of interest payable to that Facility Office under the Facility Agreement by that Borrower will be brought into account as a trading receipt of a bona fide banking business carried on by it in the United Kingdom. 6. The Transferee hereby undertakes with the Bank and each of the other parties to the Facility Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Facility Agreement will be assumed by it after delivery of this Transfer Certificate to the Facility Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect. 7. The Bank makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Facility Agreement or any document relating thereto and assumes no responsibility for the financial condition of any of the Borrowers or for the performance and observance by such Borrower of any of its obligations under the Facility Agreement or any document relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded. 8. The Bank hereby gives notice that nothing herein or in the Facility Agreement (or any document relating thereto) shall oblige the Bank to (i) accept a re-transfer from the Transferee of the whole or any part of its rights, benefits and/or obligations under the Facility Agreement transferred pursuant hereto or (ii) support any losses directly or indirectly sustained or incurred by the Transferee for any reason whatsoever including, without limitation, the non-performance by any of the Borrowers or any other party to the Facility Agreement (or any document relating thereto) of its obligations under any such document. The Transferee hereby acknowledges the absence of any such obligation as is referred to in (i) or (ii) above. 9. This Transfer Certificate and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with English law. THE SCHEDULE 1. Bank: 2. Transferee: 3. Transfer Date: 4. Commitment: Portion Transferred 5. Advance(s): Term and Repayment Date Portion Transferred 86 6. Bill(s): Tenor and Maturity Date Portion Transferred [Transferor Bank] [Transferee Bank] By: By: Date: Date: ADMINISTRATIVE DETAILS OF TRANSFEREE London Facility Office Address: New York Facility Office Address: Contact Name: Contact Name: Telex: Telex: Telefax: Telefax: Telephone: Telephone: Account for Payments Account for Payments in sterling: in dollars: 87 THE THIRD SCHEDULE CONDITIONS PRECEDENT 1. In relation to each of the Original Borrowers: (i) a copy, certified a true copy by a duly authorised officer of such Original Borrower, of the constitutive documents of such Original Borrower; (ii) a copy, certified a true copy by a duly authorised officer of such Original Borrower, of a resolution of the Board of Directors of such Original Borrower (or a duly authorised committee thereof) approving the execution, delivery and performance of the Finance Documents and the terms and conditions hereof and authorising a named person or persons to sign the Finance Documents and any documents to be delivered by such Original Borrower pursuant hereto or in connection herewith and to make Utilisations hereunder; (iii) a certificate of a duly authorised officer of such Original Borrower setting out the names of persons authorised to verify notices and communications as contemplated in Clause 46.1 and the names and signatures of the persons authorised to sign, on behalf of such Original Borrower, the Finance Documents and any documents to be delivered by such Original Borrower pursuant hereto or in connection herewith and to make Utilisations hereunder; and (iv) if the resolution (referred to in (ii) above) is that of a committee of the Board of Directors, a copy, certified by the Secretary or an Authorised Signatory of such Original Borrower, to be a true, complete and up to date resolution of the Board of Directors of such Original Borrower appointing such committee with authority to authorise the matters referred to in (ii) above. 2. A certificate addressed to the Facility Agent and signed by an officer of each Original Borrower stating that the execution by such Original Borrower of the Finance Documents, the performance by it of its obligations thereunder and the utilisation by it of the Facility are within its corporate powers, have been duly approved by all necessary corporate action and will not cause any limit or restriction on any of its powers (whether imposed by law, decree, rule, regulation, its Memorandum or Articles of Association (or other equivalent constitutive documents), agreement or otherwise) or on the right or ability of its Directors to exercise such powers, to be exceeded or breached. 3. For Pearson Inc., an opinion of Pearson Inc.'s counsel in the jurisdiction of incorporation of Pearson Inc. in a form satisfactory to the Facility Agent. 4. An opinion of Clifford Chance, solicitors to the Agents, in substantially the form distributed to the Banks prior to the execution hereof. 5. Evidence that PLC has agreed to act as the agent of the Borrowers (other than itself) for the service of process in England. 88 6. Evidence that Pearson Inc. has agreed to act as the agent of the Borrowers (other than itself) for the service of process in New York. 7. Evidence that a notice cancelling the commitments under the 1988 Facility has been delivered to the Agent thereunder and evidence satisfactory to the Facility Agent that such commitments will be cancelled and all outstandings under the 1988 Facility reduced to zero on or prior to the Utilisation Date of the first Utilisation hereunder. 8. A power of attorney substantially in the form of the Twelfth Schedule issued by PLC. 89 THE FOURTH SCHEDULE UTILISATION REQUEST From: [Name of Borrower] To: [Facility Agent] cc: [each other Agent] Dated: Dear Sirs, 1. Reference is made to the multi-currency multi-option facility agreement, dated [ ] August, 1995 (as the same may be amended, varied, novated or supplemented from time to time, the "AGREEMENT"), between Pearson plc and Pearson Inc. as original borrowers, the Banks as defined therein, Samuel Montagu & Co. Limited as agent and others. 2. We hereby give you notice that, pursuant to the Facility Agreement, we wish the Banks to *[make Advances/Dollar Swing-Line Advances/Sterling Swing-Line Advances/accept Bills] as follows: (i) Currency (ii) Aggregate *[principal/face] amount: (iii) Utilisation Date: (iv) *[Term/Tenor]: (v) *[Repayment Date/Maturity Date]: 3. We confirm that, at the date hereof, the representations set out in Clause 22 of the Facility Agreement are true and no Event of Default or Potential Event of Default has occurred which has not been remedied or waived pursuant to Clause 45. - ------------------------------------------------------------------------------- * Delete as appropriate 90 4. The proceeds of this Utilisation should be credited to [insert account details]. Yours faithfully ............................. for and on behalf of [NAME OF BORROWER] 91 THE FIFTH SCHEDULE TIMETABLES UTILISATION BY MEANS OF ADVANCES "D" = Utilisation Date "D-x" = x business days prior to Utilisation Date "Bs" = Banks "SLA" = Relevant Swing-Line Agent "SLBs" = Swing-Line Banks "FA" = Facility Agent "( )" = Clause number of Agreement ADVANCES OTHER THAN SWING-LINE ADVANCES AND COMPETITIVE ADVANCES STERLING OPTIONAL CURRENCY ADVANCES ADVANCES (LONDON TIME) (LONDON TIME) 1. Utilisation Request to FA (6.1) D-1 10.00 a.m. D-3 10.00 a.m. 2. FA to notify Bs of D-1 Noon D-3 Noon allocations (6.10) 3. LIBOR fixing (1.1) D 11.00 a.m. D-2 11.00 a.m. SWING-LINE ADVANCES STERLING SWING-LINE DOLLAR SWING-LINE ADVANCES ADVANCES (LONDON TIME) (NEW YORK TIME) 1. Utilisation Request to FA D 9.45 a.m. D 11.00 a.m. with copy to SLA (6.4) 2. SLA to notify Bs of D 10.30 a.m. D Noon allocations (6.10) 3. Rate Fixing D 11.00 a.m. N/A 92 4. SLBs to advise SLA of wire number N/A D 2.00 p.m. effecting transfer (6.6) 5. SLA to advise Borrower of wire number effecting transfer N/A D 2.00 p.m. 6. Payment by SLBs to SLA D 1.00 p.m. D 2.00 p.m. 7. Payment by SLA to relevant Borrower D 2.00 p.m. D 2.30 p.m. COMPETITIVE ADVANCES
STERLING OPTIONAL CURRENCY COMPETITIVE ADVANCES COMPETITIVE ADVANCES (LONDON TIME) (LONDON TIME) 1. Competitive Bid Request to FA (8.2) D-2 11.00 a.m. D-4 11.00 a.m. 2. FA to send Invitation for Competitive D-2 2.00 p.m. D-4 2.00 p.m. Bids to Bs (8.3) 3. Bs send Competitive Bids to FA (8.4) D-1 9.00 a.m. D-3 9.00 a.m. 4. FA to notify relevant Borrower of D-1 10.30 a.m. D-3 10.30 a.m. Competitive Bids (8.5) 5. Borrower to confirm to FA the D-1 Noon D-3 Noon Requested Amount 6. FA to notify Bs of acceptance/rejection D-1 3.00 p.m. D-3 3.00 p.m. and allocations (8.8) 7. LIBOR fixing (1.1) D 11.00 a.m. D-2 11.00 a.m.
93 UTILISATION BY MEANS OF BILLS "D" = Utilisation Date "D-x" = x business days prior to Utilisation Date "Bs" = Banks "FA" = Facility Agent "( )" = Clause number of Agreement BILLS OTHER THAN COMPETITIVE BILLS 1. Utilisation Request to FA (6.1) D-1 10.00 a.m. 2. FA to notify Bs of allocations (6.10) D-1 Noon 3. If applicable Bs to notify FA D-1 3.00 p.m. of election to make an Advance (7.1) 4. If applicable Bs to notify FA D-1 3.00 p.m. that FA will not be required to discount Bills (6.11) 5. FA to elect whether or not to D 11.00 a.m. purchase any Bills (9.2) 6. Eligible Bill Discount Rate D 11.00 a.m. Fixing (1.1 and 9.2) 7. If applicable Bills to be delivered D 11.00 a.m. by FA to relevant Bs (9.1) 8. FA to notify relevant Borrower and relevant D 11.30 a.m. Bs to which Clause 9.3 or 9.4 applies of Eligible Bill Discount Rate (9.2) 9. If applicable Bills to be returned D 1.00 p.m. to FA (9.1) 94 COMPETITIVE BILLS
1. Competitive Bid request to FA (8.2) D-2 11.00 a.m. 2. FA to send Invitation for Competitive Bids to Bs (8.3) D-2 2.00 p.m. 3. Bs send Competitive Bids to FA (8.4) D-1 9.00 a.m. 4. FA to notify relevant Borrower of Competitive Bids (8.5) D-1 10.30 a.m. 5. Borrower to notify FA of Requested Amount (8.6) D-1 Noon 6. FA to notify Bs of acceptance/rejection and D-1 3.00 allocation (8.8) p.m. 7. If applicable Bs to notify FA that FA will not be D-1 5.00 p.m. required to discount Bills (6.10) 8. If applicable Bills to be delivered by FA to relevant D 11.00 a.m. Bs (9.1) 9. Eligible Bill Discount Rate Fixing (1.1 and 9.2) D 11.00 a.m. 10. FA to notify the relevant Borrower and relevant Bs to which D 11.30 a.m. Clause 9.3 or 9.4 applies of Eligible Bill Discount Rate (9.2) 11. If applicable Bills to be returned to FA (9.1) D 1.00 p.m.
95 THE SIXTH SCHEDULE ASSOCIATED COSTS RATE 1. For the purposes of this Agreement, the cost of compliance with existing requirements of the Bank of England in respect of Advances denominated in sterling will be calculated by the Facility Agent in relation to each Advance on the basis of rates to be supplied by each of the Reference Banks by reference to the circumstances existing on the first day of the Term in respect of such Advance and, if such Term exceeds three months, at three calendar monthly intervals from the first day of such Term during its duration in accordance with the following formula: AB + C(B - E) + D(B - F) per cent. per annum ------------------------ 100 - (A + D) Where: A is the percentage of eligible liabilities which such Reference Bank is from time to time required to maintain as an interest free cash deposit with the Bank of England to comply with cash ratio requirements. B is the percentage rate per annum at which sterling deposits are offered by such Reference Bank, in accordance with its normal practice, for a period equal to (i) the Term (or, as the case may be, remainder of such Term) in respect of the relevant Advance or (ii) three months, whichever is the shorter, to a leading bank in the London Interbank Market at or about 11.00 a.m. in a sum approximately equal to the amount of such Advance. C is the percentage of eligible liabilities which such Reference Bank is from time to time required by the Bank of England to maintain as secured money with members of the London Discount Market Association ("LDMA") and/or as secured call money with money brokers and gilt edged market makers. D is the percentage of eligible liabilities which such Reference Bank is required from time to time to maintain as interest bearing special deposits with the Bank of England. E is the percentage rate per annum at which members of the LDMA are offered sterling deposits in a sum approximately equal to the amount of the relevant Advance as a callable fixture from such Reference Bank for such period as determined in accordance with B above at or about 11.00 a.m. F is the percentage rate per annum payable by the Bank of England to such Reference Bank on interest bearing special deposits. 2. For the purposes of this Schedule "ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" shall bear the meanings ascribed to them from time to time by the Bank of England. 96 3. The percentages used in A, C and D above shall be those required to be maintained on the first day of the relevant period as determined in accordance with B above. 4. In application of the above formula, A, B, C, D, E and F will be included in the formula as figures and not as percentages e.g. if A is 0.5 per cent. and B is 12 per cent., AB will be calculated as 0.5 x 12 and not as 0.5 per cent. x 12 per cent. 5. Calculations will be made on the basis of a 365 day year (or, if market practice differs, in accordance with market practice). 6. A negative result obtained by subtracting E from B or F from B shall be taken as zero. 7. The arithmetic mean of the resulting figures for each Reference Bank shall be calculated and shall then be rounded upwards, if not already such a multiple, to the nearest 0.0001 per cent. per annum. 8. Additional amounts calculated in accordance with this Schedule are payable on the last day of the Term to which they relate. 9. The Facility Agent's determination of the Associated Costs Rate in relation to any period shall, in the absence of manifest error, be conclusive and binding on all of the parties hereto. 10. The Facility Agent may from time to time, after consultation with PLC and the Banks, determine and notify to all the parties hereto any amendments or variations which are required to be made to the formula set out above in order to comply with any requirements from time to time imposed by the Bank of England in relation to Advances denominated in sterling (including without limitation, any requirements relating to sterling primary liquidity) and, any such determination shall, in the absence of manifest error, be conclusive and binding on all the parties hereto. 97 THE SEVENTH SCHEDULE FORM OF BORROWER ACCESSION MEMORANDUM To: [Facility Agent] CC: [Dollar Swing-Line Agent and Sterling Swing-Line Agent] From: [PLC and Subsidiary] Dated: Dear Sirs, 1. We refer to an agreement (the "Facility Agreement") dated [ ], August 1995 and made between Pearson plc ("PLC") and Pearson Inc as original borrowers, PLC as guarantor, Midland Bank plc and Union Bank of Switzerland as arrangers, Samuel Montagu & Co. Limited as facility agent, the financial institutions defined therein as Banks and others. 2. Terms defined in the Facility Agreement shall bear the same meaning herein. 3. PLC hereby requests that [Subsidiary] become an Acceding Borrower pursuant to Clause 41.1 of the Facility Agreement. 4. [Subsidiary] is a corporation duly organised under the laws of [Name of Relevant Jurisdiction]. 5. [Subsidiary] undertakes to deliver the documents listed in the Eighth Schedule to the Facility Agreement. 6. [Subsidiary] hereby agrees to such request and accordingly undertakes, upon its becoming a Borrower, to perform all the obligations expressed to be undertaken under the Facility Agreement by a Borrower in all respects as if it had been an original party thereto as an Original Borrower. 7. PLC confirms that it will guarantee in accordance with Clause 27 of the Facility Agreement all the obligations of [Subsidiary] under the Finance Documents in all respects in accordance with the terms of the Facility Agreement. 8. PLC (on behalf of itself and each other Borrower): (i) hereby makes, for the benefit of the Agents and each of the Banks, each of the representations set out in Clause 22 of the Facility Agreement; and (ii) confirms that no Event of Default or Potential Event of Default has occurred and is continuing. 98 9. [Subsidiary's] administrative details as follows: Address: Telephone No.: Telex No.: Telefax No.: 10. This memorandum shall be governed by and construed in all respects in accordance with English law. Pearson plc [Subsidiary] By: ..................... By: ..................... 99 THE EIGHTH SCHEDULE DOCUMENTS TO ACCOMPANY BORROWER ACCESSION MEMORANDUM 1. A copy, certified a true copy by a duly authorised officer of the proposed Borrower of the constitutive documents of such proposed Borrower. 2. A copy, certified a true copy by a duly authorised officer of the proposed Borrower, of a board resolution of such proposed Borrower approving the execution and delivery of a Borrower Accession Memorandum, the accession of such proposed Borrower to the Facility Agreement and the performance of its obligations under the Finance Documents and authorising a person or persons (specified by name or office) on behalf of such proposed Borrower to sign such Borrower Accession Memorandum, any other Finance Document and any other documents to be delivered by such proposed Borrower pursuant thereto or in connection herewith and to make Utilisations hereunder. 3. A certificate of a duly authorised officer of the proposed Borrower setting out the names and signatures of the person or persons mentioned in the resolution referred to in paragraph 2 above and the names of persons authorised to verify notices and communications as contemplated in Clause 46.1. 4. Where the proposed Borrower is not incorporated in England and Wales, a copy, certified a true copy by or on behalf of the proposed Borrower, of each such law, decree, consent, licence, approval, registration or declaration as is, in the opinion of counsel to the Banks, necessary to render the relevant Borrower Accession Memorandum legal, valid, binding and enforceable, to make such Borrower Accession Memorandum admissible in evidence in the proposed Borrower's jurisdiction of incorporation and to enable the proposed Borrower to perform its obligations thereunder and under the other Finance Documents. 5. Legal opinions of English solicitors and, where such proposed Borrower is not incorporated in England and Wales, counsel in the proposed Borrower's jurisdiction of incorporation in a form satisfactory to the Facility Agent. 100 THE NINTH SCHEDULE FORM OF BORROWER SECESSION MEMORANDUM To: [the Facility Agent] CC: [The Dollar Swing-Line Agent and the Sterling Swing-Line Agent] From: Pearson plc Dated: Dear Sirs, 1. We refer to an agreement (the "Facility Agreement") dated [ ], August 1995 and made between Pearson plc ("PLC") and Pearson Inc as original borrowers, PLC as guarantor, Midland Bank plc and Union Bank of Switzerland as arrangers, Samuel Montagu & Co. Limited as facility agent, the financial institutions defined therein as Banks and others. 2. Terms defined in the Facility Agreement shall bear the same meaning herein. 3. We hereby declare that [name of Borrower other than PLC] is under no actual or contingent obligation under or pursuant to any Finance Document in its capacity as a Borrower. 4. Accordingly, pursuant to Clause 41.3 of the Facility Agreement and with effect from receipt of this notice, [name of relevant Borrower] shall cease to be a Borrower under the Facility Agreement. Yours faithfully For and on behalf of Pearson plc 101 THE TENTH SCHEDULE EXISTING ENCUMBRANCES 1. A first charge created by S. Pearson & Son Limited over the net earnings of the Partnership and a further charge on the undertaking and all property and assets present and future, including uncalled capital dated 4th December, 1901, in order to secure an issue of debentures totalling Pounds 750,000; and 2. a charge created by Mindscape Bordeaux SA (formerly Atreid Concept SA) in April 1993 over the revenues of the company from two software products to secure obligations under a FRF1,500,000 loan agreement between the company and UFB Locabail dated April 1993. 102 THE ELEVENTH SCHEDULE PART I FORM OF COMPETITIVE BID REQUEST To: Samuel Montagu & Co. Limited as Facility Agent for the Banks referred to below, From: Attention: [ ], 199[ ] Dear Sirs We refer to the multicurrency multi-option facility agreement, dated [ ] August, 1995 (as amended, varied, novated or supplemented from time to time, the "AGREEMENT"), between Pearson plc and Pearson Inc as original borrowers, the Banks as defined therein, yourselves as Facility Agent and others. Terms defined in the Agreement shall have the same meaning herein. We hereby give you notice pursuant to Clause 8 of the Agreement that we request a competitive bidding under the Agreement, and in that connection set forth below the terms on which such competitive bidding is requested to be made: (A) Utilisation Date -------------------- (B) Advances/Bills -------------------- (C) Aggregate amount and currency for which Competitive Bids are requested -------------------- (D) Term/Tenor -------------------- Yours faithfully The proceeds of any bids made and accepted in due course should be credited to [insert account details] [ BORROWER ] By: ___________________________________ Name: Title: 103 PART II FORM OF INVITATION FOR COMPETITIVE BID [Name of Bank] [Address] Attention: [ ] [ ], 199[ ] Dear Sirs Reference is made to the multi-currency multi-option facility agreement, dated [ ] August, 1995 (as the same may be amended, varied, novated or supplemented from time to time, the "AGREEMENT"), between Pearson plc and Pearson Inc. as original borrowers, the Banks as defined therein, Samuel Montagu & Co. Limited as agent and others. Terms defined in the Agreement shall have the same meanings herein. [Borrower] made a Competitive Bid Request on [ ], pursuant to Clause 8 of the Agreement, and in that connection you are invited to submit a Competitive Bid by [Date]/[Time]. Your Competitive Bid must comply with Clause 8 of the Agreement and the terms set forth below on which the Competitive Bid Request was made: (A) Utilisation Date ---------------------- (B) Advances/Bills ---------------------- (C) Aggregate amount and currency for which Competitive Bids are requested ---------------------- (D) Term/Tenor ---------------------- Yours faithfully Samuel Montagu & Co. Limited as Facility Agent By: ___________________________________ Name: Title: 104 PART III FORM OF COMPETITIVE BID Samuel Montagu & Co. Limited as Facility Agent for the Banks referred to below Attention: [ ] [ ], 199[ ] Dear Sirs We refer to the multi-currency multi-option facility agreement, dated [ ] August, 1995 (as the same may be amended, varied, novated or supplemented from time to time, the "AGREEMENT"), between Pearson plc and Pearson Inc. as original borrowers, the Banks as defined therein, yourselves as Facility Agent and others. Terms defined in the Agreement shall have the same meanings herein. We hereby make a Competitive Bid pursuant to Clause 8 of the Agreement, in response to the Competitive Bid Request made by the Borrower on [ ] and in that connection set forth below the terms on which such competitive Bid is made: (A) Utilisation Date ------------------- (B) Advances/Bills ------------------- (C) Principal Amount and currency ------------------- (D) Competitive Bid Rate ------------------- (E) Tenor/Term ------------------- We hereby confirm that we are prepared, subject to the conditions set forth in the Agreement, to extend credit to the Borrower upon acceptance by the Borrower of this bid in accordance with Clause 8 of the Agreement. Yours faithfully, [NAME OF BANK] By: ___________________________________ Name: 105 PART IV FORM OF COMPETITIVE BID - UTILISATION CONFIRMATION LETTER Samuel Montagu & Co. Limited as Facility Agent for the Banks referred to below Attention: [Date] Dear Sirs 1. We refer to the multi-currency multi-option facility agreement, dated [ ] August, 1995, (as the same may be amended, varied, novated or supplemented from time to time, the "AGREEMENT"), between Pearson plc and Pearson Inc as original borrowers, the Banks as defined therein, yourselves as Facility Agent and others. Terms defined in the Agreement shall have the same meaning when used herein. 2. In relation to the Competitive Bid Request dated [ ], we hereby give you notice pursuant to Clause 8.6 of the Agreement that [we wish to proceed with a Utilisation in respect thereof and the Requested Amount thereof is [ ]] **[we do not wish to proceed with a Utilisation in respect thereof]. ***3. We confirm that, at the date hereof, the representations set out in Clause 22 of the Agreement are true and no Event of Default or Potential Event of Default has occurred which has not been remedied or waived pursuant to Clause 45. ***The proceeds of the Utilisation the subject of this letter should be credited to [insert accounts details]. ......................... for and on behalf of [NAME OF BORROWER] By: Name: Title: - ------------------------------------------------------------------------------- *Delete whichever is inapplicable ***Delete if no Utilisation is to be proceeded with 106 THE TWELFTH SCHEDULE FORM OF POWER OF ATTORNEY THIS POWER OF ATTORNEY is made as a deed the day of 199 by [insert na me of company] of [insert registered address of company] (the "COMPANY") for the purposes of Clause 11 of the multi currency multi-option facility agreement dated [ ], 1995 (the "FACILITY AGREEMENT") made between Pearson plc[/the Company*] Pearson Inc. [/the Company/*/] [and the Company/*/], Samuel Montagu & Co. Limited as Facility Agent, the financial institutions defined therein as Banks and others [to which the Company has become a party pursuant to the borrower accession memorandum dated [ ] a copy of which is attached hereto/*/]. 1. Terms defined in the Facility Agreement have the same meanings when used in this Power of Attorney. 2. The Company hereby appoints Samuel Montagu & Co. Limited to be the true and lawful attorney of the Company, on behalf of and in the name of the Company (i) to complete Bills on behalf of the Company by (a) dating such Bills with the issue and maturity dates, (b) inserting the name of the relevant Bank as drawee, (c) inserting the face amount of each Bill in a manner consistent with allocations under Clause 6 of the Facility Agreement and (d) signing such Bills and (ii) to deliver the same to Banks for acceptance (Provided that the face amount of each Bill shall not exceed (Pounds)1,000,000) as provided in Clause 11 of the Facility Agreement in accordance with the following provisions of this Power of Attorney. 3. The powers conferred on Samuel Montagu & Co. Limited under paragraph 2 of this Power of Attorney shall be exercisable jointly by any two persons who are for the time being authorised signatories of, and appear in, the Signatures List of Samuel Montagu & Co. Limited. 4. In exercising those powers, such authorised signatories shall: (i) act as the agents of Samuel Montagu & Co. Limited in its capacity as the Company's attorney under this Power of Attorney; and (ii) sign on behalf of Samuel Montagu & Co. Limited and the Company as follows: "For and on behalf of [ ] by Samuel Montagu & Co. Limited as Attorney. ........................ Authorised Signatory" - -------------------------------------------------------------------------------- *Delete as appropriate 107 5. Any authorised signatory of Samuel Montagu & Co. Limited may make such arrangements as appear to him or her, as the case may be, proper for the Bills drawn and endorsed under this Power of Attorney to be delivered in accordance with the Facility Agreement. 6. Any Bills drawn, endorsed and delivered in accordance with this Power of Attorney shall be binding upon the Company for all purposes and the Company hereby (i) declares that each act, deed, matter and thing which shall be made, executed or done by any Attorney pursuant to its powers hereunder shall be as good, valid and effectual as if the Company had made, executed or done the same and (ii) agrees to ratify any and all acts, deeds, matters and things made, executed or done by or on behalf of Samuel Montagu & Co. Limited in accordance with the terms of this Power of Attorney. 7. The Company hereby agrees to indemnify Samuel Montagu & Co. Limited and each other Attorney in respect of all and any costs, losses and or expenses which it may suffer as a result of the exercise of any of its powers hereunder other than as a result of a breach by any one of them of Clause 11.3 or Clause 11.5(i) of the Facility Agreement. 8. This Power of Attorney shall remain in full force and effect and may be acted upon until the receipt by Samuel Montagu & Co. Limited of a notice in writing which is signed by a director or the secretary of the Company, is addressed to the Specialised Financing Department of Samuel Montagu & Co. Limited, is left at (not posted to) the offices of Sa muel Montagu & Co. Limited at 10 Lower Thames Street, London EC3R 6AE and expressly revokes this Power of Attorney. 9. Notwithstanding the foregoing such revocation shall not take effect with respect to any Bills in relation to which a Utilisation Request has been made prior to the time of receipt by Samuel Montagu & Co. Limited of the notice of revocation referred to in paragraph 8 above and in relation to which the powers of Samuel Montagu & Co. Limited contained in this Power of Attorney shall remain in full force and effect. 10. This Power of Attorney shall be governed by English law. IN WITNESS whereof the Company has executed and delivered this Power of Attorney as a deed on the date first before written. Executed as a deed ) ) on behalf of ) [ ] ) by: ........................ director ........................ director/secretary 108 THE ORIGINAL BORROWERS PEARSON PLC By: /s/ D.H. COLVILLE Address: 3 Burlington Gardens London W1X 1LE Telephone: 0171 411 2000 Fax: 0171 411 2390/2299 Telex: 8953869 PEARSON INC. By: /s/ D.H. COLVILLE Address: One Rockefeller Plaza New York NY 10020 USA Telephone: 00 1 212 713 1919 Fax: 00 1 212 247 4616 Telex: N/A THE ARRANGERS MIDLAND BANK PLC By: /s/ P.C. BULL Address: 27-32 Poultry London EC2P 2BX Telephone: 0171 260 4615 Fax: 0171 260 4800 Telex: 895 4744 109 UNION BANK OF SWITZERLAND By: /s/ K. TRIBLEY Address: P O Box 428 100 Liverpool Street London EC2M 2RH Telephone: 0171 901 3333 Fax: 0171 901 3903 Telex: 941 3848/3944 UBS COR G THE FACILITY AGENT SAMUEL MONTAGU & CO. LIMITED By: /s/ T.D REID Address: 10 Lower Thames Street London EC3R 6AE Telephone: 0171 260 9000 Fax: 0171 260 9809 Telex: 919316 SMTPUT G Attention: Specialised Financing Support THE DOLLAR SWING-LINE AGENT MIDLAND BANK PLC, NEW YORK BRANCH By: /s/ MARTIN BROWN Address: 140 Broadway New York NY 10005 USA Telephone: 00 1 212 658 2738 Fax: 00 1 212 658 2586 Telex: 426423 MID BK Attention: Martin Brown 110 THE STERLING SWING-LINE AGENT SAMUEL MONTAGU & CO. LIMITED By: /s/ T.D. REID Address: 10 Lower Thames Street London EC3R 6AE Telephone: 0171 260 9000 Fax: 0171 260 9809 Telex: 919316 SMTPUT G Attention: Specialised Financing Support THE BANKS MIDLAND BANK PLC By: /s/ P.C. BULL Address: 27-32 Poultry London EC2P 2BX Telephone: 0171 260 8000 Fax: 0171 260 4800 Telex: 8954744 UNION BANK OF SWITZERLAND By: /s/ K. TRIBLEY Address: P O Box 428 100 Liverpool Street London EC2M 2RH Telephone: 0171 901 3333 Fax: 0171 901 3903 Telex: 941 3848/3944 UBS COR G 111 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED By: /s/ ROBERT S. RUSSELL Address: Minerva House P O Box 7 Montague Close London SE1 9DH Telephone: 0171 378 2121 Fax: 0171 378 2880/2378 Telex: 8812741 Anzbka g 885043-6 Grndly g BANQUE NATIONALE DE PARIS, LONDON BRANCH By: /s/ N.J. SAINT Address: P O Box 781 8-13 King William Street London EC4N 7QJ Telephone: 0171 895 7070 Fax: 0171 929 0310 Telex: 883412 BNPLNX G BARCLAYS BANK PLC By: /s/ C.B. EVANS Address: for Credit Matters: for Administration Matters: Murray House Central Loans Administration 1 Royal Mint Court Department (CLAD) UK London 5th Floor, St Swithin's House EC3N 4HH St Swithin's Lane London EC4N 8AS Telephone: 0171 488 1144 Telephone: 0171 621 4000 Fax: 0171 696 3048 Facsimile: 0171 621 4583 Telex: 934148 BBSAIO G Telex: 8950821 BARIBG G 112 CREDIT LYONNAIS By: /s/ CECILE VERROEST Address: P O Box 81 84-94 Queen Victoria Street London EC4P 4LX Telephone: 0171 634 8000 Fax: 0171 489 1559/1909 Telex: 885479 DEUTSCHE BANK AG, LONDON By: /s/ GARTH M. HARLOW Address: 6 Bishopsgate London EC2P 2AT Telephone: 0171 971 7000 Fax: 0171 971 7455 Telex: 9401 5555 NATIONAL WESTMINSTER BANK PLC By: /s/ BERNARD J. SKIVINGTON Address: 135 Bishopsgate London EC2M 3UR Telephone: 0171 334 1000 Fax: 0171 375 5524 Telex: 882121 113 ROYAL BANK OF CANADA By: /s/ C. VIRAG Address: 71 Queen Victoria Street London EC4V 4DE Telephone: 0171 489 1188 Fax: 0171 248 6322 Telex: 929111 RBCCTY THE SUMITOMO BANK, LIMITED By: /s/ K.D. HARBER Address: Temple Court 11 Queen Victoria Street London EC4N 4TA Telephone: 0171 786 1000 Fax: 0171 236 0049 Telex: 887667 TORONTO-DOMINION BANK By: /s/ H.M. BAKER Address: Triton Court 14/18 Finsbury Square London EC2A 1DB Telephone: 0171 920 0272 Fax: 0171 638 0006 Telex: 886142 114 WESTDEUTSCHE LANDESBANK GIROZENTRALE, LONDON BRANCH By: T.D. REID Address: 51 Moorgate London EC2R 6AE Telephone: 0171 638 6141 Fax: 0171 374 8546 Telex: 887984/5 115 EX-99.(C)(1) 10 AGREEMENT AND PLAN OF MERGER Exhibit (c)(1) AGREEMENT AND PLAN OF MERGER BY AND AMONG ALL AMERICAN COMMUNICATIONS, INC., PEARSON PLC AND PEARSON MERGER COMPANY, INC. DATED AS OF OCTOBER 1, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER........................................................ 2 Section 1.1 The Merger............................................... 2 Section 1.2 Closing.................................................. 3 Section 1.3 Effective Time........................................... 3 Section 1.4 Subsequent Actions....................................... 3 Section 1.5 Certificate of Incorporation............................. 3 Section 1.6 The Bylaws............................................... 3 Section 1.7 Officers and Directors................................... 3 ARTICLE II CONVERSION OR CANCELLATION OF SHARES IN THE MERGER............... 4 Section 2.1 Conversion or Cancellation of Shares..................... 4 Section 2.2 Payment for Shares, Stock Options and Warrants in the Merger............................................. 5 Section 2.3 Transfer of Shares After the Effective Time.............. 6 Section 2.4 No Liability............................................. 6 Section 2.5 Lost Certificates........................................ 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 6 Section 3.1 Organization and Qualification; Subsidiaries............. 7 Section 3.2 Restated Certificate of Incorporation and Bylaws............................................................. 7 Section 3.3 Capitalization........................................... 7 Section 3.4 Authority Relative to this Agreement..................... 8 Section 3.5 No Conflict; Required Filings and Consents............... 9 Section 3.6 SEC Filings; Financial Statements........................ 10 Section 3.7 Absence of Certain Changes or Events..................... 12 Section 3.8 Intellectual Property.................................... 12 Section 3.9 Material Contracts....................................... 13 Section 3.10 Environmental Matters.................................... 14 Section 3.11 Benefit Plans............................................ 14 Section 3.12 Tax Matters.............................................. 16 Section 3.13 Litigation............................................... 17 Section 3.14 Opinion of Financial Advisor............................. 17 Section 3.15 Brokers.................................................. 17 Section 3.16 Properties and Assets.................................... 17 Section 3.17 Compliance with Laws in General.......................... 17 Section 3.18 Labor Matters............................................ 18 Section 3.19 Insurance................................................ 18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB....... 19 Section 4.1 Organization and Qualification; Subsidiaries............. 19 Section 4.2 Certificate of Incorporation and Bylaws.................. 19 Section 4.3 Authority Relative to this Agreement..................... 20 Section 4.4 No Conflict; Required Filings and Consents............... 20 Section 4.5 Ownership of Merger Sub; No Prior Activities............. 21 Section 4.6 Litigation............................................... 21 Section 4.7 Financing................................................ 21 Section 4.8 Brokers.................................................. 21 Section 4.9 Ownership of Shares...................................... 21
i ARTICLE V COVENANTS....................................................... 22 Section 5.1 Interim Operations of the Company...................... 22 ARTICLE VI ADDITIONAL AGREEMENTS.......................................... 23 Section 6.1 Meeting of the Stockholders............................ 23 Section 6.2 Filings; Other Action.................................. 24 Section 6.3 Access................................................. 24 Section 6.4 Notification of Certain Matters........................ 25 Section 6.5 Publicity.............................................. 25 Section 6.6 Indemnification........................................ 25 Section 6.7 Obligations of Merger Sub.............................. 27 Section 6.8 Stock Options and Warrants............................. 27 Section 6.9 Employee Benefit Plans................................. 28 Section 6.10 No Solicitation of Transactions........................ 28 Section 6.11 Directors.............................................. 29 Section 6.12 Use of Name............................................ 30 ARTICLE VII CONDITIONS.................................................... 30 SECTION 7.1 Conditions to the Obligations of Each Party............ 31 ARTICLE VIII TERMINATION.................................................. 31 Section 8.1 Termination by Mutual Consent.......................... 31 Section 8.2 Termination by Either Purchaser or the Company.......................................................... 31 Section 8.3 Termination by Purchaser............................... 32 Section 8.4 Termination by the Company............................. 32 Section 8.5 Effect of Termination and Abandonment.................. 33 Section 8.6 Issuance of New or Treasury Shares..................... 33 ARTICLE IX THE OFFER...................................................... 34 Section 9.1 Tender Offer........................................... 34 ARTICLE X MISCELLANEOUS; GENERAL.......................................... 35 Section 10.1 Payment of Expenses.................................... 35 Section 10.2 Survival............................................... 36 Section 10.3 Modification or Amendment.............................. 36 Section 10.4 Counterparts........................................... 36 Section 10.5 Governing Law.......................................... 36 Section 10.6 Notices................................................ 36 Section 10.7 Entire Agreement, etc.................................. 37 Section 10.8 Captions............................................... 37 Section 10.9 Certain Definitions.................................... 37 Section 10.10 No Third Party Beneficiaries........................... 38
ii GLOSSARY OF DEFINED TERMS
DEFINED TERM POSITION OF DEFINITION - ------------ ---------------------- Agreement Preamble Benefit Plans (S) 3.11(c) Certificate of Merger (S) 1.3 Certificates (S) 2.2(b) Claim (S) 6.6(b) Closing (S) 1.2 Code (S) 3.11(c) Company Preamble Common Stock Recitals Company Disclosure Schedule Article III Preamble Company Material Adverse Effect (S) 3.1 Company Subsidiary (S) 3.1 Competing Transaction (S) 6.10(b) Competing Transaction Termination (S) 8.6 Confidentiality Agreement (S) 6.3 Constituent Corporations Preamble DGCL (S) 1.1 Dissenting Shares (S) 2.1(a) Effective Time (S) 1.3 Environmental Laws (S) 3.10 ERISA (S) 3.11(b) Exchange Act (S) 3.5(b) Expenses (S) 10.1(a) GAAP (S) 3.6(c) Governmental Authority (S) 3.5(b) HSR Act (S) 3.5(b) Indemnified Parties (S) 6.6(b) Independent Directors (S) 6.11(a) Intellectual Property Rights (S) 3.8 Law (S) 3.5(a) Merger (S) 1.1 Merger Consideration (S) 2.1(a) Merger Sub Preamble NASDAQ/NMS (S) 3.5(b) Offer Recitals Offer Documents (S) 9.1(b) Order (S) 7.1(f) Paying Agent (S) 2.2(a) Payment Fund (S) 2.2(a) Plans (S) 3.3 Proxy Statement (S) 6.1(b) Purchaser Companies (S) 2.1(a) Purchaser Material Adverse Effect (S) 4.1 Purchaser Preamble Schedule 14D-9 (S) 9.1(b) SEC (S) 3.6(a)
iii SEC Reports (S) 3.6(a) Securities Act (S) 3.6(a) Shares (S) 2.1(a) Stockholders Agreement Recitals Stockholders Meeting (S) 6.1(a) Surviving Corporation (S) 1.1 Transactions (S) 3.4(a)
iv AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated as of October 1, 1997, among ALL AMERICAN COMMUNICATIONS, INC., a Delaware corporation (the "Company"), PEARSON PLC, a corporation organized under the laws of the United Kingdom ("Purchaser"), and PEARSON MERGER COMPANY, INC., a Delaware corporation ("Merger Sub"), the Company and Merger Sub sometimes being hereinafter collectively referred to as the "Constituent Corporations." RECITALS WHEREAS, the Company desires that Merger Sub merge with and into the Company, all upon the terms and subject to the conditions of this Agreement; WHEREAS, the Company, Purchaser and Merger Sub desire to make certain representations, warranties, covenants and agreements in connection with the merger of the Company and Merger Sub; WHEREAS, in furtherance of the Merger (as defined in Section 1.1), it is proposed that Merger Sub commence a tender offer for all of the outstanding Shares (as defined in Section 2.1(a)) at a price of $25.50 per share (the "Offer"); and WHEREAS, concurrently with the execution of this Agreement, certain stockholders of the Company have entered into a stockholders agreement (the "Stockholders Agreement") pursuant to which such stockholders have agreed, among other things, to vote certain of their Shares in favor of this Agreement and the Merger (as defined in Section 1.1), and to tender such Shares to Merger Sub in accordance with the Offer; NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants, agreements and conditions herein contained, the parties hereto agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3) Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease (the "Merger"). The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware, and the separate corporate existence of the Company with all its rights, privileges, immunities and franchises shall continue unaffected by the Merger. The Merger shall have the effects specified in the Delaware General Corporation Law (the "DGCL"). Section 1.2 Closing. The closing of the Merger (the "Closing") shall take place (i) at the offices of Kaye, Scholer, Fierman, Hays & Handler, LLP as promptly as practicable but in no event later than the third business day after which the last to be fulfilled or waived of the conditions set forth in Article VII hereof shall be fulfilled or waived in accordance with this Agreement, at such time as the Company and Purchaser may agree, or (ii) at such other place and time and/or on such other date as the Company and Purchaser may agree. Section 1.3 Effective Time. As soon as practicable following fulfillment or waiver of the conditions specified in Article VII hereof, and provided that this Agreement has not been terminated or abandoned pursuant to Article VIII hereof, the Company and the Purchaser will cause a Certificate of Merger (the "Certificate of Merger") or Purchaser shall cause a Certificate of Ownership and Merger (the "Certificate of Ownership") to be executed and filed with the Secretary of State of Delaware as provided in the DGCL. The Merger shall become effective at such time as the Certificate of Merger or Certificate of Ownership has been duly filed with the Secretary of State of Delaware, and such time is hereinafter referred to as the "Effective Time." Section 1.4 Subsequent Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of the Constituent Corporations acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of each of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Constituent Corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out this Agreement. Section 1.5 Certificate of Incorporation. The Certificate of Incorporation of the Company in effect at the Effective Time shall be the Certificate of Incorporation of the 2 Surviving Corporation, provided that, subject to Section 6.6(a), it shall be amended to read as set forth in Exhibit A. Section 1.6 The Bylaws. The bylaws of the Company in effect at the Effective Time shall be the bylaws of the Surviving Corporation, provided that, subject to Section 6.6(a), they shall be amended to read as set forth in Exhibit B. Section 1.7 Officers and Directors. The directors and officers of Merger Sub at the Effective Time shall, from and after the Effective Time, continue as the directors and officers, respectively, of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and bylaws. ARTICLE II CONVERSION OR CANCELLATION OF SHARES IN THE MERGER Section 2.1 Conversion or Cancellation of Shares. The manner of converting or canceling shares of the Company and Merger Sub in the Merger shall be as follows: (a) At the Effective Time, each share of the Company's common stock, par value $.0001 per share (the "Common Stock"), and each share of the Company's Class B Common Stock, par value $.0001 per share (the "Class B Common Stock", and together with the issued and outstanding Common Stock, the "Shares"), issued and outstanding immediately prior to the Effective Time (other than shares owned by Purchaser, Merger Sub or any other subsidiary or affiliate of Purchaser (collectively, the "Purchaser Companies") or Shares which are held by stockholders exercising appraisal rights pursuant to Section 262 of the DGCL ("Dissenting Shares")) shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and extinguished and converted into the right to receive, in cash, the greater of (x) $25.50 or (y) such greater amount which may be paid pursuant to the Offer (the "Merger Consideration"). All such Shares, by virtue of the Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall thereafter cease to have any rights with respect to such Shares, except the right to receive the Merger Consideration for such Shares upon the surrender of such certificate in accordance with Section 2.2. (b) At the Effective Time, each Share issued and outstanding at the Effective Time and owned by any of the Purchaser Companies, and each Share issued and held in the Company's treasury at the Effective Time, shall, by virtue of the Merger and without any action on the part of the holder thereof, 3 cease to be outstanding, be canceled and be retired without payment of any consideration therefor and cease to exist. (c) At the Effective Time, each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. (d) Notwithstanding anything in this Agreement to the contrary, any Dissenting Shares held by a person (a "Dissenting Stockholder") who shall not have voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such Dissenting Shares in accordance with Section 262 of the DGCL shall not be converted as described in Section 2.1(a), but shall become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to the laws of the State of Delaware. If, after the Effective Time, such Dissenting Stockholder withdraws its demand for appraisal or fails to perfect or otherwise loses its right of appraisal, in any case pursuant to the DGCL, its Shares shall be deemed to be converted as of the Effective Time into the right to receive the Merger Consideration without interest. The Company shall give Purchaser prompt notice of any demands for appraisal of shares received by the Company. The Company shall not, without the prior written consent of Purchaser, make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. Section 2.2 Payment for Shares, Stock Options and Warrants in the Merger. The manner of making payment for Shares and outstanding options and warrants to purchase Shares in the Merger shall be as follows: (a) At or prior to the Effective Time, Purchaser or Merger Sub shall deposit in trust for the benefit of the holders of Shares with a bank or trust company designated by Purchaser and approved by the Company (the "Paying Agent"), cash in an aggregate amount equal to the sum of (i) the product of (A) the number of Shares issued and outstanding at the Effective Time (other than Shares owned by the Purchaser Companies and other than Dissenting Shares) and (B) the Merger Consideration and (ii) the amount necessary for the payment in full of the Option Consideration (as defined in Section 6.8) (such amount being hereinafter referred to as the "Payment Fund"). The Paying Agent shall, pursuant to irrevocable instructions, make the payments provided for in Sections 2.1 and 6.8 of this Agreement out of the Payment Fund. The Payment Fund shall not be used for any other purpose except as provided in this Agreement. (b) Promptly after the Effective Time, the Paying Agent shall mail to each record holder (other than the Purchaser Companies), as of the Effective Time, of an outstanding 4 certificate or certificates which immediately prior to the Effective Time, represented Shares (the "Certificates") a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payments therefor. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor cash in an amount equal to the product of (i) the number of Shares represented by such Certificate and (ii) the Merger Consideration, and such Certificate shall forthwith be canceled. No interest will be paid or accrued on the cash payable upon the surrender of the Certificates. If payment is to be made to a person other than the person in whose name the Certificate surrendered is registered, it may be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered, or that such person shall establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 2.2, each Certificate (other than Certificates representing shares owned by the Purchaser Companies and other than Certificates representing Dissenting Shares) shall represent, for all purposes, the right to receive the Merger Consideration in cash multiplied by the number of Shares evidenced by such Certificate, without any interest thereon. (c) Any portion of the Payment Fund which remains unclaimed by the stockholders of the Company for one year after the Effective Time shall be repaid to the Surviving Corporation (or to the Purchaser if the Payment Fund was deposited by the Purchaser), upon demand, and any stockholders of the Company who have not theretofore complied with Section 2.2(b) shall thereafter look only to the Purchaser and the Surviving Corporation, jointly and severally, for payment of their claim for the Merger Consideration for Shares, without any interest thereon. The Paying Agent shall retain the right to invest and reinvest the Payment Fund on behalf of the Surviving Corporation (or the Purchaser, if applicable) in securities issued or guaranteed by the United States government or certificates of deposit of commercial banks that have, or are members of a group of commercial banks that has, consolidated total assets of not less than $500,000,000 and shall receive the interest earned thereon. Section 2.3 Transfer of Shares After the Effective Time. No transfers of Shares shall be made on the stock transfer books of the Surviving Corporation at or after the Effective Time. 5 Section 2.4 No Liability. None of Purchaser, Merger Sub, the Company or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates shall not have been surrendered prior to seven years after the Effective Time (or immediately prior to such earlier date on which any payment pursuant to this Article II would otherwise escheat to or become the property of any governmental entity), the cash payment in respect of such Certificate shall, unless otherwise provided by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. Section 2.5 Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Disclosure Schedule delivered by the Company to Purchaser and Merger Sub concurrently with the execution of this Agreement (the "Company Disclosure Schedule"), the Company hereby represents and warrants to Purchaser and Merger Sub that: Section 3.1 Organization and Qualification; Subsidiaries. The Company and each Company Subsidiary (as hereinafter defined) is a corporation or limited liability company, as the case may be, duly incorporated or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted. The Company and each Company Subsidiary is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failure to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Company Material Adverse Effect. The Company is not subject to Section 2115 of the California General Corporation 6 Law. The term "Company Material Adverse Effect" means, for all purposes of this Agreement, any change in the business of the Company and the Company Subsidiaries that is materially adverse (or any group of such changes, none of which individually is materially adverse, but which in the aggregate are materially adverse) to the business, operations, properties, financial position or results of operations of the Company and its subsidiaries, taken as a whole, provided that none of the following shall constitute a Company Material Adverse Effect: (i) a decline in the ratings of any television programs distributed or produced by the Company or its subsidiaries or the cancellation of any television programs distributed or produced by the Company or its subsidiaries, (ii) the filing, initiation and subsequent prosecution, by or on behalf of stockholders of the Company, of litigation that challenges or otherwise seeks damages with respect to the Transactions, (iii) occurrences due to a disruption of the Company's or its subsidiaries' businesses as a result of the announcement of the execution of this Agreement, (iv) general economic conditions or (v) any changes generally affecting the industries in which the Company and its subsidiaries operate. For purposes of this Agreement, the term "Company Subsidiary" shall mean a subsidiary of the Company that is identified as such in Section 3.1 of the Company Disclosure Schedule. Section 3.1 of the Company Disclosure Schedule sets forth a complete list of all subsidiaries of the Company. Except as set forth in Section 3.1 of the Company Disclosure Schedule, the Company owns directly or indirectly all of the issued and outstanding shares of capital stock of the Company Subsidiaries. Other than as set forth in Section 3.1 of the Company Disclosure Schedule, as of the date of this Agreement the Company has no other equity interest in any other entity. Section 3.2 Restated Certificate of Incorporation and Bylaws. The Company has heretofore furnished to Purchaser a complete and correct copy of the Restated Certificate of Incorporation and the Bylaws of the Company. The Restated Certificate of Incorporation and Bylaws of the Company are in full force and effect. As of the date of this Agreement, the Company is not in violation of any of the provisions of its Restated Certificate of Incorporation or Bylaws. Section 3.3 Capitalization. The authorized capital stock of the Company consists of 40,000,000 shares of common stock, consisting of (i) 20,000,000 shares of Common Stock having a par value of $.0001 per share and (ii) 20,000,000 shares of Class B Common Stock having a par value of $.0001 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. As of September 23, 1997, (i)17,981 shares of Common Stock issued before the Company's March 20, 1992 4-for-1 reverse stock split but not exchanged for certificates representing the Company's post-split Common Stock (4,495.25 equivalent shares of post-split Common Stock), 7,015,062 shares of Common Stock (such amount excludes shares held in treasury) and 5,149,650 shares of Class B 7 Common Stock (such amount excludes shares held in treasury) were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) 80,000 shares of Common Stock and 578,200 shares of Class B Common Stock were held in the treasury of the Company, (iii) 30,000 shares of restricted Common Stock were awarded in August 1994, but not issued, to Lawrence Lamattina , and (iv) no shares of Preferred Stock were issued and outstanding. Except as otherwise permitted by this Agreement and except for options granted pursuant to the Company's 1991 Incentive Stock Option Plan or 1994 Stock Incentive Plan (collectively, the "Plans") which options, including the exercise price thereof, are set forth in Section 3.3 of the Company Disclosure Schedule or options or warrants granted pursuant to agreements or arrangements otherwise described in Section 3.3 of the Company Disclosure Schedule, there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or obligating the Company to issue or sell any shares of capital stock of, or other equity interests in, the Company. All Shares subject to issuance, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. There are no outstanding contractual obligations of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any Shares. Other than as set forth on Section 3.3 of the Company Disclosure Schedule, there are no stockholder agreements, voting trusts or other agreements or understandings to which the Company is a party relating to voting or disposition of any shares of capital stock of the Company or granting to any person or group of persons the right to elect, or to designate or nominate for election, a director to the board of directors of the Company. Section 3.4 Authority Relative to this Agreement. (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby (the "Transactions"). The execution and delivery of this Agreement by the Company and the consummation by the Company of the Transactions have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the Transactions (other than, with respect to the Merger (unless Section 253 of the DGCL is applicable), the approval and adoption of this Agreement by the holders of a majority of the then outstanding shares of Common Stock, and the filing and recordation of appropriate merger documents as required by the DGCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Purchaser and Merger Sub, constitutes a legal, valid and binding obligation of the Company, enforceable against the 8 Company in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and to general principles of equity. (b) The Board of Directors of the Company has (i) approved and adopted this Agreement and the transactions contemplated hereby, (ii) determined that the Offer and the Merger are in the best interests of the Company and its stockholders and that the terms of this Agreement are fair to the Company and its stockholders and (iii) subject to the provisions of Section 6.1(a) hereof, determined and agreed to recommend that the stockholders of the Company approve and adopt this Agreement. (c) The Board of Directors of the Company has approved Purchaser as an "interested stockholder" within the meaning of Section 203 of the DGCL with respect to the Merger, any acquisition of Shares pursuant to the Stockholders Agreement, the Offer or any of the other Transactions. Section 3.5 No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not (i) conflict with or violate the Restated Certificate of Incorporation or Bylaws of the Company or conflict with or violate the certificate of incorporation or bylaws or equivalent organizational documents of any Company Subsidiary, (ii) assuming that all consents, approvals, authorizations and other actions described in subsection (b) have been obtained and all filings and obligations described in subsection (b) have been made or complied with, conflict with or violate any foreign or domestic (federal, state or local) law, statute, ordinance, rule, regulation, permit, injunction, writ, judgment, decree or order ("Law") applicable to the Company or any Company Subsidiary or by which any asset of the Company or any Company Subsidiary is bound or affected, or (iii) conflict with, result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or require any payment under, or result in the creation of a lien, claim, security interest or other charge or encumbrance on any asset of the Company or any Company Subsidiary pursuant to, any contract or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which any asset of the Company or any Company Subsidiary is bound or affected, except, with respect to (x) clause (iii), under the Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of April 13, 1995, as amended and restated as of October 23, 1996, and as in effect on the date hereof, between the Company and The Chase Manhattan Bank, as agent and fronting bank, the Indenture, dated as of October 11, 1996, between the Company and U.S. Trust Company of California, N.A., as Trustee, 9 with respect to the Company's 10 7/8% Senior Subordinated Notes due 2001, and the other agreements listed in Section 3.5(a) of the Disclosure Schedule, and (y) clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults, or other occurrences that would not, individually or in the aggregate, have a Company Material Adverse Effect, or prevent, materially hinder or make materially more burdensome the Transactions. (b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any United States (federal, state or local) or foreign government or governmental, regulatory or administrative authority, agency, commission, board, bureau, court or instrumentality or arbitrator of any kind ("Governmental Authority"), except (i) for applicable requirements, if any, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the National Association of Securities Dealers, Inc. Automated Quotation/National Market System ("NASDAQ/NMS") and state takeover laws, the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), any pre-merger notification filing with the German Federal Cartel Office and filing and recordation of appropriate merger documents as required by the DGCL and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay consummation of the Offer or the Merger or otherwise prevent the Company from performing its obligations under this Agreement, and would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 3.6 SEC Filings; Financial Statements. (a) Since January 1, 1996, and prior to the execution and delivery of this Agreement, the Company has filed all forms, reports, statements and other documents required to be filed with the Securities and Exchange Commission (the "SEC"), including, without limitation, (A) all Annual Reports on Form 10-K, (B) all Quarterly Reports on Form 10-Q, (C) all proxy statements relating to meetings of stockholders (whether annual or special), (D) all Reports on Form 8- K, (E) all other reports or registration statements and (F) all amendments and supplements to all such reports and registration statements (collectively, the "SEC Reports"). The SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act of 1933, as amended (the "Securities Act") and the Exchange Act and the rules and regulations of the SEC thereunder applicable to such SEC Reports and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or 10 necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the SEC Reports has been prepared in all material respects in accordance with the published rules and regulations of the SEC and generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each fairly presents, in all material respects, the consolidated financial position, results of operations and cash flows of the Company and its consolidated subsidiaries as at the respective dates thereof and for the respective periods indicated therein, except as otherwise indicated in the notes thereto (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which were not and are not expected, individually or in the aggregate, to have a Company Material Adverse Effect). (c) Except as and to the extent set forth on, or reserved against on, the consolidated balance sheet of the Company and its consolidated subsidiaries as of June 30, 1997, including the notes thereto, none of the Company or any Company Subsidiary has any liability or obligation of any nature (whether accrued, absolute, contingent, fixed, liquidated, unliquidated or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of the Company, or in the notes thereto, prepared in accordance with the published rules and regulations of the SEC and generally accepted accounting principles, except for liabilities or obligations (i) disclosed in any SEC Report filed since June 30, 1997 and prior to the execution and delivery of this Agreement, or in the Company Disclosure Schedule or (ii) incurred in the ordinary course of business since June 30, 1997, that would not, individually or in the aggregate, have a Company Material Adverse Effect. Except as set forth in Section 3.13 of the Company Disclosure Schedule, neither the Company nor any of the Company Subsidiaries has any liability for any discontinued operations (as such term is used in accordance with generally accepted accounting principles ("GAAP")) or with respect to any business or assets formerly owned or operated by the Company or any of the Company Subsidiaries or with respect to any predecessor of the Company or any of the Company Subsidiaries, that would individually or in the aggregate have a Company Material Adverse Effect. Section 3.6(c) of the Company Disclosure Schedule sets forth the amount of principal and unpaid interest outstanding as of September 30, 1997 under each instrument evidencing Indebtedness of or borrowed money of the Company and the Company Subsidiaries which will accelerate or become due or result in a right of redemption or repurchase on the part of the holder of such Indebtedness (with or without due notice or lapse of time) as a result of this Agreement, the Merger or the other Transactions. 11 (d) Except in each case as disclosed in the SEC Reports or as set forth in Section 3.6(d) of the Company Disclosure Schedule, none of the Company or any of the Company Subsidiaries is indebted to any director or executive officer of the Company or any of the Company Subsidiaries (except for amounts due as normal salaries and bonuses, in reimbursement of ordinary expenses and directors' fees) and no such person is indebted to the Company or any of the Company Subsidiaries, and there have been no other transactions of the type required to be disclosed pursuant to Items 402 and 404 of Regulation S-K under the Exchange Act. (e) As of the date hereof, the aggregate amount of Indebtedness of the Company and its subsidiaries does not exceed $200,000,000. Except as identified in Section 3.6(e) of the Company Disclosure Schedule, no Indebtedness of the Company or any of the Company Subsidiaries in excess of $100,000 contains any restriction upon (i) the prepayment of such Indebtedness, (ii) the incurrence of Indebtedness by the Company or any of the Company Subsidiaries or (iii) the ability of the Company or any of the Company Subsidiaries to grant any liens on its properties or assets. For purposes of this Agreement, "Indebtedness" shall mean (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (ii) any other indebtedness which is evidenced by a note, bond, debenture or similar instrument, (iii) all obligations under financing leases (as such term is used in accordance with GAAP), (iv) all obligations in respect of acceptances issued or created, (v) all liabilities secured by any lien on any property, and (vi) all guarantee obligations. Section 3.7 Absence of Certain Changes or Events. From June 30, 1997 to the date hereof, except as contemplated by this Agreement or as disclosed in any SEC Report filed since June 30, 1997 and prior to the execution and delivery of this Agreement or in the Company Disclosure Schedule, the Company and the Company Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and there has not been (a) any change by the Company in its accounting methods, principles or practices, (b) any revaluation by the Company of any material asset (including, without limitation, any writing down of the value of inventory or writing off of notes or accounts receivable), other than in the ordinary course of business consistent with past practice, (c) any entry by the Company or any Company Subsidiary into any commitment or transaction material to the Company and the Company Subsidiaries taken as a whole, except in the ordinary course of business and consistent with past practice, (d) any declaration, setting aside or payment of any dividend or distribution in respect of the Shares or any redemption, purchase or other acquisition of any of its securities, (e) except for increases required by existing 12 employment agreements, any increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any officers of the Company or any Company Subsidiary or any other employee earning in excess of $100,000 per year, (f) any entry by the Company or any Company Subsidiary into any employment, consulting, severance, termination or indemnification agreement with any officer of the Company or any Company Subsidiary or entry into any such agreement with any other person for an amount in excess of $100,000 per year or outside the ordinary course of business, (g) any Company Material Adverse Effect or (h) any agreement by the Company or any Company Subsidiary to take any of the actions described in this Section 3.7 except as expressly contemplated by this Agreement, other than for such events that would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 3.8 Intellectual Property. Except as set forth in the Company Disclosure Schedule, the Company and each of the Company Subsidiaries own or possess or have the enforceable right to use the licenses, copyrights, know-how (including trade secrets and other proprietary or confidential information, systems or procedures), trademarks, service marks and trade names, performing rights and literary, dramatic, musical or artistic rights (collectively, the "Intellectual Property") presently employed by them in connection with the operation of the businesses now operated by them, except where the failure to own, possess or have the enforceable right to use such Intellectual Property would not, individually or in the aggregate, have a Company Material Adverse Effect, and neither the Company nor any of the Company Subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to the foregoing which has a reasonable likelihood of resulting in an unfavorable decision, ruling or finding, which, individually or in the aggregate, would result in a Company Material Adverse Effect. The use of such Intellectual Property in connection with the business and operations of the Company and the Company Subsidiaries does not infringe on the rights of any person, except as would not, individually or in the aggregate, taking into account the rights of the Company against third parties, result in a Company Material Adverse Effect. Except as provided otherwise on Schedule 3.8(a) of the Company Disclosure Schedule, the Company or one of its subsidiaries owns, is licensed or otherwise possesses the exclusive right to exploit, for the remaining balance of the respective terms of copyright, existing episodes of the television series listed in Section 3.8(a) of the Company Disclosure Schedule, and the perpetual right to produce and exploit new episodes based on the 13 formats and, to the knowledge of the Company, the titles of those television series, in terms of television rights (whether free, pay, cable or satellite) and in the territories listed on Section 3.8(a) of the Company Disclosure Schedule, subject only to the licenses and grants to third parties listed or referenced on Section 3.8(a) of the Company Disclosure Schedule, except where the failure to have such rights would not, individually or in the aggregate, have a Company Material Adverse Effect. Except as provided otherwise on Section 3.8(b) of the Company Disclosure Schedule, the Company or one of its subsidiaries owns, is licensed or otherwise possesses the exclusive right to produce and exploit new episodes based on the formats and, to the best knowledge of the Company, the titles of the television series listed in Section 3.8(b) of the Company Disclosure Schedule, in terms of television rights (whether free, pay, cable or satellite) and in the territories listed or referenced on Section 3.8(b) of the Company Disclosure Schedule, subject only to the licenses and grants to third parties listed or referenced on Section 3.8(b) of the Company Disclosure Schedule, except where the failure to have such rights would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 3.9 Material Contracts. (a) Except as disclosed in Section 3.9(a) of the Disclosure Schedule, neither the Company nor any of the Company Subsidiaries nor, to the knowledge of the Company, any party other than the Company or any Company Subsidiary, is in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any Material Contracts (as hereinafter defined) to which the Company or any such Company Subsidiary is a party, except for any such default which would not reasonably be expected to result in a Company Material Adverse Effect. (b) Section 3.9(b) of the Company Disclosure Schedule sets forth a list as of the date of this Agreement of (i) all credit agreements, indentures, and other agreements related to any Indebtedness for borrowed money in excess of $100,000 of the Company or any Company Subsidiaries, (ii) all joint venture agreements to which the Company or any Company Subsidiaries are a party, (iii) all material distribution agreements and/or licensing agreements to which the Company or any Company Subsidiaries are party and (iv) all other contracts and agreements which are material (as hereinafter defined) to the Company and its subsidiaries taken as a whole (collectively, the "Material Contracts"). The Company has made available to the Purchaser each agreement listed in Section 3.9(b) or the Company Disclosure Schedule. For purposes of this Section 3.9(b) an agreement shall be deemed "material" if the Company reasonably expects that the Company or any of its subsidiaries would, pursuant to the terms thereof, (x) recognize during the current or any future fiscal year of the Company net revenues after the 14 payment of third party shares in excess of $250,000 or (y) incur during the current or any future fiscal year of the Company liabilities or obligations (not covered by corresponding revenues) in excess of $100,000. (c) Except as set forth in Section 3.5 of the Company Disclosure Schedule, no Material Contract will, by its terms, terminate as a result of the Transactions or require any consent from any party thereto in order to remain in full force and effect immediately after the Effective Time, except for any Material Contracts which, if terminated, would not have a Company Material Adverse Effect. (d) Except as set forth in Section 3.9(d) of the Company Disclosure Schedule, the Company has not granted any right of first refusal or similar right in favor of any third party with respect to any material portion of its properties or assets or entered into any non-competition agreement or similar agreement restricting its ability to engage in any business which, in either case, would result in a Company Material Adverse Effect. (e) Section 3.9(e) of the Company Disclosure Schedule sets forth a list, as of the date of this Agreement, of all agreements of the Company with any stockholder who, to the Company's knowledge, beneficially owns 10% or more of the outstanding Common Stock or Class B Common Stock or any executive officer or director of the Company. Except as set forth in the Company Disclosure Schedule, no officer or director of the Company, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any material interest in any material contract or property (real or personal, tangible or intangible), used in, or pertaining to the business of the Company. Section 3.10 Environmental Matters. Neither the Company nor any of the Company Subsidiaries has violated any environmental, safety or similar law or regulation applicable to its business or property relating to the protection of human health and safety, the environment or hazardous or toxic substances or waste, pollutants or contaminants ("Environmental Laws"), lacks any permits, licenses or other approvals required of them under applicable Environmental Laws or is violating any term or condition of any such permit, license or approval, except in each case as would not, individually or in the aggregate, result in a Company Material Adverse Effect. Section 3.11 Benefit Plans. (a) Except as disclosed in the SEC Reports or in the Company Disclosure Schedule, there exist no material employment, consulting, severance or termination agreements, arrangements or understandings between the Company or any of the Company 15 Subsidiaries and any individual current or former employee, officer or director of the Company or any of the Company Subsidiaries with respect to which the annual payments thereunder exceed $100,000. (b) Section 3.11 of the Company Disclosure Schedule contains a list of all (i) "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as "Pension Plans"), including any such Pension Plans that are "multiemployer plans" (as such term is defined in Section 4001(a)(3) of ERISA) (collectively, the "Multiemployer Pension Plans"), (ii) "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) and all other Benefit Plans and (iii) other bonus, deferred compensation, severance pay, pension, profit-sharing, retirement, insurance, stock purchase, stock option, or other fringe benefit plan, arrangement or practice maintained, or contributed to, by the Company or any of the Company Subsidiaries for the benefit of any current or former employees, officers or directors of the Company or any of the Company Subsidiaries (collectively, the "Benefit Plans"). The Company has delivered or made available to Purchaser copies of (i) each Benefit Plan, (ii) the most recent annual report on Form 5500 filed with the Internal Revenue Service with respect to each Benefit Plan (if any such report was required), (iii) the most recent summary plan description for each Benefit Plan for which such summary plan description is required and (iv) each trust agreement and group annuity contract relating to any Benefit Plan. (c) Except as disclosed in the Company Disclosure Schedule, all Pension Plans intended to be qualified plans have been the subject of determination letters from the Internal Revenue Service to the effect that such Pensions Plans are qualified and exempt from Federal income taxes under Section 401(a) and 501(a), respectively, of the Code, and no such determination letter has been revoked. (d) None of the Benefit Plans is, and none of the Company or any of the Company Subsidiaries has ever maintained or had an obligation to contribute to (i) a "single employer plan" (as such term is defined in Section 4001(a)(15) of ERISA) subject to Section 412 of the Code or Title I, Subtitle B, Part 3 of ERISA, (ii) a "multiple employer plan" (as such term is defined in ERISA or the Code), or (iii) a funded welfare benefit plan (as such term is defined in Section 419 of the Code). There are no unpaid contributions due prior to the date hereof with respect to any Benefit Plan that are required to have been made under the terms of such Benefit Plan, any related insurance contract or any applicable law. None of the Company or any of the Company Subsidiaries has incurred any liability or taken any action, and the Company does not have any knowledge of, any action or event that could reasonably be expected to cause any one of them to 16 incur any liability (i) under Section 412 of the Code or Title IV of ERISA with respect to any "single-employer plan" (as such term is defined in Section 4001(a)(15) of ERISA), (ii) on account of a partial or complete withdrawal (as such term is defined in Sections 4203 and 4205 of ERISA, respectively) with respect to any Multiemployer Pension Plan, or (iii) on account of unpaid contributions to any Multiemployer Pension Plan, which, in the case of clauses (i), (ii) or (iii), would result in a Company Material Adverse Effect. (e) None of the Company nor any of the Company Subsidiaries has engaged in a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility with respect to any Benefit Plan subject to ERISA that reasonably could be expected to subject the Company and any of the Company Subsidiaries to any tax or penalty on prohibited transactions imposed by Section 4975 or to any liability under Section 502(i) or (1) of ERISA except in each case as would not, individually or in the aggregate, result in a Company Material Adverse Effect. As of the date of this Agreement, except as disclosed in the Company Disclosure Schedule, with respect to any Benefit Plan: (i) no filing, application or other matter is pending with the Internal Revenue Service, the Pension Benefit Guaranty Corporation, the United States Department of Labor or any other governmental body, and (ii) there is no action, suit or claim pending, other than routine claims for benefits. (f) Except as disclosed in the Company Disclosure Schedule and except for any obligations which would not, individually or in the aggregate, have a Company Material Adverse Effect, none of the Company or any of the Company Subsidiaries has any obligation to provide health benefits or other non-pension benefits to retired or other former employees, except as specifically required by Part 6 of Title I of ERISA ("COBRA"). Section 3.12 Tax Matters. Except as set forth in the Company Disclosure Schedule: (a) The Company and each of the Company Subsidiaries has filed all Federal income Tax Returns and all other material Tax Returns required to be filed by it prior to the date hereof. The Company and each of the Company Subsidiaries has paid (or the Company has paid on the Company Subsidiaries' behalf) all Taxes shown as due on such returns, and the most recent financial statements contained in the SEC Reports reflect an adequate reserve for all Taxes payable by the Company and the Company Subsidiaries for all taxable periods and portions thereof through the date of such financial statements. Neither the Company nor any Company Subsidiary has incurred any liability for Taxes subsequent to the date of such most recent financial statement other than in the ordinary course of such Company's or Company Subsidiary's business. 17 (b) As of the date of this Agreement, except as set forth in the Company Disclosure Schedule: (i) no material Tax Return of the Company or any of the Company Subsidiaries is under audit or examination by any taxing authority, and no written notice of such an audit or examination has been received by the Company or any of the Company Subsidiaries; (ii) each material deficiency resulting from any audit or examination relating to Taxes by any taxing authority has been paid, except for deficiencies being contested in good faith; and (iii) no material issues relating to Taxes were raised in writing by the relevant taxing authority during any presently pending audit or examination, and no material issues relating to Taxes were raised in writing by the relevant taxing authority in any completed audit or examination that can reasonably be expected to recur in a later taxable period, (iv) there are no material liens for Taxes upon the assets of the Company or any Company Subsidiary except liens relating to current Taxes not yet due and payable; and (v) the Company and each Company Subsidiary is in substantial compliance with all applicable laws and regulations relating to the payment of withholding Taxes, and except for amounts which are not material, all Taxes which the Company or any Company Subsidiary are required by law to withhold or to collect for payment have been duly withheld and collected. (c) As used in this Section 3.12, the terms (i) "Tax" (and, with --- correlative meaning, "Taxes") mean: (A) any federal, state, local or foreign net ----- income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value added, transfer, stamp, or environmental tax, or any other similar tax, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority; and (B) any liability of the Company or any Company Subsidiary for the payment of amounts with respect to payments of a type described in clause (A) as a result of any obligation of the Company or any Company Subsidiary under any tax sharing agreement or tax indemnity agreement; and (ii) "Tax Return" means any return, report or similar statement required to ---------- be filed with respect to any Tax. Section 3.13 Litigation. As of the date of this Agreement, except as set forth in the Company Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending, or, to the best knowledge of the Company, threatened against the Company or any of the Company Subsidiaries that could reasonably be expected to have a Company Material Adverse Effect or prevent or materially delay the consummation of the Merger. As of the date of this Agreement, neither the Company nor any of the Company Subsidiaries is subject to any outstanding order, writ, injunction or decree that could reasonably be expected to prevent or materially delay the consummation of the Merger. 18 Section 3.14 Opinion of Financial Advisor. The Company has received the opinion of Goldman, Sachs & Co. on or prior to the date of this Agreement to the effect that the Merger Consideration to be received in the Merger by the Company's stockholders is fair to the Company's stockholders from a financial point of view. Section 3.15 Brokers. No broker, finder or investment banker (other than Goldman, Sachs & Co. and Media Finance Inc.) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the Company. Immediately prior to the execution hereof, the Company will make available to Purchaser a complete and correct copy of all agreements between the Company and Goldman, Sachs & Co. or Media Finance Inc. pursuant to which such firms would be entitled to any payment relating to the Transactions. Section 3.16 Properties and Assets. The Company and its subsidiaries have good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its material tangible properties and assets, real and personal, used or held for use in its business, free and clear of any liens, security interests or other encumbrances ("Liens"), except as reflected in the SEC Reports and Section 3.16 of the Company Disclosure Schedule and except for Liens for taxes not yet due and payable and except for Liens which would not result in a Company Material Adverse Effect. Section 3.17 Compliance with Laws in General. Except as set forth in Section 3.17 of the Company Disclosure Schedule, the Company has not received as of the date of this Agreement any notices of, nor to the best of its knowledge have there been any, violations of any federal, state and local laws, regulations and ordinances relating to its business and operations that would have a Company Material Adverse Effect. Section 3.18 Labor Matters. Except as set forth in Sections 3.13 and 3.18 of the Company Disclosure Schedule, insofar as the operations of the Company and the Company Subsidiaries in the United States are concerned, as of the date of this Agreement (i) there is no labor strike, dispute, slowdown, stoppage or lockout actually pending, or the to the knowledge of the Company, threatened against or affecting the Company or any of the Company Subsidiaries and during the past five years there has not been any such action, (ii) neither the Company nor any of the Company Subsidiaries is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Company or any of the Company Subsidiaries, (iii) none of the employees of the Company or any of the Company Subsidiaries is represented by any labor organization and the 19 Company does not have any knowledge of any union organizing activities among the employees of the Company or any of the Company Subsidiaries within the past five years, nor does any question concerning representation exist as of the date of this Agreement concerning such employees, (iv) there are no material written personnel policies, rules or procedures applicable to employees of the Company or any of the Company Subsidiaries, other than those set forth in Section 3.18 of the Company Disclosure Schedule, true and correct copies of which have heretofore been delivered to Purchaser, (v) neither the Company nor any of the Company Subsidiaries has received any notice that it is not in compliance, in all material respects, with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health, and is not engaged in any unfair labor practices as defined in the National Labor Relations Act or other similar laws of any jurisdiction, (vi) there is no unfair labor practice or similar charge or complaint against the Company or any of the Company Subsidiaries pending or, to the knowledge of the Company, threatened before the National Labor Relations Board or any similar state or foreign agency, (vii) there is no material grievance arising out of any collective bargaining or similar agreement or other grievance procedure relating to any employee of the Company or any of the Company Subsidiaries, (viii) to the knowledge of the Company, no charges with respect to or relating to the Company or any of the Company Subsidiaries are pending before the Equal Employment Opportunity Commission or any other federal, state, local or foreign agency responsible for the prevention of unlawful employment practices, (ix) neither the Company nor any of the Company Subsidiaries has received notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or any of the Company Subsidiaries and no such investigation is in progress, and (x) there are no complaints, lawsuits or other proceedings pending or, to the knowledge of the Company, threatened in any forum by or on behalf of any present or former employee of the Company or any of the Company Subsidiaries, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract or employment, any laws governing employment or the termination thereof or other discriminatory, wrongful or tortuous conduct in connection with the employment relationship, except in each case which would not result in a Company Material Adverse Effect. Section 3.19 Insurance. Except as set forth in Section 3.19 of the Company Disclosure Schedule, the Company and each of the Company Subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of the Company and its Subsidiaries. As of the date of this Agreement, there is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the 20 underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and the Company and the Company Subsidiaries are otherwise in compliance in all material respects with the terms of such policies and bonds. Except as set forth in Section 3.19 of the Company Disclosure Schedule, the Company has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB Except as set forth in the Disclosure Statement delivered by Purchaser and Merger Sub to the Company concurrently with the execution of this Agreement (the "Purchaser Disclosure Schedule"), Purchaser and Merger Sub hereby jointly and severally represent and warrant to the Company that: Section 4.1 Organization and Qualification; Subsidiaries. Each of Purchaser and Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Purchaser Material Adverse Effect (as defined below). Purchaser is duly qualified or licensed as a foreign corporation to do business, and is in good standing in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failure to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Purchaser Material Adverse Effect. The term "Purchaser Material Adverse Effect" means any change in or effect on the business of Purchaser and its subsidiaries that is materially adverse to the business, operations, properties, financial position or results of operations of Purchaser and its subsidiaries taken as a whole. For purposes of this Agreement, the term "Purchaser Subsidiary" shall mean Merger Sub and any subsidiary of Purchaser that constitutes a "significant subsidiary" within the meaning of Rule 1-02 of Regulation S-X of the Securities and Exchange Commission. Section 4.2 Certificate of Incorporation and Bylaws. Purchaser heretofore has provided the Company a complete and correct copy of the Certificate of Incorporation and the Bylaws of each of Purchaser and Merger Sub. The Certificate of Incorporation and Bylaws of each of Purchaser and Merger Sub so provided are in full force and effect. None of Purchaser or 21 Merger Sub is in violation of any of the provisions of its Certificate of Incorporation or Bylaws. Section 4.3 Authority Relative to this Agreement. (a) Each of Purchaser and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement, to perform its respective obligations hereunder and to consummate the Transactions. The execution and delivery of this Agreement by each of Purchaser and Merger Sub and the consummation by each of Purchaser and Merger Sub of the Transactions have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Purchaser or Merger Sub are necessary to authorize this Agreement or to consummate the Transactions (other than the filing and recordation of appropriate merger documents as required by the DGCL). No vote of Purchaser's stockholders is required to approve this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Purchaser and Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each of Purchaser and Merger Sub, enforceable against each of Purchaser and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and to general principles of equity. (b) The Board of Directors of each of Purchaser and Merger Sub has approved and adopted this Agreement and the transactions contemplated hereby. Purchaser is the sole stockholder of Merger Sub and in such capacity has approved the Transactions. Section 4.4 No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by each of Purchaser and Merger Sub does not, and the performance of this Agreement by each of Purchaser and Merger Sub does not, and the performance of this Agreement by each of Purchaser and Merger Sub will not, (i) conflict with or violate the Certificate of Incorporation or Bylaws or equivalent organizational documents of Purchaser or any Purchaser Subsidiary, (ii) assuming that all consents, approvals, authorizations and other actions described in subsection (b) have been obtained and all filings and obligations described in subsection (b) have been made or complied with, conflict with or violate any Law applicable to Purchaser or any Purchaser Subsidiary or by which any asset of Purchaser or any Purchaser Subsidiary is bound or affected, or (iii) conflict with, result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or 22 require any payment under or result in the creation of a lien, claim, security interest or other charge or encumbrance on any asset of Purchaser or any Purchaser Subsidiary pursuant to, any contract or other instrument or obligation to which Purchaser or any Purchaser Subsidiary is a party or by which any asset of Purchaser or any Purchaser Subsidiary is bound or affected, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults, or other occurrences which wold not, individually or in the aggregate, have a Purchaser Material Adverse Effect. (b) The execution and delivery of this Agreement by each of Purchaser and Merger Sub does not, and the performance of this Agreement by each of Purchaser and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, except (i) for applicable requirements, if any, of the Exchange Act and state takeover laws, the pre-merger notification requirements of the HSR Act, any pre- merger notification filing with the German Federal Cartel Office and filing and recordation of appropriate merger documents as required by the DGCL and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notification would not prevent or delay consummation of the Offer or the Merger, or otherwise prevent either Purchaser or Merger Sub from performing their respective obligations under this Agreement, and would not, individually or in the aggregate, have a Purchaser Material Adverse Effect. Merger Sub is acquiring the Shares for investment purposes and without a view to the distribution thereof in violation of the Securities Act. Section 4.5 Ownership of Merger Sub; No Prior Activities. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement. Merger Sub (i) has not conducted, and will not prior to the Effective Time conduct, any business and (ii) has no, and prior to the Effective Time will have no, assets or liabilities except in connection with the transactions contemplated by this Agreement. As of the Effective Time, all the outstanding capital stock of Merger Sub will be owned indirectly by Purchaser. Section 4.6 Litigation. As of the date of this Agreement, there is no suit, claim, action, proceeding or investigation pending, or, to the best knowledge of Purchaser, threatened against Purchaser or any Purchaser Subsidiary that could reasonably be expected to prevent or materially delay the consummation of the Merger. As of the date of this Agreement, neither Purchaser nor any of its subsidiaries is subject to any outstanding order, writ, injunction or decree that could reasonably be expected to prevent or materially delay the consummation of the Merger. 23 Section 4.7 Financing. On the date hereof Purchaser has, and upon consummation of the Offer and at the Effective Time Purchaser shall have, sufficient funds available to purchase, or to cause Merger Sub to purchase, all the Shares pursuant to the Offer and the Merger and to pay all fees and expenses related to the Transactions and to deposit with the Paying Agent the Option Consideration. Section 4.8 Brokers. No broker, finder or investment banker (other than Lazard Freres & Co. LLC) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Purchaser or Merger Sub. Section 4.9 Ownership of Shares. To the knowledge of Purchaser, neither Purchaser nor any affiliate thereof owns any Shares as of the date of this Agreement. ARTICLE V COVENANTS Section 5.1 Interim Operations of the Company. The Company covenants and agrees that, prior to such time as Purchaser's designees shall constitute a majority of the members of the Board of Directors of the Company (the "Transition Time") (unless Purchaser shall otherwise agree in writing and except as otherwise contemplated by this Agreement or the Company Disclosure Schedule): (a) the business of the Company and the Company Subsidiaries shall be conducted only in the ordinary and usual course and, to the extent consistent therewith, each of the Company and the Company Subsidiaries shall use commercially reasonable efforts to preserve its business organization intact and maintain its existing relations with customers, employees and business associates; (b) the Company shall not (i) sell or pledge or agree to sell or pledge any stock owned by it in any of the Company Subsidiaries (except in connection with its bank working capital facility); (ii) amend its Restated Certificate of Incorporation or Bylaws or the similar organizational documents of any of the Company Subsidiaries; (iii) split, combine or reclassify the outstanding Shares; or (iv) declare, set aside or pay (unless declared prior to this date) any dividend payable in cash, stock or property with respect to the Shares; (c) neither the Company nor any of the Company Subsidiaries shall (i) issue, deliver or sell or authorize or propose the issuance, delivery or sale of, any shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, capital 24 stock of any class of the Company or the Company Subsidiaries other than Shares issuable pursuant to the agreements described in Section 3.3 of the Company Disclosure Schedule or (ii) repurchase, redeem or otherwise acquire, or permit any Company Subsidiary to repurchase, redeem or otherwise acquire, any shares of capital stock of the Company; (d) neither the Company nor any of the Company Subsidiaries shall (i) grant any increase in the compensation of any director, officer or employee earning in excess of $100,000 per year except for increases required under employment agreements, (ii) enter into any new employment, severance or termination agreement with any such director, officer or employee or (iii) except as may be required to comply with applicable law, become obligated under any Benefit Plan that was not in existence on the date hereof or amend any Benefit Plan in existence on the date hereof to enhance the benefits thereunder; (e) the Company shall not, and shall not permit any of the Company Subsidiaries to, sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its material assets outside the ordinary course of business other than (i) dispositions listed in Section 5.1 (e) of the Company Disclosure Schedule, (ii) assets no longer used in the operation of the Company's and the Company Subsidiaries' respective businesses and (iii) assets related to any discontinued operations of the Company and the Company Subsidiaries; (f) the Company shall not, and shall not permit any of the Company Subsidiaries to, incur or enter into any agreement to incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any Company Subsidiary, except in the ordinary course of business consistent with past practice, including, without limitation, borrowings under the Company's existing credit agreements, as amended from time to time in the ordinary course of business, and overnight borrowings; (g) the Company shall not and shall not permit any of the Company Subsidiaries to enter into any contract or agreement or series of related contracts or agreements which involves the expenditure by the Company of over (i) One Hundred Thousand Dollars ($100,000) if outside the ordinary course of business, or (ii) Five Hundred Thousand Dollars ($500,000) if within the ordinary course of business; and (h) neither the Company nor any of the Company Subsidiaries will enter into an agreement to do any of the foregoing. 25 ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Meeting of the Stockholders. (a) The Company will take all action reasonably necessary in accordance with applicable law and its Restated Certificate of Incorporation and Bylaws to convene a meeting of its stockholders to consider and vote upon the approval of this Agreement and the Merger and such other matters as may be necessary to effectuate the transactions contemplated hereunder (the "Stockholders Meeting"), if necessary to comply with applicable law, as promptly as practicable after the expiration of the Offer. The Board of Directors of the Company shall recommend such approval and take all lawful action to solicit such approval; provided, however, that the Board of Directors of the Company may at -------- ------- any time prior to the Transition Time withdraw, modify or change any such recommendations to the extent that the Board of Directors of the Company determines in good faith after consultation with independent legal counsel that the failure to so withdraw, modify or change its recommendation would cause the Board of Directors of the Company to breach its fiduciary duties to the Company's stockholders under applicable law. The Purchaser Companies will vote all Shares over which they exercise voting control in favor of this Agreement and the Merger. (b) Notwithstanding the foregoing, in the event that Purchaser shall acquire at least 90 percent of the then outstanding Shares of each then outstanding class of shares of the Company, the parties hereto agree, subject to Article VII, to take all necessary and appropriate action to cause the Merger to become effective, in accordance with Section 253 of the DGCL, as soon as reasonably practicable after such acquisition, without a meeting of the stockholders of the Company. (c) If required by applicable law, as soon as practicable after the date of this Agreement, the Company shall file with the SEC a proxy statement (the "Proxy Statement") and form of proxy relating to the Merger, which shall comply as to form with all applicable laws. The Company shall obtain and furnish the information required to be included in the Proxy Statement and shall respond promptly to any comments made by the SEC with respect to the Proxy Statement and cause the Proxy Statement and form of proxy to be mailed to the Company's stockholders at the earliest practicable date. Purchaser and Merger Sub shall cooperate in the preparation of the Proxy Statement and shall as soon as practicable following the date hereof furnish the Company with all information for inclusion in the Proxy Statement as shall be reasonably requested by the Company. The Company agrees, as to information with respect to the Company, its officers, directors, stockholders and 26 subsidiaries contained in the Proxy Statement, and Purchaser agrees, as to information with respect to Purchaser, its officers, directors, stockholders and subsidiaries contained in the Proxy Statement, that such information, at the date the Proxy Statement is mailed and (as then amended or supplemented) at the time of the Stockholders Meeting, will not be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Purchaser and its counsel shall be given an opportunity to review the Proxy Statement, and all amendments or supplements thereof, prior to their being filed with the SEC and the Company shall not make any such filing without the approval of Purchaser (which shall not be unreasonably withheld). The Company will advise Purchaser, promptly after it receives notice thereof, of the time when the Proxy Statement has been cleared by the SEC or any request by the SEC for amendment of the Proxy Statement or comments thereon and proposed responses thereto or requests by the SEC for additional information. Section 6.2 Filings; Other Action. Subject to the terms and conditions herein provided, the Company and Purchaser shall: (a) promptly make their respective filings and thereafter make any other required submissions under the HSR Act with respect to the Merger; and (b) use their reasonable best efforts promptly to take, or cause to be taken, all other action and do, or cause to be done, all other things reasonably necessary, proper or appropriate under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, as soon as practicable. Section 6.3 Access. Subject to restrictions contained in confidentiality agreements to which the Company is subject, upon reasonable notice the Company shall (and shall cause each of the Company Subsidiaries to) afford Purchaser's officers, employees, counsel, accountants and other authorized representatives ("Representatives") access, during normal business hours throughout the period prior to the Effective Time, to its properties, books, contracts and records, and during such period, the Company shall (and shall cause each of its subsidiaries to) furnish promptly to Purchaser all information concerning its business, properties and personnel as Purchaser may reasonably request. Purchaser will not, and will cause its Representatives not to, use any information obtained pursuant to this Section 6.3 for any purpose unrelated to the consummation of the Transactions. Except as otherwise agreed to by the Company, and notwithstanding termination of this Agreement, the terms and provisions of the Confidentiality Agreement, dated February 16, 1996, between Pearson Television Limited and the Company (the "Confidentiality Agreement") shall apply to all information furnished thereunder or hereunder. 27 Section 6.4 Notification of Certain Matters. The Company shall give prompt notice to Purchaser of any notice of, or other communication relating to, a default or event which, with notice or lapse of time or both, would become a default, received by the Company or any of its subsidiaries subsequent to the date of this Agreement and prior to the Effective Time, under any contract material to the financial condition, properties, businesses or results of operations of the Company and its subsidiaries taken as a whole to which the Company or any of its subsidiaries is a party or is subject. Each of the Company and Purchaser shall give prompt notice to the other party of (a) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement or (b) any Company Material Adverse Effect or Purchaser Material Adverse Effect, as the case may be. The Company shall give prompt notice to Purchaser and Merger Sub, and Purchaser or Merger Sub shall give prompt notice to the Company, of (i) any claims, actions, proceedings or governmental investigations commenced or, to the best of its knowledge, threatened, involving or affecting the Company or any of its subsidiaries or any of their property or assets, that relate to the Offer or the Merger, (ii) the occurrence, or failure to occur, of any event that would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect, and (iii) any material failure of the Company, Purchaser or Merger Sub, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. No such notification shall affect the representations or warranties of the parties or the conditions to the obligations of the parties hereunder. Section 6.5 Publicity. Except as otherwise required by law, the Company and Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the Transactions and in making any filings with any federal or state governmental or regulatory agency or with NASDAQ or any national securities exchange with respect thereto. Section 6.6 Indemnification. (a) The Certificate of Incorporation and Bylaws of the Surviving Corporation shall contain the provisions with respect to indemnification, advancement and director exculpation set forth in the Restated Certificate of Incorporation and Bylaws of the Company on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of persons who at any time prior to the Effective Time were entitled to indemnification, advancement or exculpation under the Restated Certificate of Incorporation or Bylaws of the Company in respect of actions or 28 omissions occurring at or prior to the Effective Time (including, without limitation, the Transactions). (b) From and after the Effective Time, Purchaser and the Surviving Company shall, jointly and severally, indemnify, defend and hold harmless the present and former officers, directors and employees of the Company and its subsidiaries (collectively, the "Indemnified Parties") against all losses, expenses, claims, damages, liabilities or amounts that are paid in settlement of (with the approval of Purchaser and the Surviving Corporation, which approval shall not be unreasonably withheld or delayed), or otherwise in connection with, any claim, action, suit, proceeding or investigation (a "Claim"), to which any such person is or may become a party by virtue of his or her service as a present or former director, officer or employee of the Company or any of its subsidiaries and arising out of actual or alleged events, actions or omissions occurring or alleged to have occurred at or prior to the Effective Time (including, without limitation, the Transactions), in each case to the fullest extent permitted under the DGCL (and shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the fullest extent permitted under the DGCL, upon receipt from the Indemnified Party to whom expenses are advanced of the undertaking to repay such advances contemplated by Section 145(e) of the DGCL). (c) Any Indemnified Party wishing to claim indemnification under this Section 6.6, upon learning of any such Claim, shall notify Purchaser and the Surviving Corporation (although the failure so to notify Purchaser and the Surviving Corporation shall not relieve either thereof from any liability that Purchaser or the Surviving Corporation may have under this Section 6.6, except to the extent such failure materially prejudices such party). Purchaser and the Surviving Corporation shall have the right to assume the defense thereof and Purchaser and the Surviving Corporation shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if Purchaser and the Surviving Corporation elect not to assume such defense or if there is an actual or potential conflict of interest between, or different defenses exist for Purchaser and the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them and Purchaser and the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided however, that (i) Purchaser and the Surviving Corporation shall not, in connection with any one such action or proceeding or separate but substantially similar actions or proceedings arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm of attorneys in addition to any appropriate local counsel at any time for all Indemnified Parties 29 unless there is a conflict on any significant issue between the positions of any two or more of such Indemnified Parties, in which event any additional counsel as may be reasonably required may be retained by such Indemnified Parties at Purchaser's expense, (ii) Purchaser, the Surviving Corporation and the Indemnified Parties will cooperate in the defense of any such matter and (iii) Purchaser and the Surviving Corporation shall not be liable for any settlement effected without its prior written consent, which consent will not be unreasonably withheld or delayed, and provided further, that the Surviving Corporation shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and not subject to further appeal, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. (d) Purchaser shall cause to be maintained in effect for not less that six years after the Effective Time (except to the extent not generally available in the market) directors' and officers' liability insurance and fiduciary liability insurance that is substantially equivalent in coverage to the Company's current insurance, with an amount of coverage of not less than 100% of the amount of coverage maintained by the Company as of the date of this Agreement with respect to matters occurring prior to the Effective Time. (e) This Section 6.6 shall survive the consummation of the Merger and is intended to be for the benefit of, and shall be enforceable by, the Indemnified Parties referred to herein, their heirs and personal representatives and shall be binding on Purchaser and Merger Sub and the Surviving Corporation and their respective successors and assigns. Section 6.7 Obligations of Merger Sub. Purchaser shall take all action reasonably necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Merger on the terms and subject to conditions set forth in this Agreement. Section 6.8 Stock Options and Warrants. Purchaser acknowledges that the consummation of the Offer and the other Transactions will constitute an "Event" (as defined in the Plans) with respect to the options listed on Section 3.3 of the Company Disclosure Schedule and the other options specified in Section 3.3 of the Company Disclosure Schedule, and that the vesting of such options shall therefore become accelerated as a result of the Transactions, which Purchaser acknowledges shall occur simultaneously with the acceptance of the Offer so as to permit the exercise of any such unvested options and tender of the underlying Shares. At the Effective Time, each holder of a then outstanding option or warrant to purchase Shares, whether or not then exercisable, shall, in settlement thereof, except to the 30 extent otherwise agreed to by the holder of the option or warrant, the Company and the Purchaser, receive from the Company (from funds provided by Purchaser) for each Share subject to such stock option or warrant an amount in cash equal to the excess, if any, of the Merger Consideration over the per Share exercise price of such stock option or warrant (such amount being hereinafter referred to as the "Option Consideration"). Upon receipt of the Option Consideration, the stock option or warrant shall be canceled. The surrender of any stock option or warrant to the Company in exchange for the Option Consideration shall be deemed a release of any and all rights the holder had or may have had in respect of such stock option or warrant. Prior to the Effective Time, the Company shall use its best efforts to obtain all necessary consents or releases from holders of stock options and warrants and to take all such other lawful action as may be necessary to give effect to the transactions contemplated by this Section 6.8 (except for such action that may require the approval of the Company's stockholders). Except as otherwise agreed to by the parties, (i) the Plans shall terminate, effective as of the Effective Time and the Company shall use its reasonable efforts to cause the provisions in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company or any of its subsidiaries to be canceled as of the Effective Time and (ii) the Company shall use its reasonable efforts to ensure that following the Effective Time no participant in the Plans or other plans, programs or arrangements shall have any right thereunder to acquire equity securities of the Company, the Surviving Corporation or any subsidiary of the Company or the Surviving Corporation and to terminate all such plans, programs or arrangements. Section 6.9 Employee Benefit Plans. (a) Subject to Section 6.8, Purchaser agrees to cause the Surviving Corporation (and any successor thereto) to honor, without modification, all employment, consulting, severance, termination or indemnification agreements, arrangements or understandings, including recognition of the value (either in cash, replacement options or other consideration) of any agreement to issue a fixed number of options in the future as described in Section 3.3(3)(e) of the Company Disclosure Schedule, between the Company or any of its subsidiaries and any current or former employee, officer or director of the Company or any of its subsidiaries disclosed in the SEC Reports or in the Company Disclosure Schedule in effect on the date hereof except as may be otherwise mutually agreed by the Purchaser and a current or former employee, officer, director or consultant covered by such an agreement. Purchaser agrees to cause the Surviving Corporation and its successors to pay or provide all benefits vested as of the Effective Time under any Benefit Plan (as defined in Section 3.11) in accordance with the terms of such plans. Purchaser will for a period of at least 24 months cause 31 the Company or the Surviving Corporation and its successors to maintain for all employees of the Company employee benefit plans, programs, policies and practices which, in the aggregate, provide substantially equivalent benefits to such employees as the benefit plans from time to time in effect for employees of the Surviving Corporation, provided that employees covered by collective bargaining agreements shall be provided the benefits required under such agreements. For purposes of their participation in Purchaser's or the Surviving Corporation's employee and fringe benefit plans, programs, policies and practices, Purchaser shall credit each Company employee with full credit for all service credited under the comparable plan, program, policy or practice of the Company (including service with the Company prior to the Effective Time and, where applicable, service with prior or predecessor employers to the extent credit is given for such service under the comparable Company plans) for purposes of eligibility to participate and for purposes of vesting. Section 6.10 No Solicitation of Transactions. (a) Prior to the execution of this Agreement, the Company, through its investment bankers, has engaged in an auction process in which participants were offered an opportunity to submit their best offers to purchase the Company. The Company will not, and will instruct its Representatives not to, initiate, solicit or encourage (including by way of furnishing information or assistance) any Competing Transaction (as defined below), or enter into or maintain discussions or negotiate with any person in furtherance of or relating to or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any Representative of the Company or any of its subsidiaries to take any such action, and the Company shall use its reasonable best efforts to cause the Representatives of the Company and its subsidiaries not to take any such action; provided, however, that nothing contained in this Section 6.10 shall prohibit the Board of Directors of the Company prior to stockholder approval of the Merger from (i) furnishing information to, or entering into discussions or negotiations with, any person that makes an unsolicited bona fide proposal regarding a Competing Transaction, if, and only to the extent that, (A) the Board of Directors of the Company, after consultation with independent legal counsel, determines in good faith that such action is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law and (B) prior to furnishing such information to such person, the Company receives from such person an executed confidentiality agreement with terms no less favorable to the Company than those contained in the Confidentiality Agreement; or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard to a Competing Transaction. The Company shall promptly advise Purchaser if any such proposal or offer, or any inquiry or contact made with any person with respect thereto, is made. 32 (b) For purposes of this Agreement "Competing Transaction" shall mean any of the following involving the Company or any of its subsidiaries: (a) any merger, consolidation, business combination, or other similar transaction (other than the Merger) which results in a sale of the Company; (b) any sale or other disposition outside the ordinary course of business of 30% or more of the fair market value of the assets (other than assets held in inventory for resale and other than the licensing of the Company's programming in the ordinary course of business) of the Company and its subsidiaries, taken as a whole, in a single transaction or series of transactions; or (c) any tender offer or exchange offer for more than 50% of the outstanding Shares. Section 6.11 Directors. (a) Promptly upon the acceptance for payment of, and payment for, Shares constituting a majority of the then outstanding Shares by Purchaser or Merger Sub, as applicable, pursuant to the Offer, Purchaser from time to time shall be entitled to designate such number of directors (rounded up to the next whole number) on the Board of Directors of the Company as will give Purchaser or Merger Sub, as applicable, subject to compliance with Section 14(f) of the Exchange Act, that percentage of the total number of directors on the Board of Directors of the Company (giving effect to the election of any additional directors pursuant to this Section) equal to the percentage of then outstanding Shares owned by Purchaser or Merger Sub (provided that such percentage of the total number of directors shall not be less than a majority of the Board of Directors of the Company), and the Company shall, at such time, cause Purchaser's or Merger Sub's designees, as applicable, to be so elected by its existing Board of Directors; provided, however, that in the event that such -------- ------- designees are elected to the Board of Directors of the Company, until the Effective Time such Board of Directors shall have at least two directors who are directors on the date of this Agreement and who are neither officers of the Company or of any holder of more than 5% of its Shares (as of the date of this Agreement) nor affiliates of Purchaser or Merger Sub (the "Independent Directors"); and provided further that if the number of Independent Directors shall be reduced below two for any reasons whatsoever, the remaining Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of this Agreement or, if no Independent Directors then remain, the other directors shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company or of any holder of more than 5% of its Shares (as of the date of this Agreement) or officers or affiliates of Purchaser or any of its Subsidiaries, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. (b) Subject to applicable law, the Company shall take all actions requested by Purchaser necessary to effect any such 33 election, including mailing to its stockholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder by the SEC, and the Company agrees to make such mailing with the mailing of the Schedule 14D-9 (as defined below). In connection with the foregoing and subject to the provisions of this Section 6.11 regarding Independent Directors, the Company will promptly, at the option of Purchaser, either increase the size of the Company's Board of Directors and/or obtain the resignation of such number of its current directors as is necessary to enable Purchaser's or Merger Sub's designees, as applicable, to be elected or appointed to, and to constitute (rounded up to the next whole number) that percentage of the total number of directors on the Board of Directors of the Company (giving effect to the election of any additional directors pursuant to this Section) equal to the percentage of then outstanding Shares owned by Purchaser or Merger Sub (provided that such percentage of the total number of directors shall not be less than a majority of the Board of Directors of the Company). (c) Following the election of Purchaser's or Merger Sub's designees, as applicable, pursuant to this Section 6.11, prior to the Effective Time, any amendment or termination of this Agreement or waiver of any of the Company's rights hereunder shall require the concurrence of a majority of the Independent Directors. Section 6.12 Use of Name. As contemplated by Section 5.1(e) of the Company Disclosure Schedule, effective as of the Effective Time, the Company hereby assigns to Anthony J. Scotti and Benjamin J. Scotti all of its rights, title and interest in the name "Scotti Brothers" and all variations and derivatives thereof (the "Retained Names"). Promptly after the Effective Time Purchaser shall cause the names of the Company and its subsidiaries which contain the Retained Names to be changed so as not to include the Retained Names. No Purchaser Company shall put into use after 90 days after the Effective Date any products, signs, television or recorded music credits and other materials that bear any Retained Name or any name, mark or logo similar thereto. Notwithstanding the foregoing, the Purchaser Companies shall have the right to continue using the Retained Names in connection with the sale of inventory which as of the Effective Time contains any Retained Name on the label identifying such inventory. ARTICLE VII CONDITIONS SECTION 7.1 Conditions to the Obligations of Each Party. The obligations of the Company, Purchaser and Merger Sub to consummate the Merger are subject to the satisfaction of the following conditions: 34 (a) Company Stockholder Approval. If required by the DGCL, this Agreement shall have been approved and adopted by the stockholders of the Company in accordance with the DGCL, the Company's Certificate of Incorporation and its Bylaws. (b) HSR; German Federal Cartel Office. Any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office shall have been obtained and shall have remained in full force and effect. (c) No Order. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order or Order that is then in effect and has the effect of prohibiting the consummation of the Merger. (d) The Offer. The Offer shall not have been terminated in accordance with its terms prior to the purchase of any Shares. ARTICLE VIII TERMINATION Section 8.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after the approval by holders of Common Stock, by the mutual consent of Purchaser and the Company, by action of their respective Boards of Directors. Section 8.2 Termination by Either Purchaser or the Company. This Agreement may be terminated and the Merger and the other Transactions may be abandoned by action of the Board of Directors of either Purchaser or the Company if (a) the Merger shall not have been consummated on or before February 28, 1998, unless the failure to consummate the Merger is the result of a material breach of this Agreement by the party seeking to terminate this Agreement, or (b) there shall be any Law that makes consummation of the Merger illegal or otherwise prohibited or any Order that is final and nonappealable preventing the consummation of the Merger, or (c) Merger Sub or Purchaser shall have terminated the Offer in accordance with its terms and conditions without purchasing any Shares pursuant thereto. Section 8.3 Termination by Purchaser. This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after approval of the holders of Common Stock, by action of the Board of Directors of Purchaser: 35 (a) if, prior to the Transition Time there has been a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement such that any of the conditions set forth in clause (f) or (g) of Exhibit A would not be satisfied (a "Terminating Company Breach"); provided, however, that, if such Terminating Company Breach is curable by the - -------- ------- Company through the exercise of its reasonable best efforts and for so long as the Company continues to exercise such reasonable best efforts (but in no event longer than thirty days after Purchaser's notification to the Company of the occurrence of such Terminating Company Breach), Purchaser may not terminate this Agreement under this Section 8.3(a); (b) if prior to the Transition Time (i) the Board of Directors of the Company withdraws, modifies or changes its recommendation of this Agreement or the Merger or other Transactions in a manner adverse to Purchaser or Merger Sub or (ii) the Board of Directors of the Company shall have recommended to the stockholders of the Company any proposal involving a Competing Transaction. Section 8.4 Termination by the Company. This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, before or after the approval by holders of Common Stock by action of the Board of Directors of the Company: (a) if there has been a breach of any material representation, warranty, covenant or agreement on the part of Purchaser or Merger Sub set forth in this Agreement ("Terminating Purchaser Breach"); provided, however, that, if -------- ------- such Terminating Purchaser Breach is curable by Purchaser or Merger Sub through the exercise of its reasonable best efforts and for so long as Purchaser or Merger Sub continue to exercise such reasonable best efforts (but in no event longer than thirty days after the Company's notification to Purchaser of the occurrence of such Terminating Purchaser Breach), the Company may not terminate this Agreement under this Section 8.4(a); or (b) if prior to the Transition Time (i) the Board of Directors of the Company withdraws, modifies or changes its recommendation of this Agreement or the Merger or other Transactions or (ii) the Board of Directors of the Company shall have recommended to the stockholders of the Company any Competing Transaction, or resolved to do either of the foregoing after consultation with independent legal counsel, having determined in good faith that such action is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law; provided, that any termination of this Agreement by the Company pursuant to this Section 8.4(b) shall not be effective until the close of business on the second (or, in the event that the party with whom the Company proposes to engage in the Competing Transaction was a participant in the 36 auction process referred to in the first sentence of Section 6.10(a) hereof, fifth) full business day after notice of such termination to Purchaser; or (c) if (i) Purchaser or Merger Sub shall have failed to commence the Offer within the time required in Section 9.1, or (ii) Merger Sub or Purchaser shall not have purchased any Shares pursuant to the Offer by the later of 45 days after the date of this Agreement and 3 business days after the expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Offer under the HSR Act [and any required approvals in connection with any pre-merger notification filing with the German Federal Cartel Office have been obtained] or (iii) the Offer shall have been terminated without Purchaser or Merger Sub having purchased any Shares pursuant thereto. Section 8.5 Effect of Termination and Abandonment. Except as set forth in Section 10.1, in the event of termination of this Agreement and abandonment of the Merger pursuant to this Article VIII, no party hereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement, except that nothing herein will relieve the Company, Purchaser or Merger Sub from liability for any breach of this Agreement. Section 8.6 Issuance of New or Treasury Shares. If this Agreement is terminated pursuant to Section 8.3(b) or 8.4(b) hereof, or if the Purchaser shall terminate the Offer because the Minimum Condition (as defined in Exhibit A hereto) is not satisfied and at or prior to such time there has been publicly announced or the Company has received one or more proposals for a Competing Transaction which at the time of such termination has not been absolutely or unconditionally withdrawn or abandoned (a "Competing Transaction Termination"), the Company agrees that, until the expiration of one year following such termination, it will not issue any new or treasury shares (other than pursuant to commitments in effect on the date thereof) unless it shall have first given the Purchaser at least 5 business days advance written notice thereof (the "Issuance Notice"). The Purchaser may, by written notice to the Company prior to the expiration of 5 business days from receipt of the Issuance Notice, elect to exercise the Option (as such term is defined in the Stockholders Agreement) in full. If Purchaser has exercised the Option the Company shall not thereafter issue any such shares unless the Purchaser shall have consented in advance thereto, which consent shall not be unreasonably withheld. If at any time after the exercise of the Option Purchaser beneficially owns, or if before exercise of the Option if the Option were fully exercised Purchaser would own, less than 30% of the voting securities of the Company on a fully diluted basis, the provisions of this Section 8.6 shall immediately terminate and be of no further 37 force or effect with respect to any issuances of shares by the Company. ARTICLE IX THE OFFER Section 9.1 Tender Offer. (a) As promptly as reasonably practicable after the date hereof, but in no event later than five business days after the public announcement of the execution of this Agreement, Purchaser or Merger Sub will commence the Offer for all of the outstanding Shares at a price of not less than $25.50 per Share in cash, net to the seller, subject to the conditions set forth in Exhibit A, and, subject only to the terms and conditions of the Offer, will pay, as promptly as reasonably practicable after expiration of the Offer, for all Shares duly tendered and not withdrawn. Purchaser expressly reserves the right to waive any such condition other than the Minimum Condition, to increase the price per Share payable in the Offer, and to make any other changes in the terms and conditions of the Offer; provided, however, that no change may be made to the Minimum -------- ------- Condition, and no change may be made which decreases the price per Share payable in the Offer, which reduces the maximum number of Shares to be purchased in the Offer, which imposes conditions to the Offer other than those set forth in Exhibit A hereto or which extends the Offer (except as set forth in the following sentence). Notwithstanding the foregoing, Purchaser may, without the consent of the Company, (i) extend the Offer beyond the scheduled expiration date (the initial scheduled expiration date being 20 business days following the commencement of the Offer) if, at the scheduled expiration date of the Offer, any of the conditions to Purchaser's obligation to accept for payment, and to pay for, the Shares, shall not be satisfied or waived, (ii) extend the Offer for any period required by any rule, regulation or interpretation of the SEC or the staff thereof applicable to the Offer, or (iii) extend the Offer for an aggregate period of not more than 10 business days beyond the latest applicable date that would otherwise be permitted under clause (i) or (ii) of this sentence, if as of such date, all of the conditions to Purchaser's obligations to accept for payment, and to pay for, the Shares are satisfied or waived, but (x) the number of Shares validly tendered and not withdrawn pursuant to the Offer is less than 90 percent and (y) Purchaser reasonably believes that such extension would cause the number of validly tendered and not withdrawn shares to exceed 90 percent of the outstanding Shares. (b) The Company hereby consents to the Offer and represents that the Board of Directors of the Company has unanimously (i) determined that the Offer is fair to the holders of the Shares and the Merger is in the best interests of the Company and the stockholders of the Company, (ii) approved the 38 making of the Offer and the purchase of the Shares pursuant to the Offer and (iii) resolved to recommend acceptance of the Offer by the holders of the Shares and approval of the Merger by the Company's stockholders. The Company's Board of Directors shall recommend the Transactions, in accordance with the provisions of Section 6.1(a) hereof, to its stockholders in a Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") to be filed with the SEC as soon as practicable on the day the Offer is commenced. Purchaser agrees, as to the Offer to Purchase and related Letter of Transmittal (which together constitute the "Offer Documents") and the Company agrees, as to the Schedule 14D-9, that subject to compliance by the Purchaser with the requirements of Section 6.1(c) hereof such documents shall, in all material respects, comply with the requirements of the Exchange Act and other applicable laws. The Company and its counsel, as to the Offer Documents, and the Purchaser and its counsel, as to the Schedule 14D-9, shall be given an opportunity to review such documents prior to their being filed with the SEC. Neither Purchaser nor the Company shall file any of such documents with the SEC without the approval of the other party (which shall not be unreasonably withheld). (c) In connection with the Offer, the Company will cause the transfer agent for the Company Common Stock to furnish promptly to Merger Sub a list, as of a recent date, of the record holders of shares and their addresses, as well as mailing labels containing the names and addresses of all record holders of Shares and lists of security positions of Shares held in stock depositories. The Company will furnish Merger Sub with such additional information (including, without limitation, updated lists of holders of Shares and their addresses, mailing labels and lists of security positions) and such other assistance as Purchaser or Merger Sub or their agents may reasonably request in communicating the Offer to the record and beneficial holders of Shares. ARTICLE X MISCELLANEOUS; GENERAL Section 10.1 Payment of Expenses. (a) Except as otherwise set forth in this Section 9.1, whether or not the Merger shall be consummated, each party hereto shall pay its own Expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the Merger. "Expenses" as used in this Agreement shall include all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of outside counsel, investment bankers, experts and consultants to a party hereto) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this 39 Agreement and all other matters relating to the closing of the Transactions. (b) The Company agrees that (i) if Purchaser shall terminate this Agreement pursuant to Section 8.3 or (ii) if the Company shall terminate this Agreement pursuant to Section 8.4 (b), the Company shall reimburse Purchaser for its Expenses up to an aggregate amount not to exceed $500,000 . If Purchaser terminates this Agreement under Section 8.3(b) or the Company terminates this Agreement under Section 8.4(b) or in the event of a Competing Transaction Termination, the Company shall pay the Purchaser $3,500,000 upon demand after such termination, and if, within twelve months after such termination, a Competing Transaction shall be consummated, the Company shall pay the Purchaser an additional $3,500,000 concurrently with the consummation of such Competing Transaction. (c) The Purchaser agrees that if the Company shall terminate this Agreement pursuant to Section 8.4 (a), Purchaser shall reimburse the Company for its Expenses and all damages caused to Company as a result of the Terminating Purchaser Breach. (d) The Company, Purchaser and Merger Sub each agree that the payment provided for in Section 10.1 (b) shall be the sole and exclusive remedy of Purchaser and Merger Sub against the Company and its Representatives upon a termination of this Agreement pursuant to Sections 8.3 or 8.4 (b), and such remedy shall be limited to the payment stipulated in Section 10.1(b), regardless of the circumstances (including willful or deliberate conduct) giving rise to such termination. Section 10.2 Survival. The representations, warranties and agreements in this Agreement and in any certificate delivered pursuant hereto shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Article VIII, as the case may be, except that the agreements set forth in Articles I and II and Sections 6.6, 6.7, 6.8, 6.9, 6.12 and Article X shall survive the Effective Time and those set forth in Sections 6.3 (regarding confidentiality), 8.5 and 8.6 and Article X shall survive termination. Section 10.3 Modification or Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Subject to the previous sentence and Section 6.11(c), the Board of Directors of the Company may amend this Agreement at any time prior to the Effective Time, provided that an amendment made subsequent to the adoption of this Agreement by the stockholders of the Company shall not (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for the Shares, (2) alter or change any term of the certificate of incorporation of the Surviving Corporation to be effected by the Merger, or (3) alter 40 or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any Shares. Section 10.4 Counterparts. For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Section 10.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflict of laws thereof. Section 10.6 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by delivery in person, by facsimile transmission, by registered or certified mail (postage prepaid, return receipt requested) or courier service providing proof of delivery to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 10.6): If to Purchaser or Merger Sub: Pearson plc 3 Burlington Gardens London W1X 1LE, England Attention: Paul Vickers Facsimile No.: 44-171-411-2329 with a copy to: Pearson Inc. 30 Rockefeller Plaza, 50th Floor New York, New York 10112-5095 Attention: John Davis Facsimile No.: (212) 861-2124 and: O'Melveny & Myers LLP 1999 Avenue of the Stars, Suite 700 Los Angeles, California 90067 Attention: Robert D. Haymer, Esq. Facsimile No.: (310) 246-6779 41 If to the Company: All American Communications, Inc. 808 Wilshire Boulevard Santa Monica, California 90401 Attention: Chief Financial Officer Facsimile No.: (310) 656-7400 with a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP 1999 Avenue of the Stars, Suite 1600 Los Angeles, California 90067 Attention: Barry L. Dastin, Esq. Facsimile No.: (310) 788-1200 Section 10.7 Entire Agreement, etc. This Agreement (a) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties, with respect to the subject matter hereof, and (b) shall not be assignable by operation of law or otherwise except that the Merger Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Purchaser or to any direct or indirect wholly-owned newly formed Delaware subsidiary of Purchaser. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 10.8 Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Section 10.9 Certain Definitions. For purposes of this Agreement, the term: (a) "subsidiary" of any person means any corporation, partnership, joint venture or other legal entity of which such person (either alone or through or together with any subsidiary) owns, directly or indirectly, more than 50% of the stock or other equity or beneficial interests, the holders of which are generally entitled to vote for the election of the board of governors or other governing body of such corporation or other legal entity; and (b) "knowledge" means, with respect to any matter in question with respect to the Company, if any of Anthony J. Scotti, Thomas Bradshaw, Paul Westphal, Paul Pavlis, Lawrence Lamattina or Leonard Breijo has actual knowledge of such matter. 42 Section 10.10 No Third Party Beneficiaries. Except as provided in Section 6.6 hereof, this Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity not a party hereto. 43 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first hereinabove written. ALL AMERICAN COMMUNICATIONS, INC. By: /s/ Anthony J. Scotti ---------------------------------- Name: Anthony J. Scotti Title: Chief Executive Officer PEARSON PLC By: /s/ John Davis ---------------------------------- Name: John Davis Title: Senior Vice President, Chief Financial Officer PEARSON MERGER COMPANY, INC. By: /s/ John Davis ---------------------------------- Name: John Davis Title: Vice President 44 EXHIBIT A CONDITIONS OF THE OFFER Notwithstanding any other provision of the Offer, Purchaser or Merger Sub, as applicable, shall not be required to accept for payment or pay for any Shares tendered, and may terminate or amend the Offer (subject to the provisions of the Merger Agreement) and may postpone the acceptance of, and payment for, subject to Rule 14e-1(c) of the Exchange Act, any Shares tendered, if: 1. the Minimum Condition (as defined below) shall not have been satisfied prior to the expiration of the Offer; 2. any applicable waiting period under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer or other approvals required by the German Federal Cartel Office shall not have been obtained; or 3. at any time on or after the date of this Agreement, and prior to the expiration of the Offer, any of the following conditions shall exist: (a) (i) there shall be threatened or pending any suit, action or proceeding brought by any Governmental Authority against the Purchaser, Merger Sub, the Company or any Company Subsidiary (A) seeking to prohibit or impose any material limitations on Purchaser's or Merger Sub's ownership or operation (or that of any of their respective subsidiaries or affiliates) of all or a material portion of the Company's businesses or assets, or to compel Purchaser or Merger Sub or their respective subsidiaries or affiliates to dispose of or hold separate any material portion of the business or assets of the Company or any of the Company Subsidiaries, (B) challenging the acquisition by Purchaser or Merger Sub of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or the performance of any of the other transactions contemplated by the Merger Agreement or the Stockholders Agreement, or seeking to obtain from the Company, Purchaser or Merger Sub any damages that are material in relation to the Company and its subsidiaries taken as a whole, (C) seeking to impose material limitations on the ability of the Purchaser, or render the Purchaser unable, to accept for payment, pay for or purchase some or all of the Shares pursuant to the Offer and the Merger or (D) seeking to impose material limitations on the ability of Purchaser or Merger Sub effectively to exercise full rights of ownership of the Shares, including, without limitation, the right to vote the Shares purchased by it on all matters properly presented to the Company's shareholders; or (ii) any Governmental Authority or other person or entity shall have obtained an injunction (A) prohibiting the making of the Offer, the acceptance for payment of, or payment for, any Shares by 1 Purchaser, Merger Sub or any other affiliate of Purchaser or (B) prohibiting the ownership by the Purchaser or any of its subsidiaries of the Company, or compelling the Company, Purchaser or any of their respective subsidiaries to dispose of or to hold separate all or any material portion of the business or assets of the Company, Purchaser or any of their respective Subsidiaries, as a result of the Transactions; (b) there shall have been any Law enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Purchaser, the Company or any Subsidiary or affiliate of Purchaser or the Company or (ii) any Transaction, by any government or Governmental Authority other than the routine application of the waiting period provisions of the HSR Act to the Offer or the Merger, which effects any of the consequences referred to in paragraph (a) above; (c) there shall have occurred and be continuing any Company Material Adverse Effect or any event or series of events which would result in a Company Material Adverse Effect; (d) there shall have occurred and be continuing a declaration of a banking moratorium or any suspension of payments in respect of banks in the City of New York; (e) the Board of Directors of the Company or any committee thereof shall have withdrawn, modified or changed in a manner adverse to Purchaser or Merger Sub the approval or recommendation of the Offer, the Merger or the Agreement, or approved or recommended any Competing Transaction or any other acquisition of Shares other than the Offer or the Merger; (f) any representation and warranty of the Company shall not be true and correct as of the date of this Agreement or as of the expiration of the Offer except for (i) changes specifically contemplated by this Agreement and (ii) those representations and warranties that address matters only as of a particular date (which shall remain true and correct as of such date) and in each case except where failure of such representation and warranty to be so true and correct individually or together with failures of other representations and warranties to be true and correct would not have a Company Material Adverse Effect (other than representations and warranties that are already so qualified or that are qualified as to the prevention or delay of the consummation of any of the Transactions or as to the performance by the Company of its obligations under this Agreement, which in each such case shall be true and correct as written); (g) the Company shall have failed to perform any obligation or to comply with any agreement or covenant of the Company to be performed or complied with by it under the 2 Agreement unless such failures, would not, individually or in the aggregate, have a Company Material Adverse Effect; (h) the Agreement shall have been terminated in accordance with its terms; or (i) Purchaser and the Company shall have agreed that Purchaser or Merger Sub, as applicable, shall terminate the Offer. For purposes hereof, the term "Minimum Condition" shall mean a majority of the outstanding shares of Common Stock and a majority of the outstanding Shares (including for purposes of such calculation all Shares issued upon exercise of all vested and unvested stock options and warrants, prior to or simultaneously with the acceptance of the Offer) being validly tendered and not withdrawn prior to the expiration of the Offer. The foregoing conditions may be waived by Purchaser or Merger Sub in whole or in part at any time and from time to time in their sole discretion, subject in each case to the terms of the Agreement. The failure by Purchaser or Merger Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 3 EX-99.(C)(2) 11 STOCKHOLDER AGREEMENT DATED 10/01/97 EXHIBIT (C)(2) STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT (this "Agreement") dated as of October 1, 1997, by and among Pearson plc, a corporation organized under the laws of the United Kingdom ("Purchaser"), Pearson Merger Company, Inc., a Delaware corporation and wholly-owned indirect subsidiary of Purchaser (the "Merger Sub") and the Stockholders named on Exhibit A hereto (each a "Stockholder"). WHEREAS, each Stockholder is, as of the date hereof, the record and beneficial owner of the number of shares of common stock, par value $0.0001 per share (the "Class A Common Stock") and/or the number of shares of Class B Common Stock, par value $.0001 per share ("Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock") of All American Communications, Inc., a Delaware corporation (the "Company") set forth next to such Stockholder's name on Exhibit A hereto; and WHEREAS, Purchaser, Merger Sub and the Company concurrently herewith are entering into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides, among other things, for the acquisition of the Company by Purchaser by means of a cash tender offer (the "Offer") for any and all of the outstanding shares of Common Stock and for the subsequent merger (the "Merger") of Merger Sub with and into the Company upon the terms and subject to the conditions set forth in the Merger Agreement; and WHEREAS, as a condition to the willingness of Purchaser and Merger Sub to enter into the Merger Agreement, and in order to induce Purchaser and Merger Sub to enter into the Merger Agreement, each Stockholder has agreed to enter into this Agreement. NOW, THEREFORE, in consideration of the execution and delivery by Purchaser and the Merger Sub of the Merger Agreement and the foregoing and the mutual representations, warranties, covenants and agreements set forth herein and therein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Representations and Warranties of the Stockholders. Each -------------------------------------------------- Stockholder hereby severally represents and warrants to Purchaser and Merger Sub as follows as to such Stockholder: a. Such Stockholder is the record and beneficial owner of the shares of Common Stock ("Shares") set forth next to such Stockholder's name on Exhibit A hereto. b. Such Stockholder, if a corporation, is duly organized, validly existing and in good standing under the laws of its respective jurisdiction, has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. c. This Agreement has been duly authorized, executed and delivered by such Stockholder and constitutes the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. d. Neither the execution and delivery of this Agreement nor the consummation by such Stockholder of the transactions contemplated hereby will result in a violation of, or a default under, or conflict with, any contract, trust, commitment, agreement, understanding or arrangement of any kind to which the Stockholder is a party or bound or to which such Stockholder's Shares are subject. Consummation by such Stockholder of the transactions contemplated hereby will not violate, or require any consent, approval, or notice under any provision of any judgment, order, decree, statute, law, rule or regulation applicable to such Stockholder or such Stockholder's Shares, except for any necessary filing under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), any pre-merger notification with the German Federal Cartel Office or state takeover laws. e. Such Stockholder's Shares and the certificates representing such Stockholder's Shares are now and at all times during the term hereof will be held by such Stockholder, or by a nominee or custodian for the benefit of such Stockholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever, except for any such encumbrances or proxies arising hereunder or otherwise disclosed to the Purchaser; provided, however, that such Stockholder may transfer all or a portion of the shares to a person or entity who, by written instrument reasonably acceptable in form and substance to Purchaser, agrees to be bound by each of the terms of this Agreement. SECTION 2. Representations and Warranties of Purchaser and Merger Sub. ---------------------------------------------------------- Each of Purchaser and Merger Sub hereby, jointly 2 and severally, represents and warrants to each Stockholder as follows: a. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the United Kingdom, has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. b. This Agreement has been duly authorized, executed and delivered by each of Purchaser and Merger Sub and constitutes the legal, valid and binding obligation of each of Purchaser and Merger Sub, enforceable against each of them in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) the availability of the remedy of specific performance or injunctive or other form of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. c. Neither the execution and delivery of this Agreement nor the consummation by each of Purchaser and Merger Sub of the transactions contemplated hereby will result in a violation of, or a default under, or conflict with, any contract, trust, commitment, agreement, understanding or arrangement of any kind to which each of Purchaser and Merger Sub is not a party or bound. The consummation by each of Purchaser and Merger Sub of the transactions contemplated hereby will not violate, or require any consent, approval, or notice under any provision of any judgment, order, decree, statute, law, rule or regulation applicable to either Purchaser or Merger Sub, except for any necessary filing under the HSR Act, any pre-merger notification with the German Federal Cartel Office or state takeover laws. SECTION 3. Purchase and Sale of the Shares. ------------------------------- a. Purchaser hereby agrees to make the Offer. Each Stockholder hereby severally agrees that it shall tender its Shares and any shares subsequently acquired pursuant to exercises after the date hereof of options or warrants to purchase Common Stock (the "Subject Shares") into the Offer in accordance with the terms and conditions of the Offer and that it shall not withdraw any Subject Shares so tendered unless the Merger Agreement is terminated in accordance with its terms. In 3 addition, each Stockholder hereby severally agrees to sell to Merger Sub, and Merger Sub hereby agrees to purchase, all such Stockholder's Subject Shares at a price per Share equal to $25.50 or such higher price per Share as may be offered by Merger Sub in the Offer (the "Purchase Price"), provided that such obligation to purchase is subject to Merger Sub having accepted Shares for payment under the Offer and the Minimum Condition (as defined in Exhibit A to the Merger Agreement) and other conditions set forth in Exhibit A of the Merger Agreement having been satisfied, which conditions (other than the Minimum Condition) may be waived by Merger Sub in its sole discretion. Notwithstanding anything to the contrary herein, the Subject Shares which are shares of Class A Common Stock, shall not, in the aggregate for all purposes of this Agreement, exceed 49.9% of the then outstanding shares of Class A Common Stock, and the number of Subject Shares shall be reduced on a share-for-share basis for any Shares owned by Purchaser or any affiliate thereof as of the date hereof. The Subject Shares as of the date hereof are set forth on Exhibit B hereto. b. Each Stockholder hereby grants to Purchaser an irrevocable option (collectively, the "Option") to purchase such Stockholder's Subject Shares at a price per Share equal to the Purchase Price, exercisable in whole but not in part during the one year period after (i) termination of the Merger Agreement pursuant to Section 8.3(b) or 8.4(b) thereof or (ii) a Competing Transaction Termination (as defined in the Merger Agreement). In the event Purchaser wishes to exercise the Option, Purchaser shall send a written notice to each Stockholder specifying the place, date and time for the closing of such purchase at least 5 business days in advance of the date of such closing. Any such purchase shall be subject to the expiration of any applicable waiting period under the HSR Act and pre-merger approval required by the German Federal Cartel Office. SECTION 4. Transfer of the Shares; Option Exercises. Prior to the ---------------------------------------- termination of this Agreement, except as otherwise provided herein, no Stockholder shall: (i) transfer (which term shall include without limitation, for the purposes of this Agreement, any sale, gift, pledge or other disposition) or consent to any transfer of any or all of such Stockholder's Shares; (ii) enter into any contract, option or other agreement or understanding with respect to any transfer of any or all of such Stockholder's Shares or any interest therein; (iii) except as provided in Section 5(b) hereto, grant any proxy, power-of-attorney or other authorization or consent or with respect to such Stockholder's Shares; or (iv) deposit such Stockholder's Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Stockholder's Shares; provided, however, that (x) a Stockholder may transfer all or a portion of such Stockholder's Shares to a person or entity who, by written instrument reasonably acceptable in form and substance to Purchaser, agrees to be bound by each of the terms of this 4 Agreement, and (y) any Stockholder may sell any of such Stockholders' Shares in a sale which complies with Rule 144 under the Securities Act of 1933, as amended, provided that prior to any such sale, such Stockholder shall give notice (the "Sale Notice") to Purchaser of the number of Shares such Stockholder desires to sell and, for a period of 5 business days after receipt of the Sale Notice, Purchaser shall have the right to purchase such Stockholders' Shares desired to be sold from the Stockholder at the Purchase Price. In the event that Purchaser does not purchase such Stockholders' Shares within such 5 business days period, Stockholder will be free to sell such Stockholders' Shares desired to be sold to any third party. Prior to the Transition Time (as defined in the Merger Agreement), except as otherwise provided herein, no Stockholder shall exercise any outstanding options or warrants to purchase Common Stock except (i) as necessary to avoid the expiration of such option or warrant or (ii) in connection with the tender or sale of the underlying Common Stock to Purchaser or its affiliates. SECTION 5. Voting of Shares; Grant of Irrevocable Proxy; Appointment of ------------------------------------------------------------ Proxy. - ----- a. Each Stockholder hereby agrees that at any meeting (whether annual or special and whether or not an adjourned or postponed meeting) of the holders of Common Stock, however called, or in connection with any written consent of the holders of Common Stock solicited by the Board of Directors, such Stockholder will appear at the meeting or otherwise cause the Section 5 Shares (as such term is hereinafter defined) to be counted as present thereat for purposes of establishing a quorum and vote or consent (or cause to be voted or consented) such Stockholder's Section 5 Shares (i) in favor of the Merger during the term of the Merger Agreement and (ii) against any Competing Transaction during the term of this Agreement. "Section 5 Shares" shall mean (i) the Subject Shares unless and until the Class B Common Stock shall have become voting stock, and (ii) all shares of voting stock of the Company from and after the time that the Class B Common Stock shall have become voting stock; provided, however, that notwithstanding anything to the contrary herein, unless and until the Transition Time shall have occurred, the Section 5 Shares shall not in the aggregate exceed such amount of the then outstanding shares of voting stock of the Company as would result in the occurrence of a Change in Control under the Indenture referred to in Section 3.5(a) of the Merger Agreement. b. Each Stockholder hereby irrevocably grants to, and appoints Purchaser and any nominee thereof, its proxy and attorney-in-fact (with full power of substitution) during the term of this Agreement, for and in the name, place and stead of such Stockholder, to vote such Stockholder's Section 5 Shares, or grant a consent or approval in respect of such Stockholder's 5 Section 5 Shares, in connection with any meeting of the stockholders of the Company (i) in favor of the Merger during the term of the Merger Agreement, and (ii) against any Competing Transaction (as defined in the Merger Agreement) during the term of this Agreement. c. Except as otherwise disclosed to Purchaser, each Stockholder represents that any proxies heretofore given in respect of such Stockholder's Subject Shares, if any, are not irrevocable, and that such proxies are hereby revoked. d. Each Stockholder hereby affirms that the irrevocable proxy set forth in this Section 5 is given in connection with the execution of the Merger Agreement and that such irrevocable proxy is given to secure the performance of the duties of such Stockholder under this Agreement. Each Stockholder hereby further affirms that the irrevocable proxy is coupled with an interest and, except as set forth in Section 5 hereof, is intended to be irrevocable in accordance with the provisions of Section 212(e) of the Delaware General Corporation Law (the "DGCL"). e. Purchaser agrees that, until any such Stockholder's Section 5 Shares are purchased by Merger Sub pursuant to Section 3 hereof, such Stockholder shall retain the right to vote such Stockholder's Section 5 Shares (as well as any other Shares) for the election of directors of the Company and for any other matter other than those specified in clauses (a) and (b) of this Section 5. SECTION 6. Competing Transactions. Each Stockholder will not, and will ---------------------- instruct its Representatives during the term of the Merger Agreement not to, initiate, solicit or encourage (including by way of furnishing information or assistance) any Competing Transaction (as defined in the Merger Agreement), or enter into or maintain discussions or negotiate with any person in furtherance of or relating to or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any Representative to take any such action, and such Stockholder shall use its reasonable best efforts to cause its Representatives not to take any such action. Such Stockholder shall promptly advise Purchaser if any such proposal or offer, or any inquiry or contact made with any person with respect thereto, is made. SECTION 7. Further Assurances; Stockholder Capacity. ---------------------------------------- a. Each Stockholder shall, upon request of Purchaser or Merger Sub, execute and deliver any additional documents and take such further actions as may reasonably be deemed by Purchaser or 6 Merger Sub to be necessary or desirable to carry out the provisions hereof and to vest the power to vote the Shares as contemplated by Section 5 hereof in Purchaser. b. Nothing in this Agreement shall be construed to prohibit any Stockholder or any affiliate of any Stockholder who is or has designated a member of the Board of Directors of the Company from taking any action solely in his capacity as a member of the Board of Directors of the Company or from exercising his, her or its fiduciary duties as a member of such Board of Directors. SECTION 8. Termination. This Agreement and all rights and obligations of ----------- the parties hereunder shall terminate immediately upon the earlier of (a) the date (the "Termination Date") that is one year following a Competing Transaction Termination or the date upon which the Merger Agreement is terminated in accordance with its terms pursuant to Section 8.3(b) or 8.4(b) of the Merger Agreement or immediately on the date upon which the Merger Agreement is otherwise terminated in accordance with its terms or (b) the Effective Time (as defined in the Merger Agreement). In the event that the Merger is consummated, the provisions set forth in Section 9 shall survive any termination of this Agreement. SECTION 9. Expenses. Except as provided in Section 6 hereof, all fees and -------- expenses incurred by any one party hereto shall be borne by the party incurring such fees and expenses. SECTION 10. Public Announcements. Each of Purchaser, Merger Sub and each -------------------- Stockholder agrees that it will not issue any press release or otherwise make any public statement with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that such disclosure can be made without obtaining such prior consent if (i) the disclosure is required by law or regulation or by obligations imposed pursuant to any listing agreement with the NASDAQ National Market and (ii) the party making such disclosure has first used its reasonable best efforts to consult with the other party about the form and substance of such disclosure. SECTION 11. Miscellaneous. ------------- a. Capitalized terms used and not otherwise defined in this Agreement shall have the respective meanings assigned to such terms in the Merger Agreement. b. All notices and other communications hereunder shall be in writing and shall be deemed given upon (i) transmitter's confirmation of a receipt of a facsimile transmission, (ii) confirmed delivery by a standard overnight carrier or when delivered by hand or (iii) the expiration of five business days 7 after the day when mailed in the United States by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): i. If to the Purchaser or Merger Sub, to the address set forth on Exhibit C: ii. If to any Stockholder, to the address set forth next to such Stockholder's name on Exhibit A hereto. c. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. d. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. e. This Agreement (including the Merger Agreement and any other documents and instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, whether written or oral, among the parties hereto with respect to the subject matter hereof. f. This Agreement shall be governed by, and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of laws thereof. g. Except as provided in Section 4 hereof, neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns, and the provisions of this Agreement are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. h. If any term, provision, covenant or restriction herein is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. i. Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, each non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto (i) will waive, in any action for specific performance, the defense of adequacy of a remedy at law and 8 (ii) shall be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement. j. No amendment, modification or waiver in respect of this Agreement shall be effective against any party unless it shall be in writing and signed by such party. 9 IN WITNESS WHEREOF, Purchaser, Merger Sub and each Stockholder has executed and delivered or caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Myron Roth Pearson plc --------------------------- Myron Roth By: /s/ John Davis ------------------------------- Name: John Davis /s/ Thomas Bradshaw -------------------------- --------------------------- Title: Authorized Signatory Thomas Bradshaw ------------------------- /s/ Sydney D. Vinnedge Pearson Merger Company, Inc. --------------------------- Sydney D. Vinnedge By: /s/ John Davis /s/ Lawrence E. Lamattina ------------------------------- --------------------------- Name: John Davis Lawrence E. Lamattina -------------------------- Title: Vice President ------------------------- /s/ Anthony J. Scotti - ---------------------------------- The Interpublic Group Anthony J. Scotti of Companies, Inc. /s/ Benjamin Scotti - ---------------------------------- By: /s/ Eugene Beard Benjamin Scotti -------------------------- Name: Eugene Beard --------------------- Title: Vice Chairman -------------------- 10 EXHIBIT A
Ownership of Outstanding Shares Name Class A Class B - ---- ------- ------- Anthony J. Scotti 1,504,690 0 Benjamin Scotti 1,435,995 0 Myron Roth 340,850 0 Thomas Bradshaw 315,850 0 Sydney D. Vinnedge 141,875 0 Lawrence E. Lamattina 0 0 The Interpublic Group of Companies, Inc. 580,000 2,470,000
1 EXHIBIT B
Subject Shares Name Class A Class B - ---- -------------- -------- Anthony J. Scotti 1,220,248 0 Benjamin Scotti 1,164,538 0 Myron Roth 276,417 0 Thomas Bradshaw 256,143 0 Sydney D. Vinnedge 115,055 0 Lawrence E. Lamattina 0 0 The Interpublic Group of Companies, Inc. 470,358 2,470,000
1 EX-99.(C)(3) 12 CONFIDENTIALITY AGREEMENT DATED 11/20/95 EXHIBIT (C)(3) ALL AMERICAN COMMUNICATIONS, INC. 2114 Pico Boulevard Santa Monica, CA 90405 November 20, 1995 Pearson Television Limited Teddington Studios Teddington Lock, Teddington Middlesex TW11 9NT Attn: Ms. Sara Tingay Dear Sirs and Madams: In connection with your consideration of a possible transaction with All American Communications, Inc., you have requested certain information concerning the Company. Certain terms used herein (e.g., the "Company" and "you" or "your" are used as defined in the last paragraph hereof). As a condition to your being furnished such information, you agree to treat any "Evaluation Material" (as hereinafter defined) in accordance with the provisions of this letter and to take or abstain from taking certain other actions herein set forth. The terms "Evaluation Material" means information concerning the Company (whether prepared by the Company, its advisors or otherwise and irrespective of the form of communication) which is furnished to you or to your Representatives (as hereinafter defined) now or in the future by or on behalf of the Company, along with all notes, analyses, studies, interpretations or other documents prepared by you or your Representatives which contain, reflect or are based upon, in whole or in part, the information furnished to you or your Representatives pursuant hereto. The term "Evaluation Material" does not include information which (i) is already in your possession, provided that such information is not known by you after due inquiry to be subject to another confidentiality agreement with or other obligation of secrecy to the Company or another party, or (ii) is or becomes generally available to the public other than as a result of a disclosure by you or any of your directors, officers, employees, agents, Pearson Television Limited November 20, 1995 Page 2 representatives or advisors ("Representatives"), or (iii) becomes available to you on a non-confidential basis from a source other than the Company or its advisors, provided that such source is not known by you after due inquiry to be bound by a confidentiality agreement with or other obligation of secrecy to the Company or another party. You hereby agree that the Evaluation Material will be used solely for the purposes of evaluating a possible transaction between the Company and you, will not be used in any way detrimental to the Company, and that such information will be kept confidential by you and your Representatives; provided, however, that (i) any of such information may be disclosed to your Representatives who need to know such information for the purpose of evaluating any such possible transaction between the Company and you (it being understood that such Representatives shall be informed by you of the confidential nature of such information and shall be directed by you to treat such information confidentially and you shall be responsible for any breach of this agreement by any of the foregoing), (ii) any disclosure of such information may be made to which the Company consents in writing. You agree, at your sole expense, to take all reasonable measures (including but not limited to court proceedings) to restrain you Representatives from prohibited or unauthorized disclosure or use of the Evaluation Material. In the event that you (or any other person to whom you are permitted to disclose Evaluation Material) are requested in any proceeding or are required by applicable law to disclose any Evaluation Material, you will give the Company prompt notice of such request or requirement so that the Company may seek an appropriate protective order or other appropriate remedy. If in the absence of a protective order, or other appropriate remedy, you (or such other person) are nonetheless compelled by law to disclose Evaluation Material, you (or such other person) may disclose such information (but only to the extent so required) without liability hereunder; provided, however, that you give the Company written notice of the information to be disclosed as far in advance of its disclosure as is practicable and, upon the Company's request and at the Company's expense, use your best reasonable efforts to obtain reliable assurances that confidential treatment will be accorded to such information, Pearson Television Limited November 20, 1995 Page 3 including without limitation, by cooperating with the Company to obtain an appropriate protection order. You hereby acknowledge that you are aware, and that you will advise your Representatives who are informed as to the matters which are the subject of this letter, that the United States securities laws prohibit any person who has received from an issuer material, non-public information concerning the issuer or the matters which are the subject of this letter from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. In addition, except as required by law or regulatory authority, without the prior written consent of the Company, you will not, and will cause your Representatives not to, and the Company agrees that it will not, disclose to any person that Evaluation Material has been made available to you or that discussions or negotiations are taking place concerning a possible transaction between the Company and you or any of the terms, conditions or other facts with respect to any such possible transaction, including the statue thereof. You have advised us that the regulatory authorities applicable to Pearson plc as a quoted company may require disclosure of the possible transaction after the parties have reached written agreement on the material terms of the transaction in the event of significant "leaks" of the transaction; however, nothing herein shall relieve any party from its responsibility for any breach of this letter agreement. Without limiting the generality of the foregoing, you further agree that prior to the execution of any definitive agreement with the Company, without the prior written consent of the Company, you will not, directly or indirectly, enter into any agreement, arrangement or understanding, with any person regarding a possible transaction involving the Company (other than with your representatives or with your banks or similar financial institutions providing credit to you). The term "person" as used in this letter agreement shall be broadly interpreted to include the media and any corporation, partnership, group, individual or other entity. Pearson Television Limited November 20, 1995 Page 4 You hereby acknowledge that the Evaluation Material is being furnished to you in consideration of your agreement that without the prior written consent of the Board of Directors of the company, for a period of two years from the date hereof, you and your affiliates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) will not (and you and they will not assist, provide or arrange financing to or for others or encourage others to), directly or indirectly, acting alone or as part of a group, acquire or agree, offer, seek or propose to acquire ownership (including, but not limited to, beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of any of the assets or businesses of the Company or any securities issued by the Company, or any rights or options to acquire such ownership (including from a third party), or otherwise seek or propose to influence or control (including by proxy solicitation or otherwise) the management or policies of the Company, make any public announcement with respect to any of the foregoing, request permission (without the Company's consent) to do any of the foregoing or enter into any discussions, negotiation, arrangement or understanding with any third party with respect to the foregoing. Although the Company may include in the Evaluation Material information known to it which it believes to be relevant for the purpose of your investigation, you understand that neither the Company nor any of its directors, officers, employees, representatives or advisors has made or makes any representation or warranty as to the accuracy or completeness of the Evaluation Material. You agree that neither the Company nor any of the directors, officers, employees, representatives or advisors shall have any liability to you or any of your directions, officers, employees, representatives or advisors resulting from the use or content of the Evaluation Material. In the event that you or we do not proceed with a transaction within a reasonable time, and, in any event, within five days after being so requested by the Company, you shall promptly redeliver to the Company all written Evaluation Material and shall deliver or promptly destroy any other written material containing or reflecting any information in the Evaluation Material (whether prepared by the Company, its advisors or otherwise) and will not retain any copies, extracts or other reproductions in whole or in part of such written material. All Pearson Television Limited November 20, 1995 Page 5 documents, memoranda, notes and other writings whatsoever prepared by you or any of your advisors based on or including any of the information in the Evaluation Material shall be destroyed, and such destruction shall be certified in writing to the Company by an authorized officer supervising such destruction. For this purpose, a "writing" includes data in computer format. Notwithstanding the foregoing, one copy of written Evaluation Material and other written material containing or reflecting Evaluation material may be retained in a confidential manner by the Secretary of Pearson plc in the event such company is required to maintain such copy as a result of the submission of such material to its Board of Directors in connection with a determination by such Board. In addition, notwithstanding the return or destruction (or, as provided above, the retention) of the Evaluation material, you and your Representatives will continue to be bound by your obligations of confidentiality hereunder. For eighteen months from the date of this letter agreement, you agree not to (i) initiate or maintain contact (except for those contacts made in the ordinary course of business) with any officer, director or significant employee of the Company or any customer, client, or account of the Company regarding the Company's business, operation, prospects or finances, or (ii) solicit for employment any current key management employee of the Company or breach the provisions of Schedule I hereto, except, in either case, with the express permission of the Company. You agree that unless and until a definitive agreement between the Company and you with respect to any transaction referred to in the first paragraph of this letter has been executed and delivered, neither the Company nor you will be under any legal obligation of any kind whatsoever with respect to such a transaction by virtue of this or any written or oral expression with respect to such a transaction by any of its directors, officers, employees, agents, representatives or advisors or representatives thereof except, in the case of this letter, for the matters specifically agreed to herein. You further acknowledge and agree that the Company reserves the right, in its sole discretion, to reject any and all proposals made by you or on your behalf with regard to a transaction between the Company and you, and to terminate discussions and negotiations with you at any time. Pearson Television Limited November 20, 1995 Page 6 You acknowledge that any breach of this Agreement would cause irreparable harm to the Company and the Company could not be made whole by money damages. It is understood and agreed therefore that money damages would not be a sufficient remedy for any breach of this letter agreement and that the Company shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach and you further agree to waive any requirement for the security or posting of any bond in connection with such remedy. Such remedy shall not be deemed to be the exclusive remedy for breach of this agreement but shall be in addition to all other remedies available at law or in equity to the Company. It is agreed that no failure or delay by the Company in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. The agreements set forth in this letter agreement may be modified or waived only by a separate writing between the Company and you expressly so modifying or waiving such agreements. Unless the context indicates otherwise, the term (i) "the Company" shall include All American Communications, Inc. and its direct and indirect subsidiaries (including Mark Goodson Productions, LLC, and the assets and business acquired from Mark Goodson Productions, L.P. and the Child's Play Company) and the term "you" shall include Pearson Television Limited and its direct or indirect subsidiaries and its controlling persons, including Pearson plc and Grundy Worldwide Limited (and members Pearson Television Limited November 20, 1995 Page 7 of the Grundy Group). This letter shall abe governed by, and construed in accordance with, the laws of the State of Delaware. Very truly yours, ALL AMERICAN COMMUNICATIONS, INC. By: /s/ Thomas Bradshaw ----------------------- Confirmed and Agreed to: PEARSON TELEVISION LIMITED By: /s/ Sara Tingay ------------------------- Pearson Television Limited November 20, 1995 Page 8 SCHEDULE I ---------- Capitalized terms used herein without definition shall have the meaning set forth in the attached letter agreement. ________________________________________________________________________________ 1. During the eighteen months from the date of the letter agreement, you shall not solicit for any employment David Hasselhof or Pamela Anderson. EX-99.(C)(4) 13 TERMINATION OF CONFIDENTIALITY AGREEMENT EXHIBIT (C)(4) [Letter on All American Communications letterhead] December 7, 1995 Pearson Television Limited Teddington Studios Teddington Lock Middlesex TW11 9NT England Dear Sirs and Madams: Reference is made to the letter agreement (the "Agreement") dated November 20, 1995, between you and All American Communications, Inc. (The "Company") in connection with your consideration of a possible transaction with the Company. Capitalized terms used herein without definition shall have the respective meanings set forth in the Agreement. Please be advised that we are not proceeding with and are hereby terminating and abandoning any discussions concerning a transaction as contemplated in the Agreement. Pursuant to the Agreement, we hereby request that you redeliver to the Company all written Evaluation Material and deliver or promptly destroy (which destruction should be certified to the Company in writing) any other written material containing or reflecting any information in the Evaluation Material and not retain any copies, extracts or other reproductions thereof except as expressly permitted by the Letter Agreement. Notwithstanding the foregoing, as provided in the Letter Agreement, the obligations of the parties under the Letter Agreement shall remain in full force and effect in accordance with the terms thereof. Very truly yours, ALL AMERICAN COMMUNICATIONS, INC. By: /s/ Thomas Bradshaw ----------------------------- Thomas Bradshaw Senior Vice President, Chief Financial Officer EX-99.(C)(5) 14 LETTER REINSTATING CONFIDENTIALITY AGREEMENT EXHIBIT (C)(5) [Letter on All American Communications, Inc. letterhead] February 16, 1996 Pearson Television Limited Teddington Studios Teddington Lock Middlesex TW11 9NT England Dear Sirs and Madams: Reference is made to the letter agreement (the "Letter Agreement") dated November 20, 1995, between All American Communications, Inc. (The "Company") and Pearson Television Limited ("Pearson"). Capitalized terms used herein without definition shall have the respective meanings set forth in the Letter Agreement. This will confirm our understanding and agreement that the Letter Agreement remains in full force and effect and that, notwithstanding the Company's prior termination of all discussions concerning a possible transaction referenced in the Letter Agreement, all Evaluation Material furnished to you or to your Representatives, whether prior to the date hereof, now or in the future, has been and shall be furnished pursuant to and shall be subject to the provisions of the Letter Agreement. Very truly yours, ALL AMERICAN COMMUNICATIONS, INC. By: /s/ Thomas Bradshaw ----------------------------- Confirmed and Agreed to: PEARSON TELEVISION LIMITED By: /s/ Sara Tingay ----------------------------- EX-99.(C)(6) 15 AGREEMENT NOT TO COMPETE EXHIBIT (C)(6) AGREEMENT NOT TO COMPETE This Agreement Not to Compete (this "AGREEMENT") is entered into as of October 1, 1997, by and between All American Communications, Inc., a Delaware corporation ("COMPANY"), on the one hand, and Anthony J. Scotti, an individual ("SCOTTI"), on the other hand. R E C I T A L S WHEREAS, Company, Pearson plc and Pearson Merger Company, Inc. ("MERGER SUB") have entered into an Agreement and Plan of Merger ("MERGER AGREEMENT") dated as of October 1, 1997 relating to the merger of Merger Sub into Company; WHEREAS, Company and Scotti are parties to that certain letter agreement dated February 25, 1991, as amended and extended (including, without limitation, by that certain undated "Amendment to Employment Agreement", that certain "Second Amendment to Employment Agreement" dated as of January 18, 1993, that certain "Third Amendment to Employment Agreement" dated May 1, 1994, that certain "Fourth Amendment to Employment Agreement" dated as of February 26, 1996 and that certain "Fifth Amendment to Employment Agreement" of even date herewith) (said letter agreement, together with any and all amendments thereto and extensions thereof, being referred to herein as the "EMPLOYMENT AGREEMENT"); WHEREAS, it is contemplated that, in connection with the Merger Agreement and/or the Stockholders Agreement, Scotti's Shares of Company will be acquired by Merger Sub; WHEREAS, in connection with the purchase of Scotti's Shares by Merger Sub, Company and Scotti each desire to set forth in this Agreement the terms and conditions of Scotti's voluntary resignation from Company and Scotti's agreement not to engage in certain businesses which compete with Company or Company's Affiliates as of and after the Transition Time (as defined below); NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows: A. CONDITION PRECEDENT. The rights and obligations of each of ------------------- Company and Scotti under this Agreement shall become effective only upon the occurrence of the Transition Time (as defined in Paragraph 2 below). In the event the Transition Time does not occur, for whatever reason, this Agreement shall be of no force and effect, and neither Company nor Scotti shall have any rights or obligations hereunder. 1. TERMS/DEFINITIONS. Capitalized terms used and not defined ----------------- herein have the meanings given to them in the Merger Agreement. For the purposes of this Agreement: (a) "AFFILIATE" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person; (b) "AREAS" means (i) the County of Los Angeles, (ii) all counties in the State of California, the names of which are all deemed to be specifically included herein by this reference, (iii) the County of New York, New York, (iv) all counties in the State of New York, the names of which are all deemed to be specifically included herein by this reference, (v) the United States, (vi) the United Kingdom, and (vii) all communities, municipalities and counties, wherever located throughout the world; (c) "PERSON" means an association, a corporation, an individual, a partnership, a trust or any other entity or organization, including a governmental entity; (d) "GAME SHOW BUSINESS" means any business, in whole or in part, involving the development, production, licensing, distribution, broadcast, marketing, promotion, merchandising and/or other exploitation of game shows and/or game show formats in any medium or media now known or hereafter devised, and/or any combination of the foregoing; and (e) "MUSIC BUSINESS" means any business, in whole or in part, involving (i) the development, recording, production, pressing, manufacturing, marketing, promotion, distribution, merchandising and/or other exploitation of musical recordings in any medium or media now known or hereafter devised (including, without limitation, the exploitation of musical recordings by means of CDs, cassettes, albums, music videos or any other audio or audiovisual work or device, in any medium or media now known or hereafter devised), (ii) the publishing, licensing, administration, merchandising and/or other exploitation of musical compositions in any medium or media now known or hereafter devised, (iii) the development, production, promotion, exhibition, merchandising and/or other exploitation of live musical performances in any medium or media now known or hereafter devised, and/or (iv) any combination of the foregoing; provided, however, that "Music Business" shall not include any business activities to the extent they relate to (x) musical compositions written in whole or in part by, or musical performances of, any of Scotti's individual family members (including family members of Scotti's spouse), or (y) musical recordings and compositions which are a part of theatrical motion pictures or television programs (other than game shows and music videos) produced by Scotti. 2. RESIGNATION. Reference is hereby made to Paragraph 3.2.1.A of ----------- the Employment Agreement. Company and Scotti acknowledge and agree that the transaction contemplated by the Merger Agreement shall constitute an "EVENT" (as defined in the Employment Agreement and in Company's 1994 Stock Incentive Plan). Effective as of the date on which Merger Sub purchases more than fifty percent (50%) of the Shares of Common Stock and Class B Common Stock combined (the "TRANSITION TIME"), Scotti (1) hereby exercises his right to terminate the Term (as defined in the Employment Agreement), which termination shall become effective immediately upon the Transition Time, and (2) agrees to assign and to cause each and every Scotti Affiliate to assign to Company or any designee of Company all equity securities of any Company Subsidiary owned by any of them. Accordingly, effective as of the Transition Time, Scotti hereby voluntarily resigns (i) as Chief Executive Officer of Company, (ii) from the Board of Directors of Company (and all committees thereof), (iii) the Boards of Directors (and all committees thereof) of all Company Subsidiaries of which Scotti is a member, and (iv) any other position of employment or engagement which Scotti may occupy in Company or any Affiliate of Company. Scotti hereby acknowledges and agrees that his termination of the Term does not constitute and shall not be deemed to constitute a termination by Company, for 2 "good cause" or otherwise, or a termination by Scotti for "good cause"; and that all of Scotti's rights under the Employment Agreement shall be determined in accordance with Paragraph 3.2.2.(b) of the Employment Agreement. Scotti acknowledges and agrees that he shall be entitled to no payments or benefits pursuant to the Employment Agreement other than as set forth in said Paragraph 3.2.2.(b). In this regard, Scotti hereby (i) waives his right to receive any further compensation and benefits from Company pursuant to the Employment Agreement or any other agreement with Company (other than this Agreement); and (ii agrees that all other obligations of Company pursuant to the Employment Agreement (including, without limitation, all payment obligations pursuant to Section 2 of the Employment Agreement, and all obligations arising out of the termination of the Term of the Employment Agreement pursuant to Section 3 of the Employment Agreement) are hereby discharged. In addition, Scotti acknowledges and agrees that Paragraph 1.3.2 of the Employment Agreement has been superseded by Section 6.12 of the Merger Agreement and is of no force and effect. 3. COVENANT NOT TO COMPETE AND NOT TO SOLICIT. ------------------------------------------ (a) COVENANT. In consideration of the Noncompetition Payment and -------- as a material inducement to Company to enter into the Merger Agreement, Scotti agrees as follows: (i) During the period commencing at the Transition Time and continuing until December 1, 1999 (the "NONCOMPETE TERM"), Scotti shall not directly (or indirectly through an Affiliate of Scotti) in the Areas, engage in, assist any Person in engaging in or acquire an interest in any Person engaging in, the Game Show Business or the Music Business, whether as an owner, shareholder, joint venturer, partner, employee, independent contractor, agent or otherwise. Notwithstanding the foregoing, nothing herein shall prevent Scotti from working for, assisting or advising any Person that is engaged in the Game Show Business or the Music Business so long as Scotti does not render any services for such Person in connection with the Game Show Business or the Music Business. (ii) During and prior to the Noncompete Term, Scotti shall not directly or indirectly (through an Affiliate of Scotti or otherwise) solicit, entice, persuade, or induce any employee or independent contractor of Company or any performer (whether music, television, theatrical or otherwise) who is under contract (whether directly or through a loanout company or other arrangement) with Company or any Affiliate of Company prior to or during the Noncompete Term to terminate his or her employment by, or other contract with, Company or such Affiliate or to refrain from extending or renewing the same (upon the same or new terms) or to become employed by or to enter into any contract with a person or business other than Company or an Affiliate of Company. (iii) Scotti shall not directly or indirectly (through an Affiliate of Scotti or otherwise) negotiate with respect to, or otherwise discuss with any third party, any television project (excluding those television projects relating to the 3 Game Show Business, which are subject to subparagraph 3(a)(ii) above) which was in development by Company or an Affiliate of Company, or submitted or otherwise presented (orally, in writing or otherwise) to Company or an Affiliate of Company prior to the Transition Time, unless and until such time (if ever) as (x) Company, after the Transition Time, approves such negotiation or discussion, or (y) such television project has been re-submitted or otherwise re-presented to Company after the Transition Time, and such television project has thereafter been rejected in writing by Company. The foregoing agreement contained in this subparagraph (a) is referred to in this Agreement as the "COVENANT". Scotti represents and warrants that Scotti has not, prior to the date hereof, acted or failed to act in a way which would constitute a breach of the Covenant. (b) COMPANY RELIANCE. Scotti represents that Scotti's experience and ---------------- capabilities are such that the provisions of this Paragraph 3 will not prevent Scotti from earning a livelihood. It is understood and agreed that this Agreement and the Merger Agreement are being made and entered into by Company in reliance on the Covenant in view of the irreparable injury that would befall Company should Scotti engage in any activities which are prohibited by the Covenant during the effectiveness of the Covenant. (c) PAYMENT FOR COVENANT. In consideration for the Covenant, and -------------------- subject to the occurrence of the Transition Time, Company will pay to Scotti Two Million Nine Hundred Seven Thousand Six Hundred Sixty-Five Dollars ($2,907,665) ("NONCOMPETITION PAYMENT") within ten (10) business days following the Transition Time; provided, however, that if the Transition Time occurs prior to December 1, 1997, the Noncompetition Payment shall be increased by Two Thousand Seven Hundred Thirty-Five Dollars ($2,735) for each such day prior to December 1, 1997, and if the Transition Time occurs after December 1, 1997, the Noncompetition Payment shall be decreased by Two Thousand Seven Hundred Thirty-Five Dollars ($2,735) for each such day after December 1, 1997; and provided further that any obligation of Company to make payments to Scotti will be subject to Paragraph 6 below. 4. OWNERSHIP OF COMPANY EXCEPTION. Nothing contained in Paragraph 3 ------------------------------ above shall prohibit Scotti from acquiring and/or retaining, solely as an investment, and taking customary actions to maintain and preserve Scotti's ownership of, securities of any corporation as long as Scotti is not part of any control group of such corporation or legally or beneficially the direct or indirect owner of 5% or more of the outstanding voting securities of such corporation and so long as Scotti does not render any services for such corporation in connection with the Game Show Business or the Music Business. 5. AIRCRAFT LEASE. Reference is hereby made to that certain Option -------------- Agreement dated as of July 7, 1997 between Company and Scotti (the "OPTION AGREEMENT"), and the following agreements relating to that certain Gulfstream G- 1159B Aircraft Equipped with two (2) Rolls-Royce Spey MK511-8 Engines (the "AIRCRAFT"): (i) the Aircraft Purchase and Sale 4 Agreement dated as of June 30, 1997, between Atlantic Richfield Company ("ARCO") and Company, (ii) the Purchase Agreement Assignment Agreement, dated as of July 7, 1997, between Company, as assignor, and C.I.T. Leasing Corporation ("LESSOR"), as assignee, as consented to by ARCO in the Consent and Agreement dated as of July 7, 1997, (iii) the Aircraft Lease Agreement dated as of July 7, 1997, between Lessor and Company) (the "LEASE AGREEMENT"), (iv) the Tax Indemnity Agreement, dated as of July 7, 1997, between Lessor and Company, and (v) the Management Agreement, dated as of July 7, 1997, between Company and Bloomer de Vere Group Avia, Inc. (the agreements referred to in (i) through (v) above being referred to collectively as the "AIRCRAFT AGREEMENTS"). Effective as of the Transition Time and subject to payment of the Noncompetition Payment, Scotti hereby exercises the option granted to Scotti under the Option Agreement, subject to the terms hereof. Notwithstanding anything to the contrary contained in the Option Agreement, Company shall (subject to obtaining all necessary consents, unless Company in its sole discretion elects to proceed without such consents) sublease, effective as of January 1, 1998, the Aircraft to Scotti for a term co-terminous with the term of the Lease Agreement, in which event Scotti shall assume all duties, obligations and liabilities of Company pursuant to the Aircraft Agreements relating to the period after January 1, 1998, and Scotti shall, prior to the Transition Time (unless later requested by Company, but not in any event later than January 1, 1998), sign a sublease agreement containing customary terms and conditions consistent with those contained in the Aircraft Agreements. Scotti shall use reasonable best efforts to obtain any and all necessary consents for the sublease of the Aircraft, provided that Company shall reasonably cooperate with Scotti in obtaining such consents (unless Company in its sole discretion elects to proceed without such consents). Commencing as of the Transition Time and prior to January 1, 1998, Scotti shall have the exclusive right to use the Aircraft, provided that Scotti shall pay or reimburse Company for all costs incurred in connection with the Aircraft after the Transition Time (including, without limitation, the payment of Basic Rent (as defined in the Aircraft Agreements) allocable to the period after the Transition Time); and prior to the Transition Time, Scotti shall sign an aircraft use agreement containing standard terms and conditions consistent with those contained in the Aircraft Agreements. Company shall pay all costs incurred in connection with the Aircraft prior to the Transition Time. Scotti hereby agrees to defend, indemnify and hold harmless Company and each and every Affiliate of Company, and each of their officers, directors, employees, trustees, shareholders, partners and principals, and the successors and assigns of all of them, from and against any and all losses, costs (including without limitation attorneys' fees), liabilities, damages and claims of any nature arising from or in connection with any breach or alleged breach of the Aircraft Agreements after January 1, 1998 or the use of the Aircraft after the Transition Time. 6. REMEDIES AND ENFORCEMENT. Company and Scotti agree that a breach ------------------------ by Scotti of any of the covenants set forth in this Agreement (including, without limitation, the Covenant) will cause irreparable harm to Company, that Company's remedies at law in the event of such breach are inadequate, and that, accordingly, in the event of such breach, a restraining order or injunction or both may be issued against Scotti or any of Scotti's Affiliates, in addition to any other rights and remedies that are available to Company. In connection with any such action or proceeding for injunctive relief, Scotti hereby waives the claim or defense that a remedy at law alone is adequate and agrees, to the maximum extent permitted by law, to have each provision of this Agreement specifically enforced against Scotti or any of Scotti's Affiliates, and 5 consents to the entry of injunctive relief against Scotti or any of Scotti's Affiliates, enforcing or restraining any breach or threatened breach of this Agreement. Any breach of the obligation of Company to make payments hereunder will result solely in a right for Scotti to receive payment (or in the absence of payment, to pursue any action solely for the amount of such payment), and Scotti shall not in any event have any right to terminate this Agreement or seek or be entitled to rescission, injunctive or other equitable relief. 7. SEPARATE COVENANTS. If this Agreement is more restrictive than ------------------ permitted by the laws of any jurisdiction in which Company seeks enforcement hereof, this Agreement shall be limited to the extent required to permit enforcement under such laws. In particular, the parties intend that the covenants contained in this Agreement shall be construed as a series of separate covenants, one for each community, county or city in which the businesses of Company and Company's Affiliates have been carried on. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. If, in any proceeding, a court shall refuse to enforce any of the separate covenants, then such unenforceable covenant shall be deemed eliminated from this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If the provisions of this Agreement shall ever be deemed to exceed the duration, geographical limitations or scope permitted by applicable law, then such provisions shall be reformed to the maximum time or geographic limitations in scope, as the case may be, permitted by applicable law. 8. CONFIDENTIALITY. Scotti shall, during and after the term hereof, --------------- keep in confidence and shall not use for Scotti or others, or divulge to others (except, on a confidential basis only, to Scotti's legal and financial advisors, provided that Scotti shall cause such advisors to comply with this Paragraph 8), any secret or confidential information, knowledge, or data, of Company or any Affiliate of Company, obtained by Scotti as a result of Scotti's employment, unless authorized by Company or required by law or regulatory agencies. Scotti further agrees that Company shall be entitled to injunctive or other appropriate equitable relief to prevent the disclosure of such secrets or information. 9. REPRESENTATION AND WARRANTIES. Scotti hereby represents and ----------------------------- warrants that he is free to enter into this Agreement and that he is not subject to any obligations or disabilities which will or might prevent or interfere with keeping and performing all of the agreements, covenants and conditions to be kept or performed hereunder. 10. AMENDMENTS; WAIVERS. This Agreement may be amended only by ------------------- agreement in writing of each of the parties hereto. No waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire ---------------- agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior understandings and agreements of such parties pertaining thereto. 6 12. FURTHER ACTION. The parties shall execute and deliver all -------------- documents, provide all information and take or forbear from taking all action as may be necessary or appropriate to achieve the purposes of this Agreement. 13. GOVERNING LAW. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of California applicable to contracts made and performed in the State of California and without regard to conflicts of laws doctrines, except to the extent that certain matters are preempted by federal law or are governed by the law of the jurisdiction of incorporation of the respective parties. 14. SUCCESSION. This Agreement shall be binding upon and enforceable ---------- by, and shall inure to the benefit of, Company and its respective successors and assigns. The obligations and duties of Scotti hereunder are personal and not assignable, and any attempt of assignment or transfer of Scotti's duties or obligations shall be void. 15. HEADINGS. The headings of the several paragraphs herein are -------- inserted for convenience of reference only and are not intended to be a part of or to affect the meaning of this Agreement. 16. NOTICES. Any notice or other communication hereunder must be ------- given in writing and (a) delivered in person, (b) transmitted by telex, telefax or other telecommunications mechanism (provided that any notice so given is also mailed as provided in clause (c)) or (c) mailed by certified or registered mail, postage prepaid, receipt requested as follows: IF TO COMPANY, ADDRESSED TO: ALL AMERICAN COMMUNICATIONS, INC. 808 Wilshire Boulevard Santa Monica, California 90401 7 Attention: Chief Executive Officer IF TO SCOTTI, ADDRESSED TO: Anthony J. Scotti 706 North Beverly Drive Beverly Hills, California 90210 or to such other address or to such other Person as either party shall have last designated by such notice to the other party. Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Paragraph 16, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. 17. ATTORNEYS' FEES. If any litigation is commenced among the --------------- parties or their representatives concerning any provision of this Agreement, or the rights and duties of any person or entity in relation thereto, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum for attorneys' fees reasonably incurred in such litigation. 18. COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, and by different parties in separate counterparts. All of such counterparts shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ALL AMERICAN COMMUNICATIONS, INC. By: /s/ Thomas Bradshaw ------------------------------ Name: Thomas Bradshaw Title: Senior Vice President /s/ Anthony J. Scotti ------------------------------ ANTHONY J. SCOTTI 8 EX-99.(C)(7) 16 FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT (C)(7) FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN ALL AMERICAN COMMUNICATIONS, INC. AND ANTHONY J. SCOTTI This Fifth Amendment to Employment Agreement entered into as of this 1st day of October, 1997, between All American Communications, Inc. (the "Company") and Anthony J. Scotti ("Executive") hereby amends that certain Employment Agreement, dated February 25, 1991, between the Company and Executive, as amended by Amendments Nos. 1 through 4 (collectively, the "Employment Agreement"). Effective as of the date hereof, Section 3.6 of the Employment Agreement is hereby amended by the addition of the following paragraphs: Notwithstanding any other provision of this Employment Agreement or any other agreement between the parties, this Section 3.6 will remain in effect following the termination of the Term of this Employment Agreement pursuant to Section 3.2.1.A, in which event the following provisions will apply: (a) Company will indemnify Executive for any interest and penalties payable to any taxing authority resulting from Executive's reporting of the Noncompetition Payment, as defined in the Agreement Not to Compete of even date herewith, and any income attributable to options which become vested pursuant to the second sentence of Section 2.3.3 of this Employment Agreement (the "Option Payment") in accordance with all provisions of the Form W-2 provided by the Company. (b) If Executive receives any inquiry or notice from any taxing authority with respect to the Option Payment and/or the Noncompetition Payment, he will notify the Company within five days of receipt of such inquiry or notice. Company, at its cost, will take such action in response to such notice, inquiry or further action by such taxing authority as the Company shall determine and Executive will cooperate with such action by Company as reasonably requested by Company. IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly executed as of the date first written above. ALL AMERICAN COMMUNICATIONS, INC. a Delaware corporation By: /s/ Thomas Bradshaw ------------------------- Title: Senior Vice President /s/ Anthony J. Scotti ------------------------------ ANTHONY J. SCOTTI EX-99.(C)(8) 17 LETTER REGARDING CONFIDENTIALITY AGREEMENT EXHIBIT (c)(8) [LETTERHEAD OF ALL AMERICAN COMMUNICATIONS, INC.] As of October 1st 1997 Pearson plc 3 Burlington Gardens London W1X 1LE, England Attention: Paul Vickers Pearson Merger Company Inc. 30 Rockefeller Plaza, 50th Floor New York, New York 10112-5095 Attention: John Davis Gentlemen: Reference is made to that certain confidentiality letter dated November 20, 1995 between All American Communications, Inc. (the "Company") and Pearson Television Limited (the "Confidentiality Letter") as reinstated by that letter dated February 16, 1996, the Agreement and Plan of Merger dated as of October 1, 1997 (the "Merger Agreement") among the Company, Pearson plc ("Purchaser") and Pearson Merger Company, Inc. ("Merger Sub") and the Stockholders Agreement dated as of October 1, 1997 (the "Stockholders Agreement") among Purchaser, Merger Sub and certain stockholders of the Company. Terms which are defined in the Merger Agreement and are not otherwise defined herein shall have the same meanings herein as therein. This is to confirm that the Board of Directors of the Company has consented to and approved the acquisition by Pearson and Merger Sub of all of the shares of Common Stock and Class B Common Stock of the Company (the "Shares") at the price set forth in the Merger Agreement (the "Offer Price"). Accordingly, the Company acknowledges and agrees that until the Standstill Termination Date (as defined below), to the extent that the Merger Agreement or the Stockholders Agreement permits the Purchaser or Merger Sub to take any of the actions which are prohibited by the standstill provisions set forth on page 4 of the Confidentiality Letter (the "Standstill Provisions") and provided that the Merger Agreement has not been terminated pursuant to Section 8.4(a) or (c) thereof, such Standstill Provisions of the Confidentiality Letter will no longer be applicable and none of Purchaser, Merger Sub nor any of their respective affiliates shall be prohibited by the terms thereof from soliciting or receiving proxies with respect to any Shares or seeking or proposing to acquire ownership of any Shares in accordance with the terms of the Merger Agreement or 1 the Stockholders Agreement. The Standstill Provisions will terminate entirely upon the earlier of (a) a Competing Transaction Termination, (b) the date upon which the Merger Agreement is terminated pursuant to Section 8.3(b) or 8.4(b) of the Merger Agreement, (c) the date upon which the Transition Time occurs, or (d) November 20, 1997 (the "Standstill Termination Date"). After the Standstill Termination Date, none of Purchaser, Merger Sub nor any of their respective affiliates shall be prohibited from soliciting or receiving proxies with respect to any Shares or seeking or proposing to acquire ownership of any Shares. Very truly yours, All American Communications, Inc. By: /s/ Thomas Bradshaw ----------------------------- Its: Chief Financial Officer ---------------------------- 2 EX-99.(G) 18 PEARSON PLC REPORT AND ACCOUNTS 1996 EXHIBIT (g) [LOGO OF PEARSON] Annual Report 1996 ANNUAL REPORT 1 Pearson plc - an introduction 2 Pearson at a glance 4 Chairman's statement 6 Managing Director's review Business reviews 9 Information 13 Education 17 Entertainment 22 Investment banking 23 Pearson and the community 24 Board of Directors 26 Finance Director's review 29 Summary Directors' report 30 Summary Remuneration Committee report 32 Profit and loss account 33 Cash flow statement 34 Balance sheet and Auditors' report 35 Five year summary 36 Shareholder information ibc Principal offices Pearson plc an introduction Pearson plc is an international media group with interests in publishing, television production, broadcasting, electronic and multi-media businesses. The Group focuses on three key markets worldwide: information, education and entertainment.
- ------------------------------------------------------------------------------------------------------------------ 1996 1995 Change - ------------------------------------------------------------------------------------------------------------------ Sales Pounds 2,186.0 million Pounds 1,830.4 million +19% - ------------------------------------------------------------------------------------------------------------------ Operating profit before charge for improper accounting at Penguin USA* Pounds 281.3 million Pounds 259.6 million +8% - ------------------------------------------------------------------------------------------------------------------ Operating profit Pounds 181.3 million Pounds 259.6 million -30% - ------------------------------------------------------------------------------------------------------------------ Profit before tax Pounds 356.8 million Pounds 365.1 million -2% - ------------------------------------------------------------------------------------------------------------------ Earnings per share 42.9 pence 47.1 pence -9% - ------------------------------------------------------------------------------------------------------------------ Adjusted earnings per share 30.6 pence 28.8 pence +6% - ------------------------------------------------------------------------------------------------------------------ Dividends per share 18.0 pence 16.5 pence +9% - ------------------------------------------------------------------------------------------------------------------ *See Finance Director's review
[BAR GRAPHS APPEAR HERE] 1 Pearson at a glance [LOGO OF PEARSON] Pearson is an international media group with a diverse range of skills in newspaper, magazine and book publishing, on-line and software services, television and visitor attractions. The Group focuses these core skills, through separate business divisions, on three markets worldwide: information, education and entertainment. Pearson also has significant interests in investment banking. Investment Banking The Group has a 50% stake in Lazard Brothers, one of London's pre-eminent merchant banks, and interests in Lazard Freres of New York and Lazard Freres of Paris.
Sales (pounds in million) 1996 1995 % [PIE CHART APPEARS HERE] United Kingdom 738.5 687.3 7 Continental Europe 419.4 351.6 19 North America 798.3 591.4 35 Asia Pacific 185.2 163.0 14 Rest of World 44.6 37.1 20 -------- -------- --- Total 2,186.0 1,830.4 19
The Information division encompasses a wide portfolio of information services worldwide. Its printed products include national and international business newspapers, professional books, magazines and periodicals. It also provides electronic information services. The Education division is one of the world's top three educational publishers, selling books, multimedia and learning programmes in the school, higher education, professional and English language teaching markets throughout the world. The Entertainment division produces, distributes and broadcasts television programmes, is a leading international trade book publisher, runs visitor attractions and produces consumer magazines, videos and software. 2 Pearson at a glance
[PIE CHART APPEARS HERE] Operating Profit (pounds in millions) 1996 1995 % Information 134.4 105.3 28 Education 68.1 31.8 114 Entertainment* 52.5 110.9 (53) Investment Banking 40.8 39.9 2 Corporate Expenses (14.5) (28.3) 49 ------ ------ --- Total* 281.3 259.6 8
* Excludes pounds 100 million charge for improper accounting at Penguin USA Financial Times Newspaper publishes the Financial Times, printed in ten centres covering Europe, North America and Asia. Financial Times Information provides comprehensive electronic business and specialist financial information worldwide. Les Echos is France's leading business daily newspaper and the flagship of a group which includes many other business and professional titles. Recoletos is one of Spain's leading newspapers and magazine publishers. Its titles include the country's premier business daily and sports daily. Pearson Professional publishes books, periodicals and screen-based services for professional communities worldwide. Addison Wesley Longman publishes teaching products in many major markets in the US and throughout the world for elementary and secondary schools, colleges, and computer science and engineering professionals. AWL is also the world's largest publisher of American and British English language teaching materials. Penguin publishes English language consumer books, fiction and non-fiction, in hardcover and paperback. The Tussauds Group is the largest European operator of leading visitor attractions specialising in exhibitions and theme parks. Pearson New Entertainment publishes special-interest consumer magazines, videos and related new media. Mindscape develops and publishes consumer software for personal computers and video game systems. Pearson Television is the UK's largest international television producer. It sells its formats worldwide and also has interests in distribution and broadcasting. 3 CHAIRMAN'S STATEMENT The foundations of an international media company have been laid and 1996 saw Pearson building its strengths in the information, education and entertainment markets. In the Information division we increased the availability of the Financial Times newspaper in key world financial centres and developed further our electronic information services. In Education Addison Wesley Longman expanded through the acquisition of HarperCollins Educational Publishing, substantially increasing the range of our US educational products and reinforcing our position as a leading world educational publisher. In our Entertainment division the purchase of Putnam Berkley did very much the same for Penguin and Pearson Television consolidated its position as the UK's foremost international production company. Our 1996 profits were badly hit by the results at Mindscape and the events at Penguin. Before taking into account the exceptional pounds 100 million charge in relation to unauthorised behaviour at Penguin USA (which is detailed in the Finance Director's Review) our operating profits for the year nonetheless increased by 8% and a 6% rise was achieved in adjusted earnings per share. These included the loss of pounds 45 million relating to Mindscape, which although large and disappointing, was nonetheless in line with what we forecast at the time of the last Annual General Meeting. Pearson has made a satisfactory start to the year with operating profits in line with expectations and I will report further to shareholders at the AGM in May. In the meantime your board is recommending a final dividend of 11.1 pence, which would take the total dividend to 18 pence, representing a 9% increase for the year as a whole. In addition to building on the strengths of the company, the other important development that has been taking place in the Group over the past year is the orderly transfer of executive power from one generation to another. David Bell, Greg Dyke and John Makinson became Pearson executive directors in March last year, Marjorie Scardino became chief executive in January this year and Dennis Stevenson will replace me as chairman after the AGM on 2 May. They will make a formidable team, with great individual skills, strong beliefs and the ability to create growing long term value for shareholders. 4 In wishing success to the new team I would also like to thank and acknowledge the achievements of the previous team of Frank Barlow, Mark Burrell, James Joll and David Veit, all of whom, with the exception of David who forms part of the new team, will have retired by the end of the AGM. I have worked with them on a daily basis since I became chairman of Pearson in September 1983. The market capitalisation of the company that September stood at Pounds 313 million. At the time of writing (mid-March 1997) it stands at Pounds 4.4 billion, the adjusted share price has multiplied by more than nine and a half times and Pearson shares have outperformed the FTSE All Share Index by over 100%. The FTSE 100 Index was started in January 1984. Since then 51 of the original companies have dropped out of the index and of the remainder only three companies have improved their ranking by more places than Pearson. In this period the nature of the company has been changed from that of a widespread conglomerate to a leading international media company. During the course of this change three additional successful public companies have been established in their own right, Fairey, Camco and Royal Doulton, and the value of the latter's shares distributed by scrip dividend to Pearson shareholders. The philosophy of Pearson is to take a long term view; to take risk and sometimes substantial risk against a background of financial security; to deal fairly and honestly and to promote quality; and in doing so to create a company with a culture which attracts and motivates entrepreneurial and talented people and makes it attractive for other companies to join. Throughout this period the executives have been advised and encouraged by a strong group of internationally minded non-executive directors and I would like to thank them and the chief executives of the operating companies and everyone working in the Group for their enthusiasm and support throughout the good times and bad. In addition to immediate colleagues, of whom Frank Barlow has played an outstanding leadership role, I would also like to pay special tributes, as they leave the Group, to Peter Mayer who has over nineteen years taken Penguin from the position of a threatened UK paperback publisher to the international publishing house it is today, and to Sir Simon Hornby, who in addition to chairing the Remuneration Committee has been a valued contributor to the Pearson board for many years. I want to conclude by emphasising that Pearson as a company has gone through a transformation. We are now well positioned with our leading international franchises to take advantage of the exciting prospects of the new media age, and as the pace of change quickens, I intend to enjoy watching the new management team do just that. /s/ Michael Blakenham MICHAEL BLAKENHAM, Chairman 5 [PHOTO APPEARS HERE] Managing Director's review Pearson, as an international media group, is now organised into three business divisions. David Bell is responsible for the Information division worldwide, and J Larry Jones directs all our Education activities. David Veit co-ordinates our Entertainment businesses, with the exception of Pearson Television, which is run by Greg Dyke. This year, for the first time, in the divisional review on pages 9-21 of this annual report, each of them writes personally about the key issues and events of 1996 as he sees them. Results The majority of Pearson's operating companies continued to make significant progress during the year. Sales increased by 19% and exceeded Pounds 2 billion for the first time. We reported an operating profit of Pounds 181 million but this was after taking a charge of Pounds 100 million in relation to improper accounting at Penguin USA. Setting this and the operating losses at Mindscape aside, profits increased by 23%. A global strategy for Information The Information division had a good year in 1996, expanding sales to Pounds 829 million from Pounds 759 million in 1995, and also generated excellent growth in operating profits. The division is establishing its strategic direction for the future, a position to be built firmly on the brand values associated with the Financial Times newspaper. In publishing, whether in newspapers or in professional areas, there is great potential for international growth. In electronic information, key opportunities lie in supplying the expanding demand for high-quality financial and business information. The Information portfolio will therefore be focused on markets where the division can build a significant international position. Consequently, Westminster Press, one of the UK's largest regional newspaper groups and a valued member of the Group for many years, no longer fitted this strategy, and its sale was completed in 1996. All the Information division's companies saw a steady advance in sales in 1996. Growth in the UK economy created an uplift in financial and trade advertising, and the FT and Pearson Professional both increased their operating profit. Despite the difficult economic climate in France, Les Echos also improved its trading profitability, although this performance was 6 outweighed by the closure costs of our personal finance magazine Argent. In Spain, Recoletos continued to perform well, and we made further investment for its future. Financial Times Information enjoyed a strong contribution from Interactive Data Corporation which, in its first full year as part of Pearson, benefited from the rapid growth of mutual funds in the US. Now a world-scale player in Education The major event of the year was the acquisition in April of HarperCollins Educational Publishing, part of the HarperCollins publishing group. This has increased Pearson's turnover in Education from Pounds 359 million in 1995 to Pounds 554 million in 1996, making it one of the world's top three educational publishers, and positioned it for further global development. Profit for the combined business in 1996 was Pounds 68 million compared with Pounds 32 million in 1995. This is a good result during a year when management was heavily absorbed in a major integration exercise - the second in two years, following the merger of Addison-Wesley and Longman. Substantial operational efficiencies should be achieved from 1997, with the most significant benefits of the acquisition becoming apparent as we near 2000 and new, larger publishing programmes are launched. [PHOTO APPEARS HERE] In the US school market, the Scott Foresman.Addison Wesley School Publishing Group has seen significant increases in the sales of its maths programme. The US college business continued to expand and international higher education is also growing healthily. The English language teaching (ELT) market remains buoyant. AWL is number one in the world in ELT, a market where continuing growth is expected for the foreseeable future. New international talent in Entertainment The Entertainment division achieved a 13% increase in sales in 1996 to Pounds 803 million compared to Pounds 712 million in 1995. 1996 has been a year of international expansion for Pearson Television, with particular success in developing and selling worldwide the Grundy programme formats acquired in 1995. As part of the acquisition of SelectTV, we acquired the Alomo and Witzend programme makers, and all Pearson's television production activities were brought together at a single location in Central London in March 1997. In consumer books, Penguin USA's strong publishing programme produced a good result, and Penguin UK achieved a healthy profit recovery. The acquisition of Putnam Berkley brings together two of the most successful trade publishers in the US and makes Penguin the second largest English language trade book publisher in the world. At the end of 1996, we bade farewell to Peter Mayer, who had been chief executive of the Penguin Group since 1978 and who had 7 Managing Director's review [PHOTO APPEARS HERE] built it from a loss-making British company to one of the leading international publishing houses. He was succeeded by Michael Lynton, who joins Penguin from Hollywood Pictures and Disney Publishing, bringing us the benefit of experience with one of the world's leading consumer brands. The Tussauds Group produced a year of solid profit growth from its visitor attractions, against increased competition in the UK market, and continued to apply its management skills worldwide. Excellent performances came from Port Aventura in Spain, which has now completed a second successful year; Madame Tussaud Scenerama in Amsterdam; and the new Alton Towers Hotel, opened in March. Pearson New Entertainment (PNE), which produces magazines, videos and other media for 'boys of all ages', also advanced into profit in 1996. Future Publishing had an outstanding year, concluding with a welcome recovery in the computer and video games magazine market. Following an extremely difficult year in 1995, our software publishing company, Mindscape, has been reorganised and refocused in 1996 under its new chief executive, John Moore. Excellent prospects for the future When this Annual Report is published, I will have retired as Managing Director after nearly 30 years with Pearson, seven as its managing director. The past few years have been personally very fulfilling and particularly momentous for the company. Pearson has been transformed from a broadly-based conglomerate to a coherent and increasingly cohesive media group. I feel confident that the Group is now in a position to go from strength to strength, gaining further benefits from greater integration and global development of its portfolio. The prospects for 1997 are excellent, and I wish my successor Marjorie Scardino and her team every success in continuing Pearson's progress. /s/ Frank Barlow FRANK BARLOW, Managing Director 8 [FINANCIAL TIMES LOGO APPEARS HERE] Financial Times Newspapers publishes the Financial Times, widely regarded as one of the world's great newspapers, and a journal of record for the business community. It is printed in ten centres across the world. Recoletos is one of Spain's leading newspaper and magazine publishers. Its titles include Expansion, the country's premier business daily, Marca, the leading sports newspaper and Diario Medico, a daily newspaper for doctors. INFORMATION GROUPE Pearson Professional publishes books, periodicals, reports and screen-based services for professional communities worldwide, under brand names which include the Financial Times, Pitman Publishing and Churchill Livingstone. [PEARSON PROFESSIONAL LOGO APPEARS HERE] Les Echos Group is France's leading business daily newspaper and the flagship of a group which also includes amongst its many titles a monthly business magazine, Enjeux les Echos, and a twice-weekly medical newspaper, Panorama du Medecin. [FINANCIAL TIMES LOGO APPEAR HERE] Financial Times Information provides electronic business and specialist financial information to the asset management, investment research and general business information markets worldwide. 9 Information [PIE GRAPH APPEARS HERE]
1996 1995 SALES (pounds in millions) TOTAL SALES 828.7 759.1 OPERATING PROFIT: [ ] FT Newspaper 28.6 19.4 [ ] FT Information 17.3 11.4 Les Echos (0.3) 3.2 Recoletos 34.9 37.8 [ ] Pearson Professional 18.6 11.5 [ ] Westminster Press 35.3 22.0 -------------------------------------------- TOTAL 134.4 105.3
THE INFORMATION REVOLUTION [PHOTO APPEARS HERE] The value of the worldwide information market - encompassing both the printed word and electronic media - is estimated at nearly Pounds 40 billion. Over the next ten years, it should double, driven by changes in technology. David Bell talks about Pearson's position and prospects. We are in the midst of a global revolution in electronic data, as open systems like the Internet, or more localised 'intranets', provide access to all on an equal basis. This is opening up huge opportunities to sell business and financial information, and we are seeing value shift from the technology itself 10 to the content of the information it delivers - in which Pearson excels. Ours has become a universal industry, as information requirements around the world converge. Fund managers everywhere, for example, need the same timely access to dependable pricing data; business people in Asia, like those in the UK, want to wake up to the world's leading financial newspaper. During the past few years, Pearson has substantially strengthened its position in this exciting global market and we are developing a portfolio of information services for management communities worldwide. [LOGO APPEARS HERE] THE POWER OF THE PRINTED WORD The Financial Times itself serves the world's key financial centres: it is published in ten centres in eight countries worldwide. For reliability, authority and integrity in financial publishing, its reputation is unsurpassed. Overseas circulation continues to grow - the paper attracts more than half of its circulation revenue and approaching half of its advertising revenue from outside the UK. The FT is now read by over a million people in over 140 countries worldwide. CLUB FANTASTICO MARCA Recoletos continues to capitalise on the success of the leading Spanish sports newspaper Marca with the introduction of Club Fantastico - a readers' club - which in its first year already has over 1,300,000 members. The Financial Times Web site, http://www.FT.com. demonstrates the FT's commitment to electronic publishing and the delivery of business news, comment and analysis around the world in a variety of formats. The Web site combines articles from the newspaper with material specially prepared and updated by a team of dedicated journalists. New users are registering to use the site at a rate of over 1,000 per day. As well as being a global financial newspaper, the Financial Times is the UK's major national business newspaper. Its sisters are Les Echos, which has remained one of very few profitable national newspapers in the difficult French market; and Expansion, part of Recoletos, the market leader in Spain for both circulation and advertising. This year we invested in both, increasing our holding in Recoletos to an effective 94% and installing new presses for Les Echos. The three papers benefit from sharing content - as, for example, in the highly successful Mastering Management series. Beyond Europe, we extended our services to Spanish language markets by taking a preliminary stake in El Diario, a leading Chilean business newspaper. In February 1997 we acquired a 50% interest in Business Day and Financial Mail, the leading daily and weekly financial and business publications in South Africa. While our national daily papers paint the broader business picture, we also provide a range of information products and services to more focused business communities. Pearson Professional publishes data, comment and analysis, in the form of newsletters, management reports, journals, magazines, directories and screen-based products, for the legal community and for specialists in the finance, [PHOTO APPEARS HERE] Mastering Management began as a 20-part weekly supplement in the Financial Times. Circulation of the newspaper increased dramatically and it has had a similar impact on the 13 other newspapers, including Les Echos and Expansion, in which Mastering Management has been published worldwide. Now it has gone on to become a book published by Pitman Publishing (a division of Pearson Professional) which sold 10,000 copies in the first six weeks. 11 energy, healthcare, media and telecommunications, advertising and marketing industries. During 1996, six specialist companies were acquired in these fields. Pitman Publishing has established itself as Europe's leading provider of management development materials in a range of paper-based and screen formats. Two excellent pieces of news from Les Echos in the French specialist publishing field were the rapid growth in market share of Enjeux les Echos to become the second-ranking business magazine in the country and the turnaround of Panorama du Medecin, our specialist magazine for doctors. Information in depth - the electronic media The Financial Times and other business titles give Pearson a highly visible presence as a quality information provider across diverse geographical markets and professional sectors. They also help to generate interest in the wide range of on-line information services which benefit from association with the Financial Times brand. There is much talk of electronic data overtaking the written word, but in reality the world needs both; they occupy different, but equally important, positions in the information hierarchy. Our electronic information services, whether text or number-based, are designed to provide selected data to specific users, with the emphasis on our unrivalled quality, authority and reliability. In the past year, we have invested substantially in database development and acquisition. Financial Times Information is co-operating with Dow Jones and Knight-Ridder Information to build a global news database, which will be the most comprehensive global collection of news available. In Asia, we acquired Asia Intelligence Wire, the region's leading on-line news and business database, and opened a new data collection centre in Manila. [KNIGHT-RIDDER INFORMATION LOGO APPEARS HERE] [DOW JONES LOGO APPEARS HERE] [FINANCIAL TIMES LOGO APPEARS HERE] Financial Times Information is leading the team who are working together to build the world's largest, truly international database. [PHOTO APPEARS HERE] The Register Group, the advertising and marketing information division of Pearson Professional, acquired SHOTS Ltd which publishes a bi-monthly video and magazine for the international advertising community. Added value through quality of content Pearson now has one of the best financial data sets in the world. Success, however, depends on quality as much as quantity. Raw data means nothing until it is refined and presented in a form which meets the needs of its recipients. In the written word, this means excellence of comment and analysis for which the Financial Times and our other publications are already renowned. In electronic media, we are building a similar reputation providing timely, accurate, value- added data for the end-user. For example, this year Financial Times Information signed a global strategic agreement with Verity to co-develop a new generation of on-line information products, including the re-engineering of FT Profile, the on-line market leader in English-language business information in Europe. This will enable not only text, but also audio and video, to be available worldwide, on demand. The Register Group, part of Pearson Professional, has developed a new, highly automated system to monitor television and press advertising across Europe. Most important of all, we have embarked on a major new development which will integrate all our databases and make them easily accessible, whether via the Internet or a dial-up phone line. The project has already excited interest worldwide. The information business, like any other, succeeds by managing its assets effectively. Pearson, over the past few years, has extended the powerful position of the Financial Times brand into the global arena; we have invested in high-quality information databases and high-technology delivery systems; and we have developed and honed our ability to add value to information. We know where and how to focus our efforts, and expect to see the benefit of that knowledge coming through in sustained, profitable future growth. 12 EDUCATION [LOGO ADDISON WESLEY LONGMAN APPEARS HERE] Addison Wesley Longman (AWL) is a global educational publisher, selling books, multimedia and learning programmes in major academic disciplines to the primary, secondary, higher education and professional markets throughout the world. Its main imprints include Addison-Wesley, Longman, Scott Foresman.Addison Wesley and Benjamin Cummings. AWL is also the world's largest publisher of English language teaching (ELT) books and materials. [PHOTO APPEARS HERE] LEARNING THE BUSINESS 1996 1995 [PIE GRAPH APPEARS HERE] (pounds in millions) Total sales 554.3 358.9 Total operating profit 68.1 31.8 [ ] US School [ ] ELT US College Consumer International With the addition of the HarperCollins Educational business in 1996, Addison Wesley Longman (AWL) is now one of the world's biggest educational publishers, with a significant share of the US market and a massive international presence. J Larry Jones discusses the global market for high-quality educational resources. Education, by its very nature, is a growth market. As economies develop around the world, governments, schools, colleges and individuals wish to invest increasing amounts in education for the future. AWL is in an excellent position to secure a significant share of the demand, and the acquisition of HarperCollins Educational in April has greatly extended our global franchise in educational publishing. There were compelling reasons for making this acquisition. The US educational publishing market is consolidating and those companies that will compete successfully into the next century need to offer their customers a broad range of products and secure economies of scale in selling, distribution and administration. The acquisition achieves this critical mass: AWL now has enviable, highly ranked positions in both the US school and college markets. It has, equally, enhanced our credibility and will ensure we can continue to attract the best authors and editorial talent for the future. The process of integrating the HarperCollins operation has been remarkably smooth and our customers are already benefiting from the combination. New key executives in Corporate Services, School, and Higher Education, as well as our ongoing strong management team, have provided the experience and leadership to guide the company successfully through the integration and to maintain business performance. This has been a tremendous achievement by all concerned, and is a major reason for this year's much improved results. [PHOTOGRAPH APPEARS HERE] 1996 was a particularly strong year for the merged Scott Foresman.Addison-Wesley science lines. Strong state adoption sales secured the lead market position for two elementary science programmes: Destinations in Science and Discover the Wonder. In the secondary school market, both the new fourth edition of Addison-Wesley Chemistry and the new third edition of Conceptual Physics had record revenues and are outstanding market leaders. A major player in US school publishing The acquisition has had its most immediate effect on our school publishing programme in the US. It brings into our portfolio the highly respected Scott Foresman business, which includes titles in reading, language arts, mathematics and science. The school sales force can now add many popular, established programmes like Discover the Wonder, Literature and Integrated Studies and Celebrate Reading! to its bookbag. Having this extended range will assist AWL in achieving a more even revenue stream throughout the US school book adoption cycle. Under this system, about half the states, after evaluating many offerings, select titles from which their schools must choose for the next five to seven years. The HarperCollins acquisition is well timed to take advantage of opportunities offered by the cycle; a number of major subject adoptions are forthcoming in 1998 and 1999, with another important adoption year in 2001. Success in securing places on the adoption lists, particularly in significant markets like California, Florida and Texas, will depend on the excellence of our publishing. Our priority, now that the integration with HarperCollins is complete, is for our editorial teams to ensure that Scott Foresman.Addison Wesley books and other teaching materials fully meet - or exceed - the requirements of students, teachers and school boards. Apart from mainstream book publishing, this year we have extended our school product by offering the Waterford Early Reading Program, a software-based programme for children in pre-school through grade two. We are very pleased with the results of this innovative programme to date. New initiatives - home education, Electronic Commerce Center, expansion in Asia Home education is an increasingly important market as families seek to supplement their children's formal studies with out-of-school learning activities, and there is increasingly an overlap between educational and consumer publishing. To respond to this market, we acquired BrightIdeas, a company that sells directly to parents, helping them to choose appropriate software to supplement their children's formal educational curriculum. Other products and methods to reach this market are in the pipeline. The ability of customers to purchase our products and services via the worldwide web took a step closer in 1996, with the decision to establish an Electronic Commerce Center (ECC). Through an innovative use of technology the Waterford Early Reading Program provides a proven way to enable all children to learn to read regardless of level of literacy. The program was developed by the Waterford Institute, a non-profit making educational research center. [PHOTO APPEARS HERE] 15 [PHOTO APPEARS HERE] The success of Michael Parkin's Economics has been driven by the joint commitment of author and publisher. In 1990, it was the most successful entry into the competitive US principles-of-economics textbook market in two decades. It is a market leader worldwide with bestselling adaptations in the UK, Australia, Canada and Mexico. In addition to being a new source of business, the ECC will provide a new publishing platform for many of our groups and invaluable customer data for direct marketing. AWL already has a substantial presence in Hong Kong. Now we have established a beachhead in China, a vast new market, with offices in Shanghai and Beijing that will permit visibility for many of our publications. This exciting initiative sprang from the AWL China Development Group, made up of members from the International and English language teaching groups. They also initiated Korean co-publishing programmes in computer science and higher education and planned a reprint programme for developing countries. A global franchise in higher education, technology and computer sciences/engineering AWL's strong global franchise in higher education has been further strengthened by the HarperCollins College list, which includes titles such as Psychology by Wade and Tavris, the Lial/Hornsby/Miller maths series and Economics by Miller. Internationally, the higher education market is growing rapidly as the American education model exercises an increasing influence as far afield as Japan, Australia and, in some subjects, Europe and the UK. Our college products have shown themselves capable of travelling well, proving highly acceptable in different cultures and languages. Technology has an especially important place in higher education. This year, Addison Wesley Interactive (AWI) has published four new CD-ROM products that support interactive learning approaches to maths and science subjects. Through an arrangement with Netscape, a leading Internet software provider, we now offer students the ability to work seamlessly between AWI's multimedia products and worldwide web resources. It is a small, but important, step to ensure that AWL is ready for on-line teaching which, we believe, will inevitably follow interactive study as a force in education. [PHOTO APPEARS HERE] Longman Malaysia launched the monthly newspaper The Malaysian Student in May. The newspaper, according to Datin Hajjaj Aidah Ghani (representing the Deputy Director General of Education), "can play a significant role in helping to create a world-class youth for a 21st century Malaysia". We are particularly strong around the world in computer sciences and engineering education which, in a technology-driven world, has created an important bridgehead for entering new international markets. In recognition of our publishing strengths in these subjects, we created the Computer and Engineering Publishing Group, whose charter is to publish a broad range of computer and engineering products, both print and new media, for the professional, academic and consumer markets. This concentrated focus will strengthen our acquisition, development and delivery capabilities, as well as taking advantage of scale and resources. English language teaching - a world force English is the mother tongue of some 370 million people and an official language for a further 250 million. It has been estimated that there are 350 million people in the world studying English, and that they spend nearly Pounds 1 billion on books and other published materials to help them. Whereas the traditional education market for English language teaching (ELT) in western Europe has matured, in the high-growth economies of the world, demand for English is accelerating. AWL is already strongly represented in Latin America and the tiger economies of south-east Asia and is well positioned to secure business in the huge Chinese market. AWL offers a full range of innovative global programmes in both British and American English. We have the financial strength to develop new products and recoup the investment through worldwide sales. In particular, we have been highly successful in meeting the shift in demand from grammar-based learning to more sophisticated programmes centred on communication skills. 16 The Tussauds Group is the leading operator in Europe of paid-for visitor attractions, including Madame Tussaud's, Madame Tussaud Scenerama Amsterdam, Warwick Castle, Chessington World of Adventures, Alton Towers theme park and hotel and a 40% stake in Port Aventura, a major new theme park near Barcelona. [LOGO OF PEARSON NEW ENTERTAINMENT APPEARS HERE] Pearson New Entertainment is a consumer entertainment company with a growing stake in the market for special-interest magazines, videos and related new media products. It is the parent company of Future Publishing, the UK's fifth largest consumer magazine publisher. ENTERTAINMENT [LOGO OF PEARSON TELEVISION APPEARS HERE] Pearson Television is the UK's largest international television producer, selling programmes and formats under Thames, Grundy, Alomo and Witzend and ACI brands. It also has interests in distribution and broadcasting, including a 24% stake in the UK's Channel 5. [LOGO OF PENGUIN BOOKS] Penguin Books is one of the world's foremost publishers of English-language consumer books, in both hardback and paperback. It owns a wide range of imprints and trademarks in addition to its own name, and also produces maps, audio books and other media products. Mindscape develops and publishes consumer software for personal computers and video game systems, focusing primarily on entertainment, educational and reference titles. 17 ENTERTAINING IDEA The world of consumer entertainment is fast-moving and demanding. Behind the entertainment value of a paperback novel or a TV serial, an exhibition or a theme park, a consumer magazine or a computer game, lies a great store of business skill and acumen. David Veit and Greg Dyke explain. [PIE GRAPH APPEARS HERE]
1996 1995 (pounds in millions) Total sales 803.0 712.4 Operating profit: [ ] Penguin* 31.0 33.6 Tussauds 22.2 18.3 [ ] Mindscape (45.5) (6.9) [ ] Pearson New Entertainment 2.4 (0.1) [ ] Pearson Television 42.4 66.0 ----------------------------------------------- Total* 52.5 110.9
*Excludes Pounds 100 million charge for improper accounting at Penguin USA 18 Entertainment and leisure today are big business, global business - a company has to know where it is going and why. Pearson is clear about its products and markets, and has invested in top talent to direct its chosen businesses. Each of our businesses has, in different ways, successfully strengthened its management and strategy this year. Penguin - a story of our times Defying the predictions that television would eclipse book publishing, the consumer's appetite for a good read is growing. Competition for the attention of both adult and young readers is fierce, so even with a brand as powerful as Penguin, we must innovate constantly. In recent years we have produced some outstanding new publishing ideas, the pocket-sized Penguin 60s and serial partworks. This year, Stephen King's six-part thriller The Green Mile has been a runaway success on both sides of the Atlantic. So too have books which tie in with television dramatisations - especially the Jane Austen revival - and with children's films like Babe, James and the Giant Peach, and Matilda. [PHOTO APPEARS HERE] Dick Francis' To the Hilt was his best-selling novel ever for Penguin UK, and PD James' Original Sin was her strongest-selling novel yet. Other UK successes were Pat Barker's Regeneration trilogy, including her Booker Prize winner, The Ghost Road, and Fergal Keane's Letter to Daniel. In the US, hardback triumphs included Terry McMillan's How Stella got her Groove Back and Jacquelyn Mitchard's The Deep End of the Ocean, as well as the highly successful simultaneous publication of Stephen King's Desperation and The Regulators (under his pseudonym Richard Bachman). Best-selling paperbacks were The Road Ahead by Bill Gates and The Song of Solomon by Toni Morrison. [PHOTO APPEARS HERE] Penguin published Stephen King's latest thriller The Green Mile which was notable for two reasons: it was published in six monthly instalments and it was the first time that the author had been published by Penguin in the UK. Michael Lynton, who joined Penguin in October and took over as chief executive from Peter Mayer at the year end, will have the task of developing our publishing lists still further. Michael's first major contribution has been the acquisition of the US trade publisher Putnam Berkley, whose front list includes authors such as Tom Clancy, Patricia Cornwell, Dick Francis, Robin Cook, Amy Tan, Lawrence Sanders and Nora Roberts. Such names - each of whom produced a book included on the New York Times best-seller lists in 1996 - form a powerful fit with Penguin's renowned back list. The acquisition doubles Penguin's share of total US trade book sales, and makes us the second largest English language trade book publisher in the world. Since the year end we have made an accounting provision of up to pound 100 million (included in the 1996 figures) pending investigation of improper accounting at Penguin USA. This should not, however, detract from the trading performance in 1996. 19 [PHOTO APPEARS HERE] In December Penguin acquired the US trade publisher, Putnam Berkley, for Pounds 200 million. Its authors include Amy Tan, Tom Clancy, Patricia Cornwell and, in the US only, Dick Francis. International expertise in visitor attractions Managing large-scale exhibitions and theme parks has become a specialised business involving a complex mix of planning, project management and operational skills. Tussauds owns and operates its enterprises in the UK, but our strategy is gradually shifting from capital-intensive investment in fixed assets towards contract-based projects. An example of our new approach to financing is for a proposed development at Stonehenge, in partnership with English Heritage, to attract Millennium Commission funding. [PHOTO APPEARS HERE] Alton Towers opened The Tussauds Group's first-ever hotel in March, since when it has acheived an outstanding 90% occupancy during the season. The Tussauds Group studios designed the themed areas to reflect the magic of the park itself. This new direction is being driven by Tussauds' young, talented management - whose resources extend from a brilliant studio team to experts in people flow and visitor management. Their success in managing our existing portfolio of strong, branded visitor attractions is opening up wider opportunities for Tussauds. In the UK, we opened our first hotel at Alton Towers, which has had an outstanding year. We have proved our international capability as operators of the new Port Aventura theme park in Spain. Now, our skills in long-term planning and project management have resulted in negotiations with developers and investors as far afield as Thailand, where we are undertaking a feasibility study for a world-class theme park near Bangkok. Projects such as these make us increasingly aware of our potential as an attractive partner worldwide. In exhibitions, of course, the Tussauds name needs no introduction. This year we have made excellent progress towards the opening of a new Madame Tussaud's on New York's 42nd Street, in the heart of this regenerated and dynamic part of the city. In Australia, plans are well advanced for a touring exhibition to be launched in autumn 1997. This innovative project is intended as a profitable enterprise in its own right, and a vehicle for raising awareness of The Tussauds Group as awhole. Market-first: a formula for success Pearson New Entertainment (PNE) is a business defined by its market - hobbyists, enthusiasts, and especially 'boys of all ages'. This approach gives us the freedom to develop the business across media boundaries: from magazines, at present our principal medium, to video and software. Our Web site, FutureNet, is one of Europe's busiest on-line services. Future Publishing, which produces over 50 magazines on computing, music, crafts, sports and entertainment, has directed a formidable array of creative, editorial and commercial talent into meeting readers' and advertisers' aspirations. As just one example, Official PlayStation Magazine, launched only at the end of 1995, recorded massive growth in its first year, dwarfing competitors despite its premium cover price. 20 [PHOTO APPEARS HERE] Future Publishing is the UK's fifth largest magazine publisher using the latest techniques to publish over 50 titles. These skills not only produce excellent magazines but have won Chris Stocker and Richard Davies a Pounds 500 first prize in a photographic competition open to all Pearson employees. Future also acquired two specialist publishing groups, Music Maker and Litharne, a craft publisher. Meanwhile, PNE has continued to explore the potential for transferring its approach overseas, moving further into the Spanish and French markets. [LOGO APPEARS HERE] Mindscape moves forward After last year's difficulties, encountered throughout the industry, our software publishing company Mindscape has taken a more positive direction in 1996. The management team has concentrated on developing and marketing proven products such as the successful 'evergreens' Chessmaster 5000, Mavis Beacon Teaches Typing, and a range of games like Steel Panthers, a contemporary wargame, Azrael's Tear, a state-of-the-art adventure game and Warwind, a critically acclaimed strategy game. In the home creativity market, they have built on the success of Printmaster Publishing Suite, launching new products including the Mindscape Student Reference Library and Mindscape Home Office Assistant which received excellent reviews. We also launched a partnership with National Geographic which, as its first project, will deliver a compendium of the National Geographic magazine's images and stories going back more than 100 years. The UK's largest international television production company The television industry worldwide is changing fast. As the means of delivery proliferate through cable, satellite and now digital technology, shareholder value is gradually shifting from broadcasting to content. The winners will be those companies which make, own or have rights to successful formats and brands, and can exploit them worldwide. 1996 has been a year of just such international expansion for Pearson, as we have concentrated on adapting formats from the Grundy, Thames, Alomo and Witzend libraries, to suit local markets. This year we have secured our leadership in the European daily serial market, launching new 'soaps' in Germany (where we now run four), Italy and Sweden. We are also gearing up to produce Britain's first five-day-a-week serial for Channel 5, the UK's last terrestrial channel, launched in March 1997. We have had great success in transferring game show formats across international boundaries. Two thirds of our profits and half of our revenues already come from outside the UK. We now aim to achieve the same international acceptability for re-formatted situation comedy programmes as we have in daily serial and light entertainment programming. Pearson's investments in distribution and broadcasting are also important, especially for their longer-term value as a means of distributing our own productions. We already sell programmes worldwide from the libraries owned by Thames, Grundy, Alomo and Witzend and ACI. In the UK, we have already sold Pounds 24m worth of new programming to Channel 5, in which Pearson has a 24% stake. The business plan for the new channel looks even more successful than it was when we submitted our bid, because since then the channel has been given an additional frequency, bringing in up to three million more viewers. [PHOTO APPEARS HERE] Pearson Television is making a daily drama called Family Affairs for Channel 5, the new terrestrial television franchise in the UK, as part of a package of programming which also includes an afternoon magazine programme, drama and several game shows. 21 INVESTMENT BANKING Through its shareholding in Lazard Partners, Pearson has a 50% interest in Lazard Brothers, and a 9% stake in the partnership profits of Lazard Freres, Paris, and Lazard Freres, New York.
1996 1995 Change (pounds in millions) % ---------------------------- Attributable profit 40.8 39.9 2
Together, the Lazard Houses occupy a unique position in the international merchant and investment banking community: a combination of three strong, indigenous operations each based in one of the world's principal capital markets. In 1996, Lazard Partners introduced a system which will enable each bank to share in the financial performance of all three, while preserving the Houses' independence and separate cultures. This will strengthen further the potential for cooperation and collaboration in their major business activities. Corporate Finance/Mergers & Acquisitions The essence of the Houses' work in corporate finance is to advise some of the largest companies in the industrialised world, principally on acquisitions and mergers. Corporate finance is a dominant business for the Lazard Houses which, unlike many other merchant banks, have remained independent and focused on their corporate advisory business and have not integrated into large-scale equity distribution and market-making activities. This has enhanced Lazard's powerful reputation for working in close partnership with its clients, and for providing objective and highly professional advice. In 1996, all three Houses again produced very strong performances in their domestic and international corporate finance markets. Notable transactions for Lazard Brothers included the high- profile takeovers of Forte by Granada and BET by Rentokil, the flotation of British Energy and advice to the Council of Lloyd's of London on the Lloyd's reconstruction. Transactions by Lazard Freres, New York included the huge, US $23 billion acquisition by SBC Communications of Pacific Telesis and, in collaboration with Lazard Brothers, the US $25 billion negotiations between MCI and BT and the merger of Lucas and Varity. Lazard Freres, Paris advised on the first tranches of privatisation for both France Telecom and Aerospatiale. Capital Markets Since March 1995, the Lazard Houses have worked in partnership in capital markets, the business of issuing capital securities to investors. 1996, the first full year of this arrangement, was extremely successful, particularly as a result of business referred to the partnership by Corporate Finance partners. Over the year, the three Houses acted as lead, co-lead or joint lead manager to their clients on more than 50 managed offerings with a combined value in excess of US $10 billion. Asset Management The Lazard Houses manage funds for institutional investors, mutual funds and private investors. Together, the Houses had funds under management in excess of US $50 billion at the end of 1996. Lazard Freres, New York and Lazard Freres, Paris enjoyed a very successful year in asset management. Lazard Brothers made a good recovery after two difficult years, achieving sales of over Pounds 100 million from the first year of its mutual funds business and launching a personal portfolio service for individuals investing over Pounds 20,000. Early in 1997 Lazard announced that the US and UK asset management operations would be combined into a new entity - Lazard Asset Management. 22 PEARSON AND THE COMMUNITY [PHOTO APPEARS HERE] Pearson is sponsoring an exhibition about Seurat's masterpiece, the Bathers at Asineres, at the National Gallery in London from 2 July to 28 September. Corporate sponsorship Pearson has sponsored 16 major art exhibitions since 1982, including, last year, an exhibition about the work of William Morris, the great Victorian designer, poet, businessman and radical. It was staged at the Victoria and Albert Museum in London to mark the centenary of Morris's death, and attracted well over 200,000 visitors - including 2,000 Pearson employees and shareholders. In 1997 we will be sponsoring Seurat and the Bathers, which will run from July to September at the National Gallery in London. It will bring together for the first time the preparatory drawings and oil sketches for Seurat's masterpiece, The Bathers at Asnieres. The Financial Times sponsored a design competition for a new Millennium bridge across the river Thames, linking St Paul's Cathedral with the south bank development of the Globe Theatre and the new Tate Gallery of Modern Art at Bankside. The competition was won by a consortium including Foster and Partners. [PHOTO APPEARS HERE] Andy Anderson, deputy managing editor, Financial Times, is part of the staff who support reading schemes in local schools and also act as 'mentors' to individual pupils. Charitable donations Each year, Pearson aims to donate approximately one half of one per cent of the previous year's adjusted earnings to charitable causes. In 1996, we gave Pounds 808,000, again focusing on education and young people. Approximately half our donations are made by operating companies, many of which take an active role in their local communities. For example, last year staff from the Financial Times and FT Information were involved in mentoring pupils from local schools; AWL supported the Victoria Hall Performing Arts Association in Harlow; and Mindscape employees helped provide Christmas gifts for underprivileged children through the Human Needs Center of Novato. Staff around the world ran, walked and biked to raise money for good causes, including charities to combat multiple sclerosis, AIDS, hunger and cancer. At the centre, Pearson plc continued to support the Bodleian Library and helped a wide range of educational charities including the National Literacy Trust and the British Dyslexia Association. The environment Pearson no longer operates in industries where there is potential for serious industrial pollution. However, we recognise our responsibility to be aware of, and take steps to control and minimise, any damage our businesses may cause to the environment. For example, we buy paper, ink and packaging from renewable sources. 23 BOARD OF DIRECTORS [PHOTOS APPEAR HERE] Michael Blakenham Chairman aged 59, became a director of Pearson in 1971, chief executive in 1978 and chairman in 1983 and will retire at the AGM in May 1997. He is also chairman of MEPC plc and a director of a number of other companies. Frank Barlow Managing Director until 31 December, aged 67, joined Pearson in 1968, where his many posts have included chief executive of Westminster Press, chief executive of the Financial Times and, since 1986, director of Pearson. He became managing director of Pearson in 1990 and will retire from the board after the 1997 AGM. He will continue to be a director of The Economist and chairman of Logica plc. David Bell Information division aged 49, became an executive director of Pearson in March 1996, with responsibility for the Group's information businesses, having previously been chief executive of the Financial Times Group since 1993. He joined Pearson as a trainee journalist on the Oxford Mail and Times before moving to the Financial Times in 1972 where his career ranged from Washington correspondent to managing editor before leaving editorial in 1989 on his appointment as advertisement director. Mark Burrell Development Director aged 60, joined Pearson in 1963 and was involved with the company's industrial subsidiaries. In 1970 he joined Lazard Brothers. He has been a director of Pearson since 1977 and will retire at the AGM. He is also non-executive chairman of Royal Doulton plc. Michel David-Weill aged 64, is chairman of Lazard Partners, deputy chairman of Lazard Brothers and chairman of Lazard Freres, New York and managing director of Lazard Freres, Paris. He is the longest serving non-executive director of Pearson having joined the board in 1970. Greg Dyke Television aged 49, chairman and chief executive of Pearson Television since 1995. He became an executive director of Pearson plc, responsible for the Group's television interests, in March 1996. He is currently chairman of Channel 5 Broadcasting. He was previously the chief executive of London Weekend Television which he left in February 1994. He started in television as a journalist in 1977 (also with LWT) held senior executive positions with TV-am and TVS, (other companies within the ITV network) during the 1980s and was chairman of ITV for two years. He is also a former director of both ITN and Channel Four. Pehr Gyllenhammar aged 61, is a senior adviser to Lazard Freres & Co LLC, New York and former chairman of AB Volvo. He has been a non-executive director of Pearson since 1983. 24 [PHOTOS APPEAR HERE] Jean-Claude Haas aged 71, retired at the AGM in 1996. He is a partner of Lazard Freres, Paris and is a non-executive managing director of Lazard Brothers. He was appointed a non-executive director of Pearson in 1990. Sir Simon Hornby+ aged 62, is a director of Lloyds Bank and the former chairman of W H Smith and Lloyds Abbey Life plc. He became a non-executive director of Pearson in 1978 and will retire at the AGM this year. James Joll aged 60, retired as finance director in April 1996 and as an executive director of Pearson at the end of 1996. He joined Pearson in 1980 and became finance director in 1985. Prior to Pearson he was a director of NM Rothschild and Sons and before then a journalist at the Financial Times. Gill Lewis+ aged 53, became a non-executive director of Pearson in 1992. She is a director and managing partner of the consumer practice of Heidrick & Struggles in Europe. John Makinson Finance Director aged 42, joined the board in March 1996 and succeeded James Joll as finance director on 1 April 1996. Prior to joining Pearson he was managing director of the Financial Times. Reuben Mark+* aged 58, is chairman and chief executive of Colgate-Palmolive Company. He became a non-executive director of Pearson in 1988. Vernon Sankey* aged 47, is chief executive of Reckitt & Colman plc which he joined in 1971. He became a non-executive director of Pearson in 1993. Marjorie Scardino Chief Executive aged 50, became a director and chief executive on 1 January 1997. Marjorie Scardino trained and practised as a lawyer before publishing a weekly newspaper in the USA. In 1985 she joined The Economist as president of its North American operations and became its chief executive in 1993. Dennis Stevenson* Deputy Chairman aged 51, is chairman of GPA Group plc and of the Trustees of the Tate Gallery. He has been a non-executive director of Pearson since 1986. He became deputy chairman in October 1996 and will succeed Michael Blakenham as chairman after the AGM in May 1997. David Veit aged 58, joined Lazard Brothers in 1961. He remained there until 1973, apart from a break of two years when he obtained an MBA at Stanford University. Over the past 20 years he has been the senior Pearson executive in the US, becoming a director in 1981 and president of Pearson Inc. in 1985. In March 1996 he assumed responsibility for Pearson's entertainment businesses (excluding television). David Verey aged 46, joined Lazard Brothers in 1972 and became chairman in 1992. He was appointed an alternate director of Pearson in 1995 and became a non- executive director in 1996. Anette Lawless FCIS Secretary, Pearson plc. * The Audit Committee, chaired by Vernon Sankey and made up entirely of non- executive directors, provides the board with the means to appraise Pearson's financial management and reporting, and to assess the integrity of the Group's accounting procedures and financial controls. The Group's internal and external auditors have direct access to the audit committee to raise any matter of concern and to report the results of work directed by the committee. The committee itself reports to the full board of Pearson. + The Remuneration Committee is chaired by Sir Simon Hornby and consists of non- executive directors. It meets regularly to decide the remuneration and benefits packages of the executive directors and approve the recommended remuneration and benefits packages of the chief executives of the main operating subsidiaries. 25 FINANCE DIRECTOR'S REVIEW [PHOTO APPEARS HERE] This is my first report to shareholders as Pearson's finance director and it spans a period of exceptional activity for the company. While the past 12 months have presented their problems, the reorganisation of Mindscape and the discovery of improper accounting at Penguin USA being the most challenging, they have also yielded progress and opportunity. The underlying operating performance of many Pearson companies has markedly improved, we have narrowed our focus on media businesses which can deliver strong and secure growth, and we have a new management committed to making the business perform to the maximum of its potential. Operating performance Pearson's sales exceeded Pounds 2 billion for the first time last year, with acquisitions made over the past two years contributing the majority of the 19% increase over 1995 levels. The underlying sales growth of the Group remains disappointing and the generation of additional revenue from our established businesses is an important priority for this year and beyond. We reported an operating profit for 1996 of Pounds 181 million but this was after taking a charge of Pounds 100 million in relation to the improper accounting at Penguin. I discuss this issue in more detail later but, in considering the Group's operating profit, it is important to remember that the 1996 charge was to cover problems dating back to 1991 and had little impact on Penguin's ongoing sales or profits. This charge has been treated as a one-off item and therefore excluded from the calculation of adjusted earnings. If the Penguin item is set aside, profit before interest emerges at Pounds 281 million, which compares favourably with the 1995 figure of Pounds 260 million. Even this comparison needs to be made with care, however, as 1996 suffered the damaging impact of significant non-trading losses from Mindscape, as well as start-up costs at Channel 5 and the absence of income from the shares in BSkyB which we sold in September 1995. Conversely, we saw the benefit of acquisitions made in each of the past two years and experienced a lower overall level of restructuring costs. If allowance is made for all these factors, underlying operating profits were Pounds 18 million higher than in 1995. The net interest charge increased from Pounds 24 million to Pounds 30 million during the year, reflecting the higher average level of debt which resulted from acquisition 26 [BAR GRAPH APPEARS HERE] activity in 1996. Despite this increase, net interest was covered almost 10 times by operating profit before the Penguin charge. The profit before tax of Pounds 357 million was, by coincidence, very similar to the previous year's level. This figure was boosted, however, by the book profit of Pounds 231 million on the sale of Westminster Press and does not provide a useful guide to our underlying performance. The tax rate attributable to our adjusted earnings was again held below 30% and we believe that this remains a realistic target for the next several years given the significant level of tax losses available to the Group in the USA. Over the past year we have undertaken a thorough review of Pearson's tax structure and this review will be helpful to us in realising our tax rate objectives. Adjusted earnings per share for the year were 30.6 pence, an increase of 6% on the previous year's number. The recommended dividend was increased at a slightly faster rate of 9% to 18 pence, reducing adjusted earnings cover fractionally to 1.7 times. While earnings cover is a useful indicator of a company's distribution capacity, we need to focus strongly in future on the generation of sufficient cash from the business, after payment of interest and tax, to meet our responsibilities to shareholders. The proposed 1996 dividend was fully funded on that basis although we would aim over time to strengthen the cash cover for the payment. Operating cash flow grew much more strongly than operating profit last year, as several of the factors that depressed our profit performance had no bearing on our cash position. At Pounds 219 million, operating cash flow was almost 50% higher than in the previous year and represented around 80% of operating profit, adjusting for the Penguin charge and for income from associates. We will be giving this ratio more weight in future as we strive to improve further the underlying cash performance of the Group. Portfolio changes The balance sheet reflects the changes in the portfolio over the course of the year. In total we spent Pounds 769 million on acquisitions, the most significant being HarperCollins Educational, for which we paid Pounds 369 million in April, and Putnam Berkley, which was acquired in December for Pounds 201 million. The goodwill which arose on these acquisitions has been charged directly to reserves, in line with our normal practice. This was the principal reason for the fall in total shareholders' funds from Pounds 855 million to Pounds 392 million. Almost half of our acquisition spending was financed by the sale of Westminster Press for Pounds 305 million. The balance was funded by an increase in our net debt from Pounds 63 million at the end of 1995 to Pounds 430 million at the 1996 balance sheet date. Since the year end we have reduced our borrowing by Pounds 111 million through the sale of our 10% investment in TVB, the Hong Kong broadcaster. We are examining other minority investments which the Group holds, to establish whether the capital could be more productively redeployed in managed businesses. The acquisition of two [BAR GRAPHS APPEAR HERE] 27 [PIE GRAPH APPEARS HERE] sizeable US publishing companies, together with the disposal of the regional newspaper business in the UK, combined to increase the proportion of the Group's total capital employed in the US, as well as the sales and profits generated by those assets. We reflected that change in the shape of our dollar balance sheet through the creation of a $750 million medium term note (MTN) programme in the US debt market. We have so far issued $250 million of this programme, which provides us with a flexible and cost-effective source of dollar capital for the future. Financial strategy The MTN issue formed an element of a comprehensive review of Pearson's financial strategy which we undertook last year. One outcome was the creation of a Treasury Committee, comprising the finance director and two other members of the Pearson board, to consider treasury policies and controls on a regular basis. In June last year we appointed Price Waterhouse as our new worldwide auditors. Since their appointment they have been working actively with the finance function throughout Pearson to reassess our risk exposures and to consider ways of refining our approach to performance measurement. Improper accounting at Penguin USA This work has been given an added urgency by the discovery of improper accounting practices at Penguin USA. The losses which have been reflected in the 1996 figures stemmed from an unauthorised practice of offering discounts to certain customers in exchange for early payment of invoices. This practice was concealed through an extremely intricate pattern of misleading accounting entries. As far as we can judge, and our investigation into the matter is not complete, this was an isolated incident involving a very small number of people. Nonetheless, we have initiated an urgent analysis of Pearson systems, procedures and controls, the importance of which has been communicated to everyone in the Group. The future This analysis is being undertaken in conjunction with an important project to improve back office services across our publishing companies. The Shared Services Project is expected to yield considerable cost savings, as well as an improvement in the quality of information and service, by combining transactional activities - such as payroll and the processing of purchase orders - which can more efficiently be conducted under one roof. The Shared Services Project, like much else that we are studying at Pearson with a fresh eye, will not show an instant return on investment. We are mindful of the need to generate the profits and cash which, year by year, will fund a rising stream of dividends to our shareholders. But, at the same time, we cannot afford to neglect the financial investment needed to make Pearson a truly competitive media company in the next century. /s/ John Makinson John Makinson, Finance Director 28 SUMMARY DIRECTORS' REPORT Important note The summary financial statements on pages 32 to 35 of this document do not contain sufficient information to allow for a full understanding of the results of the Group and of the state of affairs of the Group. For further information, the full Annual Accounts, the Directors' Report and the Auditors' Report on those accounts, should be consulted. If you have not received the Directors' Report and Accounts, but wish to do so, please return the request for these which is attached to your proxy form for the Annual General Meeting. If however, you are happy to receive this Annual Report only (which does include summary financial statements) you need take no action. Summary directors' report The full Directors' Report is set out on pages 14 to 16 of the Directors' Report and Accounts. Business review and future development The principal activities of the Group are carried out in three main sectors: information, education and entertainment. More details of these and other activities, the development of the Group and likely future developments are set out on pages 4 to 28 of this Annual Report and in the Operating and Financial Review on pages 1 to 13 in the Directors' Report and Accounts. Post balance sheet events In February 1997 Pearson acquired a 50% stake in Business Day and Financial Mail in South Africa for a consideration of Pounds 11.5 million and sold its 10% stake in Television Broadcasts Ltd in Hong Kong for Pounds 111.1 million. In March Pearson agreed to sell its interests in the satellite and cable channels, UK Gold (20%) and UK Living (25%), to Flextech as part of joint venture agreements between Flextech and the BBC. The sale of these interests involves the payment by Flextech, between now and December 1998, of Pounds 7.8 million representing the repayment of UK Living loan stock, and Pearson Television receiving 8.8m Flextech ordinary shares - a total consideration of approximately Pounds 76 million based on a Flextech share price of 772 pence. Following completion of the transaction, Pearson will own 5.6% of the enlarged share capital of Flextech. Further details are given on page 56 of the Directors' Report and Accounts. Directors Information about the directors of the Company is set out on pages 24 and 25 of this document and an extract of the Report of the Remuneration Committee containing details of directors' emoluments and share interests is set out on pages 30 and 31. Six directors will retire by rotation at the Annual General Meeting. Of these David Veit, Reuben Mark and Gill Lewis, being eligible, will offer themselves for re-election for a further three years. In addition, Lord Blakenham, Frank Barlow and Mark Burrell retire by rotation but will not seek re-election. Sir Simon Hornby will also retire at the end of the Annual General Meeting. Marjorie Scardino, who was appointed to the board on 1 January 1997, retires from office in accordance with article 77 of the Company's articles of association and, being eligible, offers herself for re-appointment. No director was materially interested in any contract of significance to the Company's business. Full details of these and related matters are set out on pages 14 to 16 of the Directors' Report and Accounts. Report of the auditors The report of the auditors on the annual accounts of the Group for the year ended 31 December 1996 was unqualified and did not contain a statement under either s.237(2) or s.237(3) of the Companies Act 1985. Dividend A final dividend of 11.1 pence per share is proposed for the year to 31 December 1996. This, with the interim already paid, makes a total for the year of 18.0 pence. The final dividend will be paid on 6 June 1997 to shareholders on the register at the close of business on 11 April 1997 (the record date). The Company operates a scrip dividend scheme. Details of the scrip dividend alternative will be posted to shareholders on 28 April 1997. If you would like further information about the scheme please contact our Registrar whose address and telephone number are on page 36. Annual General Meeting The notice convening the Annual General Meeting to be held on Friday 2 May 1997 is contained in the enclosed circular. Anette Lawless, Secretary 17 March 1997 29 EXTRACTS FROM THE REPORT OF THE REMUNERATION COMMITTEE Remuneration policy for executive directors The committee's policy is designed to attract, retain and motivate high calibre senior executives through pay and other arrangements which are competitive and represent best practice, while also relating reward to performance and aligning the interests of directors and senior management with the interests of shareholders. The main components are base salary, an annual cash bonus plan, long-term incentives and pension benefits. In addition, the Company provides company car and health care benefits. The Company also provides housing for Marjorie Scardino who is a US national. Further details of Marjorie Scardino's remuneration can be found below the following table. The full Remuneration Committee Report is set out on pages 17 to 23 of the Directors' Report and Accounts. Excluding contributions to approved pension funds, and compensation for early termination of contract, directors remuneration was as follows:
- ------------------------------------------------------------------------------------------------------------------------------- 1996 3-year 1996 1995 3-year 1995 Salary/fees Bonus Other ISP Total Salary/fees Bonus Other ISP Total* Name (Pounds in thousands) - ------------------------------------------------------------------------------------------------------------------------------- Executive directors Michael Blakenham 315 - 38 - 353 300 - 37 413 750 Frank Barlow 380 - 41 - 421 330 - 40 413 783 David Bell+ 179 12 10 - 201 - - - - - Mark Burrell 207 - 42 - 249 200 - 42 287 529 Greg Dyke+ 183 100 108 - 391 - - - - - James Joll 250 - 38 - 288 230 - 37 287 554 John Makinson+ 179 61 16 - 256 - - - - - David Veit 303 - 10 - 313 323 - 11 287 621 Non-executive directors Michel David-Weill 25 - - - 25 25 - - - 25 Pehr Gyllenhammar 25 - - - 25 30 - - - 30 Jean-Claude Haas+ 11 - - - 11 32 - - - 32 Sir Simon Hornby 25 - - - 25 25 - - - 25 Gill Lewis 25 - - - 25 30 - - - 30 Reuben Mark 32 - - - 32 32 - - - 32 Vernon Sankey 25 - - - 25 25 - - - 25 Dennis Stevenson 25 - - - 25 25 - - - 25 David Verey+ 17 - - - 17 - - - - - - -------------------------------------------------------------------------------------------------------------------------------
* The incentive share plan release relating to the three-year period 1993- 1995 is included in the total 1995 remuneration figure. + David Bell, Greg Dyke and John Makinson were appointed to the board on 15 March 1996. David Verey became a non-executive director on 3 May 1996. Jean-Claude Haas retired from the board on 3 May 1996. In the case of David Bell, Greg Dyke and John Makinson, the emoluments shown relate to the ten- month period from March to December 1996, with the exception of bonus, which relates to the full year. A sum of Pounds 250,000 was paid to James Joll as compensation for early termination of his contract, which had a three-year notice period. In addition his pension was augmented with effect from his retirement date at a capital cost of Pounds 250,000. Marjorie Scardino joined the board and became chief executive on 1 January 1997, at a base salary of Pounds 396,500, although for pension and bonus purposes, her salary is deemed to be Pounds 425,000 (so as to include an element of the housing benefit referred to below). She received a joining bonus of Pounds 130,000 in consideration of the loss of potential benefits with her previous employer. She participates in the annual bonus plan and the incentive share plan, under which she will be conditionally awarded shares to the value of Pounds 300,000 in 1997, Pounds 200,000 in 1998 and Pounds 200,000 in 1999. Housing is provided at an initial annual cost to the Company of Pounds 60,500 and she receives a pension supplement of 25% of salary to provide for benefits in excess of the pensions earnings cap. Dennis Stevenson will receive annual fees of Pounds 240,000 on becoming chairman on 2 May 1997. He will also participate in the incentive share plan, under which he will be conditionally awarded shares to the value of Pounds 300,000 upon appointment and Pounds 200,000 one year later, each vesting over five years. Dennis Stevenson's fees for 1996 were paid to SRU Limited. Frank Barlow was the highest paid director in 1996. His total remuneration, including pension contributions, amounted to Pounds 421,346. The chairman's total remuneration, including pension contributions, amounted to Pounds 352,979. 30 Extracts from the Report of the Remuneration Committee
- ------------------------------------------------------------------------------------------------------------------------------------ Maximum number of shares in lieu of Options - Incentive share plan ++ - adjustment on Interests of Ordinary shares Ordinary shares Ordinary shares Royal Doulton directors were: 31.12.96* 1.1.96** 31.12.96* 1.1.96** 31.12.96* 1.1.96** demerger - ------------------------------------------------------------------------------------------------------------------------------------ Michael Blakenham 138,214 101,580 417,454 417,454 31,926 72,919 12,908 (non-beneficial) 129,040 129,040 - - - - - Frank Barlow 38,750 6,939 419,794 419,794 25,107 72,919 11,235 David Bell 9,303 8,348 111,156 85,469 6,790 6,620 628 Mark Burrell 791,674 1,032,504 283,339 282,799 15,222 50,276 9,840 (non-beneficial) 65,040 65,040 - - - - - Michel David-Weill+ 48,129,727 48,129,727 - - - - - Greg Dyke - - 106,900 73,300 6,790 6,620 - Pehr Gyllenhammar - - - - - - - Jean-Claude Haas 29,537 29,537 - - - - - Sir Simon Hornby 4,000 4,000 - - - - - James Joll 25,494 2,093 155,846 155,847 9,160 50,276 4,541 Gill Lewis - - - - - - - John Makinson 1,000 - 103,784 68,000 - - - Rueben Mark 7,600 7,600 - - - - - Vernon Sankey - - - - - - - Dennis Stevenson 38,000 8,000 - - - - - David Veit 253,602 107,712 245,380 348,869 31,892 50,276 - David Verey - - - - - - -
- ---------------------- + Mr David-Weill's interests include 48,088,523 ordinary shares owned by companies associated with Lazard Freres et Cie., Paris. * Or date of retirement, if earlier. ** Or date of appointment, if later. ++ A full explanation of this plan is given on page 17 of the Directors' Report and Accounts. The number of shares shown represents the maximum number of shares, plus accumulated scrip dividend shares, comprised in the original award which may be transferred to the individual concerned. Executive directors of the Company, as possible beneficiaries, are also deemed to be interested in the Pearson Employee Share Trust, the trustee of which held 149,933 Pearson ordinary shares of 25 pence each at 31 December 1996 and 148,395 ordinary shares at 17 March 1997, the latest practicable date prior to the printing of this report. Marjorie Scardino was appointed to the board with effect from 1 January 1997, at which date she had no interests in Pearson securities. On 16 January 1997, she acquired 10,000 ordinary shares of 25 pence each in the Company. Also on 16 January 1997, John Makinson acquired a further 2,000 ordinary shares of 25 pence each, taking his total holding to 3,000 shares. 31 CONSOLIDATED PROFIT AND LOSS ACCOUNT for the year ended 31 December 1996
- ---------------------------------------------------------------------------------------------------------------------------- 1996 1995 Operating Other Operating Other activities items Total activities items Total (Pounds in millions) - ---------------------------------------------------------------------------------------------------------------------------- Sales Continuing operations 1,845.9 - 1,845.9 1,687.1 - 1,687.1 Acquisitions 203.0 - 203.0 - - - - ---------------------------------------------------------------------------------------------------------------------------- 2,048.9 - 2,048.9 1,687.1 - 1,687.1 Discontinued operations 137.1 - 137.1 143.3 - 143.3 - ---------------------------------------------------------------------------------------------------------------------------- Total sales 2,186.0 - 2,186.0 1,830.4 - 1,830.4 Cost of sales (1,064.1) - (1,064.1) (939.7) - (939.7) - ---------------------------------------------------------------------------------------------------------------------------- Gross profit 1,121.9 - 1,121.9 890.7 - 890.7 Net operating expenses - normal (853.3) - (853.3) (627.7) - (627.7) Net operating expenses - exceptional (40.4) (100.0) (140.4) (46.7) - (46.7) Net income from partnerships and associated undertakings 53.1 - 53.1 43.3 - 43.3 - ---------------------------------------------------------------------------------------------------------------------------- Operating profit Continuing operations 219.9 (100.0) 119.9 237.6 - 237.6 Acquisitions 26.1 - 26.1 - - - - ---------------------------------------------------------------------------------------------------------------------------- 246.0 (100.0) 146.0 237.6 - 237.6 Discontinued operations 35.3 - 35.3 22.0 - 22.0 - ---------------------------------------------------------------------------------------------------------------------------- Total operating profit 281.3 (100.0) 181.3 259.6 - 259.6 Continuing operations: Profit/(loss) on sale of fixed assets - (14.1) (14.1) - 123.4 123.4 Profit/(loss) on sale of businesses - (1.9) (1.9) - 6.0 6.0 Discontinued operations: Profit on sale of Westminster Press - 231.3 231.3 - - - - ---------------------------------------------------------------------------------------------------------------------------- Profit before interest 281.3 115.3 396.6 259.6 129.4 389.0 Net interest payable (29.5) - (29.5) (23.9) - (23.9) Loan stock redemption premium - (10.3) (10.3) - - - - ---------------------------------------------------------------------------------------------------------------------------- Profit before taxation 251.8 105.0 356.8 235.7 129.4 365.1 Taxation (72.6) (36.0) (108.6) (64.8) (28.0) (92.8) - ---------------------------------------------------------------------------------------------------------------------------- Profit after taxation 179.2 69.0 248.2 170.9 101.4 272.3 Equity minority interests (7.7) - (7.7) (11.3) - (11.3) - ---------------------------------------------------------------------------------------------------------------------------- Profit for the financial year 171.5 69.0 240.5 159.6 101.4 261.0 Dividends on equity shares (102.7) - (102.7) (91.8) - (91.8) - ---------------------------------------------------------------------------------------------------------------------------- Profit retained 68.8 69.0 137.8 67.8 101.4 169.2 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Adjusted earnings/total earnings per equity share 30.6 pence 12.3 pence 42.9 pence 28.8 pence 18.3 pence 47.1 pence - ---------------------------------------------------------------------------------------------------------------------------- Dividends per equity share 18.0 pence - 18.0 pence 16.5 pence - 16.5 pence - ---------------------------------------------------------------------------------------------------------------------------- Average number of shares (millions) 560.8 560.8 560.8 554.4 554.4 554.4 - ----------------------------------------------------------------------------------------------------------------------------
In order to show results from operating activities an adjusted earnings per equity share has been calculated which excludes profits on the sale of fixed assets and businesses, the loan stock redemption premium, the Pounds 100 million charge for improper accounting at Penguin USA and the tax consequences of these items. 32 SUMMARY CASH FLOW STATEMENT for the year ended 31 December 1996
- ---------------------------------------------------------------------------- 1996 1995 (pounds in millions) - ---------------------------------------------------------------------------- Net cash inflow from operating activities 291.2 236.4 Returns on investments and servicing of finance (36.5) (40.8) Taxation (80.8) (69.7) Capital expenditure and financial investment (56.4) 441.8 Acquisitions and disposals (427.7) (405.5) Equity dividends paid (96.0) (86.3) - ---------------------------------------------------------------------------- Cash (outflow)/inflow before management of liquid resources and financing (406.2) 75.9 Management of liquid resources 351.4 (225.0) Financing 21.6 266.7 - ---------------------------------------------------------------------------- (Decrease)/increase in cash in the year (33.2) 117.6 - ----------------------------------------------------------------------------
SUMMARY RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT for the year ended 31 December 1996
- ----------------------------------------------------------------------------- 1996 1995 (pounds in millions) - ----------------------------------------------------------------------------- Change in net debt resulting from cash flows (33.2) 117.6 Change in net debt from management of liquid resources (351.4) 225.7 Change in net debt from other borrowings (18.9) (256.6) Exchange differences 36.5 (3.7) - ----------------------------------------------------------------------------- Movement in net debt in the year (367.0) 83.0 Net debt at 1 January (63.4) (146.4) - ----------------------------------------------------------------------------- Net debt at 31 December (430.4) (63.4) - -----------------------------------------------------------------------------
33 SUMMARY CONSOLIDATED BALANCE SHEET as at 31 December 1996
- ----------------------------------------------------------------------------------- 1996 1995 (pounds in millions) - ----------------------------------------------------------------------------------- Fixed assets 908.6 925.6 - ----------------------------------------------------------------------------------- Current assets 1,337.4 1,642.2 Creditors due within one year (1,094.0) (1.087.7) - ----------------------------------------------------------------------------------- Net current assets 243.4 554.5 - ----------------------------------------------------------------------------------- Total assets less current liabilities 1,152.0 1,480.1 Creditors due after more than one year (570.3) (490.3) Provisions for liabilities and charges (189.4) (134.4) - ----------------------------------------------------------------------------------- Net assets 392.3 855.4 - ----------------------------------------------------------------------------------- Capital and reserves 388.6 833.2 Equity minority interests 3.7 22.2 - ----------------------------------------------------------------------------------- 392.3 855.4 - -----------------------------------------------------------------------------------
This summary financial statement was approved by the board of directors on 17 March 1997 and signed on its behalf by Blakenham J Makinson STATEMENT BY THE AUDITORS TO THE MEMBERS OF PEARSON PLC We have examined the summary financial statement set out on pages 32 to 34. Respective Responsibilities of Directors and Auditors The summary financial statement is the responsibility of the directors. Our responsibility is to report to you our opinion on its preparation and consistency with the annual financial statements and Directors' Report. Basis of Opinion We conducted our work in accordance with Auditing Guideline "The auditors' statement on the summary financial statement" adopted by the Auditing Practices Board. Opinion In our opinion the summary financial statement is consistent with the annual financial statements and the Directors' Report of Pearson plc for the year ended 31 December 1996 and complies with the requirements of section 251 of the Companies Act 1985 and the regulations made thereunder, applicable to summary financial statements. Price Waterhouse Chartered Accountants and Registered Auditors Southwark Towers, London SE1 9SY 17 March 1997 34 FIVE YEAR SUMMARY
- ------------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 (pounds in millions) - ------------------------------------------------------------------------------------------------------------------- Sales - ------------------------------------------------------------------------------------------------------------------- Continuing operations 1,022.3 1,193.8 1,413.3 1,687.1 2,048.9 Discontinued operations 613.4 676.3 136.8 143.3 137.1 - ------------------------------------------------------------------------------------------------------------------- 1,635.7 1,870.1 1,550.1 1,830.4 2,186.0 - ------------------------------------------------------------------------------------------------------------------- Profits Information 39.9 31.1 69.0 83.3 99.1 Education 42.5 55.8 51.2 31.8 68.1 Entertainment 41.6 62.2 129.5 110.9 (47.5) Investment Banking 23.7 36.4 30.2 39.9 40.8 Corporate expenses less other income (4.5) (4.3) (23.2) (28.3) (14.5) - ------------------------------------------------------------------------------------------------------------------- Continuing operations 143.2 181.2 256.7 237.6 146.0 Discontinued operations 12.4 34.9 15.7 22.0 35.3 - ------------------------------------------------------------------------------------------------------------------- Operating profit 155.6 216.1 272.4 259.6 181.3 Profit/(loss) on sale of businesses - (68.4) 15.2 6.0 229.4 Profit/(loss) on sale of fixed assets 8.8 4.4 26.4 123.4 (14.1) Provision on investment in BSkyB - 71.4 - - - - ------------------------------------------------------------------------------------------------------------------- Profit before interest 164.4 223.5 314.0 389.0 396.6 Net interest payable (13.6) (14.9) (16.2) (23.9) (29.5) Loan stock redemption premium - - - - (10.3) - ------------------------------------------------------------------------------------------------------------------- Profit before taxation 150.8 208.6 297.8 365.1 356.8 Taxation (44.4) (60.3) (74.3) (92.8) (108.6) - ------------------------------------------------------------------------------------------------------------------- Profit after taxation 106.4 148.3 223.5 272.3 248.2 Equity minority interests (1.1) (0.3) (0.6) (11.3) (7.7) - ------------------------------------------------------------------------------------------------------------------- Profit for the financial year 105.3 148.0 222.9 261.0 240.5 - ------------------------------------------------------------------------------------------------------------------- Earnings per equity share 19.3 pence 27.0 pence 40.4 pence 47.1 pence 42.9 pence Adjusted earnings per equity share+ 17.3 pence 27.9 pence 34.1 pence 28.8 pence 30.6 pence Dividends per equity share 12.0 pence 13.0 pence 15.0 pence 16.5 pence 18.0 pence - -------------------------------------------------------------------------------------------------------------------
+ Adjusted to eliminate the distortions caused by including abnormal items in accordance with page 25 of the Directors' Report and Accounts. 35 SHAREHOLDER INFORMATION Registered office and telephone 3 Burlington Gardens, London W1X 1LE Telephone no: 0171 411 2000, Fax no: 0171 411 2390 email: firstname.lastname@pearson.com Registered number 53723 (England) Web site Pearson has a Web site which is regularly updated with information about the Company and our operating companies. The address is: http://www.pearson.com Financial calendar for 1997 Ex-dividend date: Monday 7 April Record date: Friday 11 April Despatch of scrip dividend information: Monday 28 April Annual General Meeting: Friday 2 May Last date for scrip election: Tuesday 20 May Share entitlement under scrip dividend posted: Thursday 5 June Payment date for dividend: Friday 6 June Interim results: Monday 5 August Payment of dividends to mandated accounts Where shareholders have given instruction for payment to be made direct into a bank or building society account, this is done through the Bankers Automated Clearing System (BACS), with the associated tax voucher showing the tax credit attributable to the dividend payment sent direct to the shareholder at the address shown on our register. If you wish the tax voucher to be sent to another address, please inform our Registrar. UK tax on capital gains At 31 March 1982, the base date for capital gains tax, the value of each of the Company's ordinary shares (adjusted for the one for one capitalisation issues in May 1985 and June 1992), was 62 pence. The market quotations of Pearson plc ordinary shares and Royal Doulton plc ordinary shares on the first day of dealing in Royal Doulton shares, following the demerger in 1993, as calculated in accordance with s. 272(3) of the Taxation of Chargeable Gains Act 1992 and as derived from The Stock Exchange Daily Official List on 2 December 1993 were: Pearson plc ordinary shares of 25 pence 592 pence Royal Doulton plc ordinary shares of Pound 1 203.5 pence Personal Equity Plans (PEPs) Pearson operates a Corporate PEP and a Single Company PEP. Both are open to existing and prospective shareholders in Pearson. For further information, please ring the Halifax helpline on freephone 0800 371769. Low cost share dealing facility A postal facility, which provides a simple, low cost way of buying and selling Pearson shares, is available through the Company's stockbrokers, Cazenove & Co, 12 Tokenhouse Yard, London EC2R 7AN. Telephone 0171 588 2828. Information about the Pearson share price The current price of Pearson ordinary shares can be obtained from Financial Times CityLine on telephone 0836 433620. Calls are charged at 40 pence per minute cheap rate and 50 pence per minute at all other times, inclusive of VAT. American Depository Receipts (ADRs) Pearson introduced a sponsored Level One ADR programme in March 1995. Each ADR represents one ordinary share. The programme is administered by the Bank of New York, ADR Department, 101 Barclay Street, New York, NY 10286, telephone 1 800 524 4458. However, as holders of ADRs are not registered shareholders, they do not automatically have the right to receive the Pearson report and accounts or other communications nor are they able to attend or vote at Company shareholder meetings. For further information, please contact the Bank of New York at the above address. CREST Last year we advised shareholders that we would be joining CREST. We have now entered the CREST system. Under the new system those shareholders who wish to do so can retain their share certificates. Pearson employee magazine Pearson produces a magazine for all its employees, which is also available to shareholders. It deals with people and events within the Group. If you wish to receive copies of the magazine when it is published, please return the enclosed form to the Registrars. Advisers Registrar: Lloyds Bank Plc, Lloyds Bank Registrars, The Causeway, Worthing, West Sussex BN99 6DA. Auditors: Price Waterhouse Broker: Cazenove & Co Bankers: Midland Bank plc National Westminster Bank Plc Solicitors: Freshfields Herbert Smith Financial Advisers: Lazard Brothers & Co., Limited J. Henry Schroder & Co. Limited 36 Principal offices Group Head Office: Pearson plc 3 Burlington Gardens, London W1X 1LE Tel: 0171 411 2000, Fax: 0171 411 2390 Web site: http://www.pearson.com E-mail: firstname.lastname@pearson.com Overseas Offices Pearson Inc 50th Floor, 30 Rockefeller Plaza New York, NY 10112-5095 USA Tel: 001 212 641 2400, Fax: 001 212 641 2500 E-mail: firstname.lastname@pearson-inc.com Pearson KK 13th Floor, AIG Building, 1-3 Marunouchi 1-Chome Chiyoda-ku, Tokyo-100, Japan Tel: 00 81 3 3211 1331, Fax: 00 81 3 3211 8616 Major Subsidiaries Information Financial Times Limited Number One, Southwark Bridge, London SE1 9HL Tel: 0171 873 3000, Fax: 0171 407 5495 E-mail: firstname.lastname@ft.com Financial Times Information Fitzroy House, 13-17 Epworth Street London EC2A 4DL Tel: 0171 825 8000, Fax: 0171 251 2725 E-mail: firstname.lastname@ft.com Les Echos SA 46 rue la Boetie, Paris, 75008 France Tel: 00 331 4953 6565, Fax: 00 331 4289 1400 E-mail: initiallastname@lesechos.fr Recoletos Compania Editorial SA Paseo Recoletos 14-7, 28001 Madrid, Spain Tel: 00 341 337 3220, Fax: 00 341 337 3825 E-mail: initiallastname@recoletos.es Pearson Professional Limited Maple House, 149 Tottenham Court Road London W1P 9LL Tel: 0171 896 2000, Fax: 0171 896 2099 E-mail: FirstnameInitial@pearson-pro.com Education Addison Wesley Longman Inc One Jacob Way Reading, Massachusetts 01867-3999, USA Tel: 001 617 944 3700, Fax: 001 617 944 9338 E-mail: firstname.initial@awl.com Addison Wesley Longman Ltd Edinburgh Gate, Harlow, Essex CM20 2JE Tel: 01279 623623, Fax: 01279 431059 E-mail: firstname.lastname@awl.co.uk Entertainment Penguin Putnum Inc 375 Hudson Street, New York, NY 10014, USA Tel: 001 212 366 2000, Fax: 001 212 366 2666 E-mail: initiallastname@penguin.com Penguin Publishing Co Ltd 27 Wrights Lane, London W8 5TZ Tel: 0171 416 3000, Fax: 0171 416 3099 E-mail: firstname.lastname@penguin.com The Tussauds Group Limited Maple House, 149 Tottenham Court Road London W1P 0DX Tel: 0171 312 1131, Fax: 0171 465 0864 E-mail: firstname.lastname@tussauds.com Mindscape Inc 88 Rowland Way, Novato, California 94945, USA Tel: 001 415 897 9900, Fax: 001 415 897 2747 E-mail: initiallastname@mindscape.com Pearson New Entertainment Limited Kingsgate House, 536 Kings Road, London SW10 0TE Tel: 0171 331 3920, Fax: 0171 331 3929 E-mail: InitialLastname@pne.co.uk Pearson Television Limited 1 Stephen Street, London W1P 1PS Tel: 0171 691 6000, Fax: 0171 691 6100 E-mail: firstname.lastname@pearsontv.com 50% Associates Lazard Brothers & Co., Limited 21 Moorfields, London EC2P 2HT Tel: 0171 588 2721, Fax: 0171 628 2485 The Economist Group Limited 25 St James's Street, London SW1A 1HG Tel: 0171 830 7000, Fax: 0171 839 2968 Designed and produced by Michael Peters Limited. Type origination by Wordwork plc. Printed in England by CTD Printers Limited. PEARSON Directors' Report & Accounts 1996 accounts This document contains detailed financial and statutory information that will provide a full understanding of the results and state of affairs of Pearson. It should, however, be read in conjunction with the Annual Report, which contains the Chairman's Statement, Managing Director's Review and a review of the business divisions. 1 Operating and financial review 14 Report of the Directors 17 Report of the Remuneration Committee 24 Reports of the Auditors 25 Consolidated profit and loss account 26 Consolidated balance sheet 27 Consolidated statement of cash flows 28 Statement of total recognised gains and losses 28 Note of historical cost profits and losses 28 Reconciliation of movements in equity shareholders' funds 29 Notes to the accounts 57 Principal subsidiary and associated undertakings and investments 58 Five year summary 60 Index to the financial statements Operating and Financial Review The following review is divided into two parts. The Operating Review analyses the performance of the Group and each of the three divisions into which it is organised, looking at sales and operating profit, and highlighting significant factors that have contributed to the results. The Financial Review looks at Group interest, tax, earnings and cash flow, treasury management and accounting policies. OPERATING REVIEW A fuller discussion on the markets in which the Group operates and likely future developments can be found in the Business Reviews in the 1996 Annual Report. Group summary Sales increased by Pounds 355.6 million to Pounds 2,186.0 million. Acquisitions during the year contributed Pounds 203.0 million of sales, the most significant of which was the acquisition of HarperCollins Educational by Addison Wesley Longman which contributed Pounds 166.9 million, or 8% of sales. Discontinued operations relate to the withdrawal of the Group from the UK regional newspaper business following the sale of Westminster Press in December 1996 for Pounds 305 million. During the year Westminster Press contributed Pounds 137.1 million in sales, Pounds 35.3 million in operating profit and Pounds 35.6 million in operating cash flow. Of total sales 38% relates to the Information Division, 25% to the Education Division and 37% to the Entertainment Division.
- ------------------------------------------------------ 1996 1995 Change (Pounds in million) % - ------------------------------------------------------ Sales 2,186.0 1,830.4 19 ...................................................... Operating profit (continuing): Information 99.1 83.3 19 Education 68.1 31.8 114 Entertainment* 52.5 110.9 (53) Investment Banking 40.8 39.9 2 Corporate expenses and other income (14.5) (28.3) 49 - ------------------------------------------------------ Continuing 246.0 237.6 4 Discontinued 35.3 22.0 60 - ------------------------------------------------------ Total* 281.3 259.6 8 ...................................................... Operating cash flow 219.0 146.5 49 - ------------------------------------------------------
*Excludes Pounds 100 million charge for improper accounting at Penguin USA (see page 2). Operating profit from continuing operations, excluding the Pounds 100 million charge for improper accounting at Penguin USA, increased by Pounds 8.4 million or 4%. Excluding both the Pounds 100 million charge at Penguin USA and operating losses at Mindscape of Pounds 45.5 million, total operating profits increased by 23%. 1 Operating and financial review [CHART APEARS HERE] The change in operating profits in 1996, when compared with 1995, is due to a number of factors which are analysed in the table below. The increase in operating profits from acquisitions made in 1995 is primarily attributable to Grundy, acquired in May 1995, and Interactive Data Corporation, acquired in August 1995.
Group Group excluding including Mindscape Mindscape Mindscape (Pounds in million) ............................................................. 1995 operating profit 266.5 (6.9) 259.6 Acquisitions in 1995 24.6 0.9 25.5 Acquisitions in 1996 45.5 - 45.5 Discontinued 8.4 - 8.4 Decrease BSkyB income (30.1) - (30.1) Channel 5 losses (5.8) - (5.8) Decrease restructuring 11.7 (5.4) 6.3 Other (12.1) (19.6) (31.7) Underlying increase 18.1 (14.5) 3.6 ............................................................ 1996 pre improper accounting 326.8 (45.5) 281.3 % increase 23% 8% ............................................................ Improper accounting (100.0) - (100.0) 1996 operating profit 226.8 (45.5) 181.3
The increase from acquisitions made in 1996 relates primarily to HarperCollins Educational, acquired in April 1996. The increase attributable to the discontinued business relates to Westminster Press. Following the disposal of its direct stake in BSkyB in 1995, the Group's income from this investment is now derived from interest on its loan stock in BSB Holdings Ltd (BSBH). This amounted to Pounds 2.4 million in 1996 compared with total income of Pounds 32.5 million in 1995. Other, excluding Mindscape, includes the increase in profits arising on the disposal of the Group's remaining interest in Cedar Fair (see 'Corporate expenses and other income'), losses on Argent, a French personal finance publication launched in January 1996 but closed in August 1996, and increased costs of the Shared Services initiative (see page 3). Excluding Mindscape, all three divisions contributed to the underlying increase in operating profit. In 1996 Mindscape underwent substantial refocusing and restructuring of its operations. In addition, the accounting treatment in respect of royalty advances and development costs was changed to charge these costs earlier. Prior year figures have not been restated for the change in accounting treatment as the amounts involved are not material to the Group. Of the operating loss for the year of Pounds 45.5 million, Pounds 11.2 million relates to the write-off of abandoned product, Pounds 5.4 million to restructuring costs and Pounds 7.4 million to the change in accounting treatment. On 13 February 1997 the Group announced that it had uncovered improper accounting at Penguin USA. The problems, dating back to 1991, relate to unauthorised discounts given to customers in return for early payments which had not been 2 Operating and financial review [Graph appears here] correctly recognised in the accounts. This unauthorised practice has had little impact on ongoing sales and operating profits. The charge has been treated as a one-off item and therefore has been excluded from the calculation of adjusted earnings. Interest payable of Pounds 29.5 million was Pounds 5.6 million higher than in 1995. The increase reflects the acquisitions made during the year, in particular the Pounds 369.2 million acquisition of HarperCollins Educational in April 1996. In addition, a premium of Pounds 10.3 million was paid on the redemption of the Pounds 25 million (13.625%) 2007 Unsecured Loan Stock. The taxation charge of Pounds 108.6 million represents an effective rate of 30.4%. The effective rate on adjusted earnings of 28.8% is below the UK tax rate due mainly to consortium relief recognised following renegotiation with other partners in BSkyB/BSBH. At the end of 1995 a decision was made to proceed with a major initiative to combine back office functions across the Group, and a provision for Pounds 16.7 million was set up to cover restructuring costs. This provision will be utilised when the restructuring costs are incurred upon implementation, the main part of which is planned for 1998. During 1996 Pounds 6.9 million was incurred on the Shared Services initiative, of which Pounds 1.9 million was expensed and Pounds 5.0 million was capitalised. Information Division
1996 1995 Change (Pounds in million) % ........................................................... Sales 828.7 759.1 9 ........................................................... Operating profit (continuing): FT Newspaper 16.5 7.4 123 FT Information 17.3 11.4 52 Les Echos (0.3) 3.2 - Recoletos 34.9 37.8 (8) Pearson Professional 18.6 11.5 62 The Economist 12.1 12.0 1 Westminster Press (discontinued) 35.3 22.0 60 ........................................................... Total 134.4 105.3 28 ........................................................... Operating cash flow 122.0 77.3 58 ........................................................... Operating margin 15% 12% 25
Financial Times Newspaper Advertisement revenues grew by 7% overall and circulation revenues were up 8%, helped by a cover price rise in the UK and record overseas circulation. Average daily copy sales reached 299,000 in 1996 of which 42% were sold overseas. A new web site was opened in April and has already attracted over 250,000 registered users. Cost savings also played an important role in improving trading profits which increased by almost 50%. The closure of the East India Dock printing operation resulted in significant savings that were reinvested in the expanded network of print sites. The tenth such site, in Hong Kong, was opened in March 1996. Further significant cost savings were realised during 1996 resulting in an exceptional charge of Pounds 5.8 million. Despite this exceptional charge, [Graph appears here.] 3 Operating and financial review [Graph appears here.] operating profits before associates increased by 123%. Financial Times Information Sales from Financial Times Information's financial and business information services increased by 45% in 1996. This included the first full year of sales of Pounds 50.6 million from Interactive Data Corporation, a leading supplier of price data in the capital and securities market, which was acquired in late 1995, and which contributed to strong results from the Asset Management business. Electronic Business Information and Research Products both increased revenue, but the benefit from this was offset by considerable development expenditure, particularly within Research Products. This investment will be continuing in 1997. Overall operating profit was up 52%, mainly reflecting the benefit from Interactive Data Corporation. Les Echos Group Overall advertising revenues for Les Echos fell by 2% in depressed advertising markets although financial advertising held up well and Les Echos improved its market share. Circulation grew by 5% and Les Echos is currently the only profitable French business paper. Enjeux, the monthly business magazine, increased revenues by 16% and significantly reduced its losses, and Panorama du Medecin is now operating profitably. Argent, a personal finance publication launched in January, was closed in August because news-stand sales were below initial assumptions. The loss on this venture led to the Les Echos group showing a small loss for the year; without Argent, it would have produced a profit 66% up on 1995. Recoletos Pearson increased its stake in Recoletos from 56.7% to 94.2% during 1996. At an average paid circulation of 486,000, the sports paper Marca is the most widely read newspaper in Spain and continues to grow. Advertising pages expanded by 15% as demand for space outstripped supply. Recoletos' margin, however, fell from 33% in 1995 to 27% in 1996, as investments were made in Marca to counteract competitor activity. Developments included a fantasy football league and club, which now has 1.3 million members, new printing centres in Spain and Holland, and regional editions. Expansion continued to be Spain's leading business newspaper, with circulation up 8% in 1996. Pearson Professional Sales increased by 8% overall, helped by strong performances from publishing in finance, energy and media. US sales for Churchill Livingstone, the health publishing business, were affected by the squeeze on physicians' incomes which is making trading conditions very difficult for wholesale publishers. Operating profits for Pearson Professional improved by 62% as the medical communications business in Japan, which was disrupted by the Kobe earthquake in 1995, was re- organised and as Pearson Professional focused on growing higher margin activities, 4 Operating and financial review [Chart appears here.] whilst reducing the cost base through efficiencies in its core businesses. Meanwhile, a small number of margin-enhancing acquisitions were made. The Economist (50%) The Economist had another excellent year. Pearson's share of profits amounted to (Pounds) 12.1 million, slightly ahead of last year's record figure. Average circulation reached 640,385 by December 1996 compared to 621,201 in December 1995, an increase of 3%. Education Division The Education division consists of Addison Wesley Longman (AWL), Pearson's educational publishing business, which comprises five business units: US School, US College, International, English Language Teaching (ELT) and Consumer.
1996 1995 Change (Pounds in million) % Sales 554.3 358.9 54 ................................................... Operating profit 68.1 31.8 114 ................................................... Operating cash flow 28.3 6.8 316 ................................................... Operating margin 12% 8% 50
AWL achieved sales of Pounds 554.3 million in 1996, against Pounds 358.9 million in 1995, an increase of 54%. Pounds 166.9 million of sales or 85% of growth resulted from the acquisition of HarperCollins Educational Publishing, which chiefly impacted US School and US College publishing. The business, excluding HarperCollins Educational, also achieved a healthy organic growth of 9%. HarperCollins Educational was purchased at the beginning of April 1996 and has now been successfully integrated into Addison Wesley Longman. The operating profit of HarperCollins Educational of Pounds 45.1 million, before restructuring costs of Pounds 15.0 million, is not representative of a full 12 months performance as it excludes the loss making first quarter. However, this loss broadly equates to the charge for restructuring costs, and therefore the operating profit after restructuring costs is approximately equivalent to one full year's trading. The operating cash flow of Pounds 4.5 million, on the other hand, has been reduced by restructuring expenditure and the exclusion of the first quarter, a strong period for collections, and is less than representative of a full year's cash flow. [Graph appears here.] US School Sales of Pounds 192.9 million were Pounds 113.6 million up on 1995, including Pounds 102.3 million from HarperCollins Educational titles. Sales, excluding HarperCollins Educational, were also up by Pounds 11.3 million or 14%, driven by growth in the school publishing market, by significant increases in sales of elementary maths and science products first published in 1995, and by the introduction of the Waterford Early Reading Program. Profit, excluding HarperCollins Educational, was higher than in 1995 and margins improved through reduced pre-publication cost amortisation. US College Sales in the US college market increased by 123% over 1995, to Pounds 112.0 million. Pounds 54.0 of this was [Graph appears here.] 5 Operating and financial review [Graph appears here] attributable to HarperCollins Educational titles. Growth in sales elsewhere was also achieved, together with improved profits and margins through tight control on headcount and other discretionary expenses. This was partially offset by higher provisions for obsolescence. International The International business comprises all school and college products locally published and/or distributed outside the USA, including the UK. Sales for the business in 1996 were Pounds 125.6 million, up by 29% over 1995 and all international areas contributed to the growth. Profits and margin percentages also rose. HarperCollins Educational accounted for incremental sales of Pounds 9.5 million. English Language Teaching (ELT) Worldwide sales of ELT products were Pounds 92.8 million, an increase of Pounds 11.1 million or 13% over 1995. Most of this growth resulted from the first full year's results from Nelson titles, acquired in 1995. Profits improved over 1995 as a result of the Nelson contribution and reduced operating expenses. Consumer Publishing Sales for 1996 were Pounds 47.8 million, representing growth of 11% over 1995. A major contributor was computer-related learning materials, where the increased importance of the Internet and associated programming languages such as JAVA helped to offset the decline in demand of Apple-related products. Take Care of Yourself continued to sell well, reflecting the US focus on health care. Profit and margin for consumer publishing declined because of higher obsolescence reserves and an unfavourable movement in the mix towards higher cost product. Entertainment Division
1996 1995 Change (Pounds in million) % ........................................................... Sales 803.0 712.4 13 ........................................................... Operating profit: Penguin* 31.0 33.6 (8) Tussauds 22.2 18.3 21 Mindscape (45.5) (6.9) - Pearson New Entertainment 2.4 (0.1) - Pearson Television 42.4 66.0 (36) ........................................................... Total* 52.5 110.9 (53) ........................................................... Operating cash flow 56.5 56.2 1 ........................................................... Operating margin 5% 11% (55)
*Excludes Pounds 100 million charge for improper accounting at Penguin USA. Penguin Penguin acquired Putnam Berkley, one of the leading US publishers of best- selling fiction, for Pounds 201.0 million in December 1996. The acquisition added Pounds 8.5 million in sales during December. In addition to the operating loss of Pounds 1.1 million, a charge of Pounds 4.4 million was made to cover the cost of restructuring in 1997. Putnam Berkley also added Pounds 12.2 million in operating cash flow in the period. 1996 sales of Pounds 380.2 million were up by 3% on a highly successful 1995. A strong list of titles on both sides of the Atlantic contributed to the success. 6 Operating and financial review [Graph appears here.] Operating profit was down 8% overall, although most of this was due to the absence of any contribution from Eden Toys, which was sold at the end of 1995, and the inclusion of the Putnam Berkley loss mentioned above. A charge of Pounds 100 million has been made in 1996 to cover the cost of improper accounting at Penguin USA (see page 2). Tussauds Group Sales rose 10%, to Pounds 104.6 million, compared with 1995. Admissions to the Group's attractions rose 3% to a record 12.3 million visitors. Madame Tussaud Scenerama in Amsterdam had a record year and saw admissions rise 13%, while in Spain, Port Aventura's second season produced a rise of 11% to over 3 million visits. Increases in visitor spending, notably at Alton Towers and Chessington World of Adventures, was the primary driver in 1996 producing record profits from the existing portfolio of locations. The new Alton Towers hotel, which opened in the spring of 1996, enjoyed significantly higher occupancy and average room rates than expected in its maiden year. The Group's management contract with, and 40% stake in, Port Aventura contributed with profits of over Pounds 3.1 million in 1996. Mindscape Mindscape's sales fell by 12% in 1996, to Pounds 50.3 million, as new management focused on a smaller number of more successful software products in an extremely difficult and competitive market. As foreshadowed at the Annual General Meeting of the Group in May 1996, the company reported an operating loss for the year of Pounds 45.5 million compared with a loss of Pounds 6.9 million in 1995. Pounds 24.0 million of this loss was attributable to the costs associated with restructuring, write-offs of obsolete titles and a change in the accounting treatment of development expenditure, leaving a loss of Pounds 21.5 million for the ongoing business. Pearson New Entertainment Sales at Pearson New Entertainment (PNE) grew sharply in 1996, up 26% to Pounds 63.6 million on 1995. Of this sales growth, 40% came from a number of small acquisitions, on which the division spent Pounds 13.8 million, and 60% from existing operations. Future Publishing, the UK's fifth largest magazine publisher, accounted for Pounds 53.7 million of sales. PNE as a whole moved into profit in 1996, with over 60% of profit improvement coming from existing operations, again the remainder coming from acquisitions. Pearson Television Sales of Pounds 204.3 million were up 45% on 1995. The international production business accounted for over 70% of sales revenues, benefiting from a full year's contribution from Grundy and the early impact of Alomo and Witzend acquired as part of SelecTV. Television distribution activities were boosted by ACI- also delivering its first full year's returns. Broadcasting operations in the UK and elsewhere continued to provide a valuable contribution, although results were mixed. [Graph appears here.] 7 Operating and financial review Operating profits for the television business increased by 37%, excluding Pearson's share of Channel 5 start-up costs of Pounds 5.8 million in 1996, and income from BSkyB. The Group has a 24% economic interest in Channel 5 and has decided to amortise its share of certain Channel 5 initial costs by the end of the 10 year licence period. The Group will equity account for its share of other profits and losses. As a result of this policy the charge to profits in 1996 was Pounds 5.8 million out of a total investment of Pounds 23.8 million. In February 1997 Pearson Television sold its 10% interest in Television Broadcasts Limited for Pounds 111.1 million, realising a profit of Pounds 6.3 million. Investment Banking
1996 1995 Change (Pounds in million) % ............................................... Attributable profit 40.8 39.9 2
Lazard Attributable profits amounted to Pounds 40.8 million following high levels of Corporate Finance activity in the UK together with good performances from Asset Management and Asset Trading. Sustained levels of Corporate Finance activity in New York, as well as growth in Corporate Trading in bonds, equities, high yields and emerging markets and strong Asset Management results, led to another good performance. Corporate expenses and other income Corporate expenses and other income at Pounds 14.5 million were Pounds 13.8 million lower than in 1995. This reflects two main factors. First, the increase in income from the sale of the balance of the Group's investment in Cedar Fair, the US theme park company, from Pounds 8.0 million in 1995 to Pounds 15.4 million in 1996. Second, the lower charge relating to the Shared Services initiative, down from Pounds 16.7 million in 1995 to Pounds 1.9 million in 1996. FINANCIAL REVIEW Exchange rates The Group earns a significant proportion of its profits in overseas currencies. The currencies which have the greatest impact on the Group through the translation of overseas profits into sterling are the US dollar and the Spanish peseta (see treasury management below for a discussion on the hedging of capital employed and transactional cash flows). The relevant exchange rates are as follows:
Pounds versus US$ Pounds versus peseta 1996 1995 1996 1995 ............................................................. Weighted average for operating profits 1.58 1.57 199.6 194.9 ............................................................. Year end rate 1.71 1.55 222.6 188.4
The strengthening of sterling towards the year end had a minimal impact on 1996 results, but if year end rates had prevailed throughout 1996, profit before tax would have been lower by an estimated Pounds 5 million. If the loss at Mindscape is excluded, profit before tax would have been lower by Pounds 10 million. 8 Operating and financial review Interest Net interest payable increased by Pounds 5.6 million to Pounds 29.5 million. In addition a Pounds 10.3 million premium was paid to redeem the Pounds 25 million (13.625%) Unsecured Loan Stock 2007 in April. The size of this premium reflected the entitlement of the holders of the Stock to receive a fixed rate of interest well in excess of current fixed rates for a further eleven years. Redeeming this Stock terminated the last remaining requirement for the Group to comply with a Trust Deed which had imposed limitations on borrowings that were inconsistent with (and potentially more restrictive than) all of the Group's other borrowing documents. The principal reason for the increase in net interest payable was a Pounds 132 million increase in average net debt to Pounds 430 million in 1996. This increase reflected the effect of acquisitions made during 1996 (principally the purchase of HarperCollins Educational in April for Pounds 369 million), as well as the effect of financing for a full year the Pounds 570 million of businesses and investments which were acquired during 1995. These were, however, substantially offset by the interest benefit for a full year of the Pounds 560 million proceeds of the September 1995 disposal of the Group's direct holding in BSkyB. The effects of changes in interest rates were comparatively small. Lower US dollar interest rates had a small favourable impact on interest payable, which was partly offset by the effect of lower sterling interest rates on the interest receivable from sterling net cash. The Group's policy is to maintain its annual consolidated net interest cover ratio at a level between 5 and 9 times. For the 1996 financial year this ratio, after deducting the Pounds 100 million charge for improper accounting at Penguin USA from operating profit, was 6.1 times. Taxation
1996 1995 ........................................................ % % UK tax rate 33.0 33.0 Effect of BSkyB/BSBH income (3.5) (3.8) Other items (0.7) (1.7) ........................................................ Tax rate reflected in adjusted earnings 28.8 27.5 Effect of profits/(losses) excluded from adjusted earnings 1.6 (2.1) ........................................................ Tax rate reflected in earnings 30.4 25.4
[Graph appears here.] The tax charge of Pounds 108.6 million represents an effective rate of 30.4% compared with 25.4% in 1995. The 1995 rate was reduced by the release of Pounds 8.8 million consortium relief to offset tax payable on BSBH income. The 1996 tax rate reflected in adjusted earnings has also been reduced by several one-off factors: the rate reflected in adjusted earnings has been reduced by Pounds 8.8 million of consortium relief now recognised in the profit and loss account following renegotiation with the other partners in BSBH; there is no tax payable on the profit of Pounds 231.3 million arising on the sale of Westminster Press; the Group has tax losses, [Graph appears here.] 9 Operating and financial review [PIE CHART APPEARS HERE] arising in the US, which have not been utilised or recognised in 1996 but are available to carry forward against taxable profits in future years. Accordingly the Group has decided not to recognise tax relief on the Pounds 100 million charge for improper accounting at Penguin USA and has also written off to profit deferred tax assets totalling Pounds 36.6 million. A comprehensive worldwide tax review was carried out during 1996 aimed at further developing tax strategy and tax planning opportunities. Minority interests Minority interests decreased from Pounds 11.3 million in 1995 to Pounds 7.7 million in 1996 due to the acquisition of an additional stake in Recoletos taking the Group's holding to 94.2%. Adjusted earnings and dividends Adjusted earnings per equity share excludes the profits and losses on the sale of fixed assets and businesses, the loan stock redemption premium, the Pounds 100 million charge for improper accounting at Penguin USA and the tax consequences of these items. The weighted average number of shares in issue has increased from 554.4 million in 1995 to 560.8 million in 1996 due to the issue of shares under Executive and Save as you Earn share option schemes and the issue of shares on the acquisition of the additional stake in Recoletos. Adjusted earnings increased from Pounds 159.6 million in 1995 to Pounds 171.5 million in 1996; adjusted earnings per share increased by 1.8 pence from 28.8p to 30.6 pence in 1996. An interim dividend of 6.9 pence per ordinary share was paid in November 1996. A final dividend of 11.1 pence per ordinary share is proposed giving a total dividend for the year of 18.0 pence, a 9% increase on 1995. Dividend cover decreased from 2.8 times in 1995 to 2.3 times in 1996 (1.7 times on adjusted earnings). Cash flow The table below summarises the Group's main cash flows and is in the format used by management to monitor Group cash flow. The main difference to the FRS1 cash flow presented on page 27 is that operating cash flow, the main measure used, is calculated after the deduction of capital expenditure.
1996 1995 (Pounds in million) ........................................................ Operating activities 291.2 236.4 Net movement in fixed assets (84.0) (69.8) Other 11.8 (20.1) ........................................................ Operating cash flow 219.0 146.5 Interest, taxation and dividends (213.3) (196.8) ........................................................ Funds from operations 5.7 (50.3) Acquisitions, disposals and non operating activities (409.2) 137.0 ........................................................ Net movement of funds (403.5) 86.7 Net debt at the start of year (63.4) (146.4) Exchange 36.5 (3.7) ........................................................ Net debt at the end of year (430.4) (63.4)
10 Operating and financial review [PIE CHART APPEARS HERE] Operating cash flow grew much more strongly than operating profit, as several of the factors that depressed profit performance had no bearing on the cash position. At Pounds 219.0 million, operating cash flow was almost 50% higher than in 1995 and represented around 80% of operating profit, after adjusting for the Penguin charge and income from associates. The increase in operating cash flow is due to a number of factors. 1996 saw both profit and cash generation increase at Addison Wesley Longman, helped by a Pounds 4.5 million operating cash inflow from the HarperCollins Educational acquisition. Overall, the Information Division improved cash collections and saw operating cash flow increase from Pounds 77.3 million to Pounds 122.0 million. Penguin benefited from the receipt of Pounds 12.2 million following the acquisition of Putnam Berkley in December. Capital expenditure reduced as the new hotel at Alton Towers became operational, but 1996 was absent the cash received in 1995 on the sale of Edinburgh Gate, the UK headquarters of Addison Wesley Longman, giving a net increase in the cash outflow relating to fixed assets. Dividends paid increased by Pounds 5.0 million reflecting both the larger number of shares in issue and the increase in the dividend amount per share. The cash outflow due to acquisitions, disposals and non operating activities reflects the purchases of HarperCollins Educational for cash of Pounds 369.2 million, Putnam Berkley for Pounds 200.9 million and Recoletos for Pounds 31.0 million, offset in part by the disposal of Westminster Press for net cash of Pounds 297.0 million. Treasury management Treasury policy The treasury activities of the Group are carried out in accordance with treasury policies which are approved by the board and implemented by the finance director. The treasury department is not operated as a profit centre and is subject to audit. A structure was put in place in 1996 whereby the finance director and a treasury committee of the board receive reports and review and comment upon the treasury policies of the Group. Borrowings The Group's policy is to manage the amount of its net debt (i.e. total borrowings less cash and liquid funds) and the level of interest cover in a manner which is consistent with the maintenance of its credit ratings at, or near, their current levels. The Group's current ratings from Standard & Poor's and Moody's are A and A2 respectively for long-term debt and A1 and P1 respectively for short-term debt. The Group's credit ratings for long-term debt were reduced from A+ and A1 respectively following the acquisition of Putnam Berkley in December 1996. At 31 December 1996, total borrowings amounted to Pounds 729 million, comprising Pounds 379 million of US dollar borrowings and Pounds 210 million of sterling 11 Operating and financial review [GRAPH APPEARS HERE] borrowings, with the remainder in a variety of other currencies. The Group uses foreign currency debt to hedge a proportion of the value of its overseas assets. The aim is to reduce fluctuations in shareholders' funds resulting from changes in foreign exchange rates. Net borrowings in a particular currency may be varied if there is some other element of risk for operational reasons, but the normal aim is to hedge around 20% of capital employed in each principal foreign currency. Long-term financing requirements are met through sterling and US dollar debt issues in the capital markets. A guideline is in place whereby between 25% and 75% (with a norm of 50%) of core borrowings should come from non-bank sources. During 1996 a $750 million medium term note ('MTN') programme was set up in the United States, under which a $250 million 10 year MTN was issued in September 1996. The proceeds from this issue, which was swapped from fixed to floating rates, were used to repay short-term commercial paper borrowings. The group aims to have a diversity of debt maturity dates to avoid a concentration of refinancing risk in any single period. The guideline is that the weighted average maturity of our core gross borrowings is between three and eight years. It currently stands at 7.2 years. Short-term funding requirements are met through committed or uncommitted bank facilities and through the US commercial paper programme. At 31 December 1996, committed bank facilities amounted to Pounds 487 million, of which Pounds 325 million had a maturity of over five years. The general guideline is that available undrawn committed bank facilities should be above Pounds 200 million. Cash At 31 December 1996, total cash and liquid funds amounted to Pounds 299 million, consisting mainly of sterling and US dollars. Funds which are temporarily surplus to business requirements are invested in a range of money market instruments, including AAA-rated asset-backed securities, with a view to maximising after-tax returns while preserving liquidity and managing counterparty risk. In order to ensure that the portfolio is appropriately diversified, limits for individual issuers and assets are regularly reviewed, having regard inter alia to published credit ratings, and these limits are subject to approval by the finance director. Interest rate management Pearson's interest rate exposure arises principally in relation to sterling and the US dollar. Interest rate exposure is managed within parameters agreed by the board, with the principal policy guideline being that the interest rate on at least one third of core sterling and US dollar borrowings should be fixed or capped for around the next five years. Some of this is achieved by borrowing on a fixed rate basis, but in addition 12 Operating and financial review the Group enters into interest rate swaps and forward rate agreements to modify the interest rate reset profile of its borrowing portfolio. At 31 December 1996, 43% of US dollar borrowings were fixed at a weighted average rate of 5.95% and 24% of sterling borrowings were fixed at a weighted average rate of 10.5%. In June 1997 the pro forma proportion of sterling borrowings on a fixed or capped basis will rise to 48%, taking into account the expiration of Pounds 50 million of sterling interest rate swap contracts at that date. In broad terms, a 1% rise in US dollar interest rates would increase the net interest charge by Pounds 2 million, while a 1% rise in sterling interest rates would increase the net interest charge by Pounds 1 million. Foreign exchange Foreign currency transactional cash flows are normally hedged on the basis of rolling forecasts for periods of up to twelve months, but unremitted profits are not hedged. Cross border trading flows and other recurring items, such as dividends, giving rise to transactional foreign exchange exposure in the UK amounted to the equivalent of approximately Pounds 84 million in 1996. Accounting policies and standards The accounting policies of the Group are shown on pages 29 and 30. These policies remain unchanged and have been applied consistently throughout the year. During the year FRS1 (Revised 1996) 'Cash Flow Statements' was published by the Accounting Standards Board. The new format of presentation of the cash flow statement contained within the revised Standard has been adopted in these financial statements. In addition, compliance with FRS8 'Related Party Disclosures' became mandatory during the year. Disclosure of related party transactions and balances is shown in note 28 to the Accounts. Share price and market capitalisation The share price ended the year at 749.5 pence, close to its high during the year of 760 pence and well above 1996's low of 601 pence. This represents an increase of 20% on the closing share price of 624 pence at the end of 1995 compared with an increase of nearly 12% in the FTSE 100 index and 25% in the FTSE Media index. Based on the year end share price of 749.5 pence the market capitalisation of the Group was Pounds 4,280 million. 13 REPORT OF THE DIRECTORS The directors have pleasure in presenting their report to shareholders, together with the financial statements for the year to 31 December 1996 on pages 25 to 57. The principal activities of the Group are carried out in three main sectors: information, education and entertainment. More details of these and other activities, the development of the Group and its subsidiaries and likely future developments are given in the Operating and Financial Review on pages 1 to 13 and on pages 4 to 22 of the Annual Report. Sales and profits of the different sectors and geographical markets are given on pages 31 and 32 of this report. RESULTS AND DIVIDENDS The profit for the financial year to 31 December 1996 was pound 240.5 million (1995: pound 261.0 million. The profit retained for the year was pound 137.8 million (1995: pound 169.2 million) and has been transferred to reserves. A final dividend of 11.1p per share is proposed for the year to 31 December 1996. This, together with the interim dividend already paid, makes a total for the year of 18.0 pence (1995: 16.5 pence). The final dividend will be paid on 6 June 1997 to shareholders on the register at the close of business on 11 April 1997, the record date. SIGNIFICANT ACQUISITIONS AND DISPOSALS During the year, Pearson acquired HarperCollins Educational Publishers and Putnam Berkley in the USA and SelecTV plc in the UK, of which the Alomo and Witzend production businesses have been retained. Pearson also increased its holding in Recoletos from 56.7% to 94.2%. Further disclosure of these transactions can be found in note 23 to the accounts and on pages 1 to 13 of this report. In December 1996, Pearson disposed of Westminster Press. TRANSACTIONS WITH RELATED PARTIES For transactions with related parties which are reportable under FRS8, including the increase in Pearson's holding in Recoletos, please refer to note 28 to the accounts. POST BALANCE SHEET EVENTS In February 1997 Pearson acquired a 50% stake in Business Day and Financial Mail in South Africa for a consideration of pound 11.5 million and sold its 10% stake in Television Broadcasts Ltd in Hong Kong for pound 111.1 million. In March Pearson agreed to sell its interests in the satellite and cable channels, UK Gold (20%) and UK Living (25%), to Flextech as part of joint venture agreements between Flextech and the BBC. The sale of these interests involves the payment by Flextech, between now and December 1998, of pound 7.8 million representing the repayment of UK Living loan stock, and Pearson Television receiving 8.8 million Flextech ordinary shares - a total consideration of approximately pound 76 million based on a Flextech share price of 772 pence. Following completion of the transaction, Pearson will own 5.6% of the enlarged share capital of Flextech. Further details are given in note 31. CORPORATE GOVERNANCE The board has reviewed the Company's procedures in the light of the Code of Best Practice published by the Committee on Financial Aspects of Corporate Governance and, in the opinion of the directors, the Company fully complies with it and has done so throughout the year. INTERNAL FINANCIAL CONTROL - the board of directors has overall responsibility for the Group's system of internal financial control which it exercises through an organisational structure with clearly defined levels of responsibility and authority and appropriate reporting procedures. This structure includes an audit committee, comprising three non-executive directors, which, with the finance director, has reviewed the effectiveness of the internal financial control environment of the Group. The audit committee meets regularly and considers, inter alia, reports from internal and external auditors covering such matters. On 13 February 1997 we announced the discovery of the breakdown of certain internal controls at Penguin USA, which allowed the unauthorised practice of offering discounts to certain customers in exchange for early payment of invoices. Swift action was taken to stop this irregular practice and to determine how and why the accounting irregularities, which are described in greater detail in the Finance Director'ss Review on pages 26 to 28 of the Annual Report, were not detected. A thorough review of the Group'ss control procedures is currently being undertaken in order to ensure, as far as possible, that such an event cannot recur. On the evidence presented so far, both the directors and the auditors believe that the systems and controls in the Group are generally of high quality. However, it must be recognised that no internal control system can provide absolute assurance against misstatement or loss. The following are the main elements of the Group's control systems: FINANCIAL REPORTING - there is a comprehensive budgeting system with an annual budget approved by the directors. Monthly trading results and indebtedness are reported against the corresponding figures for the budget and the previous year with corrective action taken by the directors as appropriate. More detailed financial information, including balance sheets and cash flow statements, is provided quarterly. 14 TREASURY MANAGEMENT - the treasury department operates within board approved policies. Major transactions are authorised outside the department at the requisite level and there is an appropriate segregation of duties. Frequent reports are made to the group finance director and quarterly summaries are prepared for the board. RISK MANAGEMENT - the identification of major business risks is carried out in conjunction with operating management and steps are taken to mitigate or eliminate these where possible. In addition the Group provides insurance cover either through its captive insurance subsidiary or externally depending on the scale of the risk in question. OPERATING COMPANY SYSTEMS - each operating company maintains financial controls and procedures appropriate to its own business environment and carries out local treasury activities, in both cases conforming to overall standards and guidelines. SELF ASSESSMENT - each year relevant senior executives and chief executives of operating units are required to confirm in writing compliance with appropriate standards of internal financial control in their respective areas. INTERNAL AUDIT - the Group has a centralised internal audit department with operations located both in the UK and the US, which reviews systems and procedures in all major operating companies and reports regularly to the audit committee. GOING CONCERN - having reviewed the Group's liquid resources and borrowing facilities and the 1997 and 1998 cash flow forecasts contained in the Group budget for 1997, the directors believe that the Group has adequate resources to continue as a going concern for the foreseeable future. For this reason, the financial statements have, as usual, been prepared on a going concern basis. AUDITORS - the report of the auditors on corporate governance matters is set out on page 24. DIRECTORS The directors are shown in the Report of the Remuneration Committee on pages 17 to 23 together with details of their interests in ordinary shares and options of Pearson plc. Six directors will retire by rotation at the Annual General Meeting. Of these, David Veit, Reuben Mark and Gill Lewis, being eligible, will offer themselves for re-election for a further three years. In addition, Lord Blakenham, Frank Barlow and Mark Burrell retire by rotation but will not seek re-election. Sir Simon Hornby will also retire at the end of the AGM. Marjorie Scardino, who was appointed to the board on 1 January 1997, retires from office in accordance with article 77 of the Company's articles of association and, being eligible, offers herself for re-appointment. For details of directors' service contracts, see page 18. No director was materially interested in any contract of significance to the Company's business. NOMINATION PROCESS FOR NON-EXECUTIVE DIRECTORS The nomination and appointment of non-executive directors is included in the items reserved for the full board. INSURANCE OF OFFICERS OF THE COMPANY During the year to 31 December 1996 the Company continued to provide liability insurance for its officers. SUPPLIER PAYMENT POLICY The Company aims to pay all of its suppliers within a reasonable period of their invoices being received and in any case within the supplier's own standard payment period. Operating companies are responsible for agreeing the terms and conditions under which business transactions with their suppliers are conducted. EMPLOYMENT The Group employs 20,745 people, of whom 10,851 are employed in the UK. The employment policies of the Group embody the principles of equal opportunity and are designed to meet the needs of operating companies and comply with local regulations in their areas of operation. This means that the sole criterion for selection and promotion is the individual's suitability for the position of employment offered, including consideration of disabled persons for employment, training, career development and promotion on the basis of their aptitudes and abilities. TRAINING AND DEVELOPMENT - the Group is committed to the continuous improvement of employee performance by developing skills and expertise through training and development. Each operating company has developed its own in-house programmes and courses to meet the needs of its employees and its business. Pearson also encourages employees to develop their careers by taking up opportunities in other parts of the Group. ALL-EMPLOYEE SHARE OPTION SCHEME - the Pearson plc `Save As You Earn' Share Option Scheme, introduced for UK employees in 1982 and renewed in 1992, attracts a high level of interest and participation. The most recent grant was taken up by over 1,500 employees, and a cumulative total of more than 23.8 million 15 REPORT OF THE DIRECTORS options over ordinary shares has been granted, of which about 6.1 million were outstanding at the end of the year. COMMUNICATIONS - communications with employees continue to be developed through the distribution of the Pearson magazine, the Chairman's Report to Employees, the introduction of an intranet and the Report to Members of the UK Pension Plan. The various operating companies also have their own channels such as briefing groups, videos, magazines and newsletters. EUROPEAN EMPLOYEE FORUM - in 1996, Pearson established a European Employee Forum with elected representatives for each of the Pearson Group companies based in Europe. The Forum is intended to provide an arena for the exchange of relevant and appropriate information and the establishment of a constructive dialogue between management and employees on transnational issues which affect them. CONTRIBUTIONS FOR CHARITABLE AND POLITICAL PURPOSES In 1996, charitable donations in the UK amounted to pound 568,000 (1995: pound 792,000) and overseas to pound 240,000 (1995: pound 258,000). Political contributions of pound 25,000 were made to each of the Conservative Party and the Labour Party. A contribution of pound 10,000 was made to the Centre for Policy Studies. For further information, see page 23 of the Annual Report. SHARE CAPITAL Details of share issues are given in note 21. At the Extraordinary General Meeting held on 3 May 1996, the Company was authorised, subject to certain conditions, to acquire up to 55.7 million of its ordinary shares by market purchase. This authority expires on the date of the forthcoming Annual General Meeting. Although circumstances have not merited using it and there are no plans at present to do so, shareholders are being asked to renew this authority. At 17 March 1997, beneficial interests amounting to 3% or more of the issued ordinary share capital of the Company notified to the Company comprised:
No. of Shares % Companies associated with Lazard Freres et Cie., Paris 48,129,727 8.42
SCRIP DIVIDEND ALTERNATIVE The Company operates a scrip dividend scheme under which a total of 868,318 new ordinary shares were issued in respect of the last two dividends in response to elections for shares instead of cash, made by around 5,000 shareholders on each occasion, saving approximately pound 5.7 million in cash and deferring approximately pound 1.4 million of corporation tax. Details of the scrip dividend alternative for the final dividend for 1996 will be sent out to shareholders on 28 April 1997. CLOSE COMPANY STATUS The Company is not a close company within the terms of the Income and Corporation Taxes Act 1988. CAPITAL EXPENDITURE The analysis of capital expenditure and details of capital commitments are shown in note 10. ANNUAL GENERAL MEETING The notice convening the Annual General Meeting to be held at 12 noon on Friday, 2 May 1997 is contained in the enclosed circular. REGISTERED AUDITORS In accordance with sections 384 and 390A of the Companies Act 1985 (the Act) resolutions proposing the re-appointment of Price Waterhouse as auditors to the Company, at a level of remuneration to be agreed by the directors, will be put to the shareholders at the Annual General Meeting, special notice having been given pursuant to sections 379 and 391A of the Act. STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group as at the end of the year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to select suitable accounting policies and apply them consistently and make judgements and estimates that are reasonable and prudent. The directors must also state whether applicable accounting standards have been followed and disclose and explain any material departures in the financial statements which must be prepared on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for the maintenance of adequate accounting records in compliance with the Companies Act 1985, for safeguarding the assets of the Group, and for preventing and detecting fraud and other irregularities. ANETTE LAWLESS SECRETARY 17 March 1997 16 REPORT OF THE REMUNERATION COMMITTEE The committee, which is composed of non-executive directors, is chaired by Sir Simon Hornby. Other members in 1996 were Dennis Stevenson, Gill Lewis and Reuben Mark. In view of his forthcoming appointment as chairman, Dennis Stevenson ceased to be a member of the committee in December 1996. The terms of reference of the committee are to decide the remuneration and benefits packages of the executive directors and approve the recommended remuneration and benefits packages of the chief executives of the main operating subsidiaries. The committee determines the annual guidelines for executive long- term incentive plans and recommends the awards to be made under these plans. The committee also recommends the chairman's remuneration to the board for its decision. The committee confirms that the Company has complied throughout the year with Section A and that it has taken into account Section B annexed to the Listing Rules of the Stock Exchange. REMUNERATION POLICY FOR EXECUTIVE DIRECTORS The committee's policy is designed to attract, retain and motivate high calibre senior executives through pay and other arrangements which are competitive and represent best practice, while also relating reward to performance and aligning the interests of directors and senior management with the interests of shareholders. The main components are base salary, an annual cash bonus plan, long-term incentives and pension benefits. In addition, the Company provides company car and health care benefits. The Company also provides housing for Marjorie Scardino, who is a US national. Further details of Marjorie Scardino's remuneration can be found below table 2 on page 19. BASE SALARY - the committee aims to set base salaries in the region of the upper quartile of the range paid to directors and executives in similar positions in comparable companies, in return for above-average performance. This policy was established five years ago when annual bonuses, which had previously been unlimited, were capped. The committee believes salaries should reflect the experience, responsibilities, effectiveness and market value of the individual executives concerned. ANNUAL BONUS - under the annual bonus plan, bonuses of up to 50% of annual base salary can be earned by reference to performance against financial targets determined by the committee. The committee may also award individual discretionary bonuses. Annual bonuses do not form part of pensionable earnings. In 1996, the bonus target for directors was related to the Company's adjusted earnings per share and operating cash flow, with the exception of David Bell and Greg Dyke, part of whose targets were related to the performance of their individual divisions. LONG-TERM INCENTIVES The committee considers that long-term incentive plans align the personal interests of directors and executives with those of shareholders. The operation of long-term incentive plans for executives is subject to on- going review by the committee taking into account legislative and regulatory developments, particularly with regard to the establishment of performance conditions and evolving best practice. SHARE OPTION SCHEMES - the Company operates a UK Inland Revenue approved and two United States executive share option schemes. The UK scheme was amended in 1996 to allow unapproved options to be granted in addition to options granted within the new Inland Revenue limit of pound 30,000, but within the normal limit of four times earnings authorised by shareholders. Executive options are granted to eligible executives under the 1988 Executive Share Option Scheme and the 1992 United States Executive Share Option Scheme based on guidelines established by the committee on the total number of options which may be granted, the frequency of awards and the progression towards these maxima. A `Save As You Earn' share option scheme is also open to all eligible employees in the UK. INCENTIVE SHARE PLAN - the incentive share plan (the Plan), first introduced on the recommendation of the committee in 1993, is designed to reward executives of the Group in such a way that their total remuneration reflects the relative performance of the Company in terms of the total return received by shareholders over the medium to longer term. Under the Plan, participants are conditionally awarded a certain number of Pearson shares which are held in an employee share trust for a specified period, currently three years. At the end of this period, the shares, together with the dividends on these shares, which are taken in the form of scrip and rolled up, can be released depending upon the extent to which previously determined performance conditions, both absolute and in relation to the FTSE 100 index, are met. For existing awards the maximum release of shares is made if the total return to Pearson shareholders exceeds the equivalent average FTSE 100 figure by 25% over the period. The performance criteria are reviewed from time to time to ensure that they remain appropriate. Details of directors' awards under the Plan are set out in table 6 on page 23 of this report. To the extent that the Company has provided funds to the trust for the purchase of shares, provision has been made in the accounts for the costs associated with the Plan. 17 REPORT OF THE REMUNERATION COMMITTEE SERVICE CONTRACTS All executive directors have agreements which can be terminated by the Company on 12 months notice, although the earliest expiry date of Marjorie Scardino's employment is 31 December 1999. The committee considered that this initial fixed notice period was appropriate and necessary in order to attract her to the Company as its chief executive. In the event of early termination by the Company without cause of the service agreements of those directors appointed since January 1996, the contracts provide for liquidated damages to be payable, equivalent to 12 months base salary, benefits and a proportion of annual bonus. In the case of Marjorie Scardino, the amount of liquidated damages payable is equivalent to 15 months and 18 months base salary, benefits and a proportion of bonus should her employment be terminated without cause in the first or second year respectively. The committee feels that these provisions for liquidated damages are adequate, but not excessive, compensation for loss of office. NON-EXECUTIVE DIRECTORS' REMUNERATION Fees for non-executive directors' duties are determined by the full board with regard to market practice and within the restrictions contained in the articles of association. Fees are reviewed annually with the help of outside advice. Non- executive directors receive no other pay or benefits (other than re-imbursement for expenses incurred in connection with their directorship of the Company) and do not participate in the Company's share option schemes or incentive share plan. Since January 1995, non-executive directors have received an annual fee of pound 25,000 each. One overseas-based director is paid a supplement of pound 7,000. PENSION BENEFITS Michael Blakenham, Frank Barlow, Mark Burrell and James Joll are members of the non-contributory Pearson Section of the Pearson Group Pension Plan, which is now closed to new membership. They are entitled to pensions of two thirds of final base salary at the normal retirement age of 62 and like all other plan members may retire with company consent at age 60 without any early retirement reduction. In 1988 (on the formation of the Pearson Group Pension Plan) all former members of the S. Pearson & Son Pension Scheme, including Michael Blakenham, James Joll and Mark Burrell, received pension enhancements equivalent to 40% of accrued service to 1 August 1988. The combined pension benefits are within Inland Revenue limits. The Company contributed a total of Pound 97,965 in matching the additional voluntary contributions (AVCs) made by the above directors. The pensions of James Joll and Frank Barlow are augmented with effect from their retirement dates of 31 December 1996 (James Joll) and 2 May 1997 (Frank Barlow). The costs of these augmentations are pound 250,000 for James Joll and pound 253,333 for Frank Barlow. David Veit's pension arrangements are based in the United States and $239,967 was allocated in respect of his pension plan in 1996. David Bell, John Makinson and Greg Dyke are members of the Final Pay Section of the Pearson Group Pension Plan, which has a member contribution rate of 5% of pensionable salary. David Bell is eligible for a pension from the plan of two thirds of final base salary at normal retirement date, due to his transferred service from the Financial Times. Both John Makinson and Greg Dyke are subject to the pensions earnings cap introduced by the Finance Act 1989. It is anticipated that John Makinson will receive a pension of two thirds of capped salary at normal retirement date (inclusive of benefits transferred from his previous pension scheme). John Makinson and Greg Dyke are entitled to supplements of 31.1% and 50% of annual base salary respectively to compensate them for pension benefits which cannot be provided from the plan because of the pensions cap regulations. All the executive directors are also eligible for dependants' pensions and a lump sum payment on death in service. Details of directors' pension arrangements are set out in table 3 on page 20 of this report.
Table 1 - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 pound pound pound pound pound pound pound DIRECTORS EMOLUMENTS: 000's 000's 000's 000's 000's 000's 000's - ----------------------------------------------------------------------------------------------------------------------------------- Base salaries 1,996 1,383 1,270 1,186 1,057 1,007 953 Bonus 173 - 635 593 55 60 - Three year incentive share plan - 1,687 - - - - - Other emoluments 945 287 353 392 292 251 224 Fees to non-executive directors 210 224 212 219 141 124 122 TOTAL 3,324 3,581 2,470 2,390 1,545 1,442 1,299 - ------------------------------------------------------------------------------------------------------------------------------------
Other emoluments comprised any pension contributions and augmentations, compensation for early termination of contract and company car and health care benefits. The shares awarded in 1993 under the Company's three year incentive share plan were released on 8 August 1996. The share price on 8 August was lower than the price reported in the 1995 Directors' Report and Accounts. However, this decrease was not deemed to be material. 18 Table 2 REMUNERATION OF THE DIRECTORS: Excluding contributions to approved pension funds and compensation for early termination of contract, directors' remuneration was as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 3-year 1996 1995 3-year 1995 Salary/fees Bonus Other ISP Total Salary/fees Bonus Other ISP Total* pound pound pound pound pound pound pound pound pound pound NAME: 000's 000's 000's 000's 000's 000's 000's 000's 000's 000's - ----------------------------------------------------------------------------------------------------------------------------------- Executive directors: Michael Blakenham 315 - 38 - 353 300 - 37 413 750 Frank Barlow 380 - 41 - 421 330 - 40 413 783 David Bell+ 179 12 10 - 201 - - - - - Mark Burrell 207 - 42 - 249 200 - 42 287 529 Greg Dyke+ 183 100 108 - 391 - - - - - James Joll 250 - 38 - 288 230 - 37 287 554 John Makinson+ 179 61 16 - 256 - - - - - David Veit 303 - 10 - 313 323 - 11 287 621 Non-executive directors: Michel David-Weill 25 - - - 25 25 - - - 25 Pehr Gyllenhammar 25 - - - 25 30 - - - 30 Jean-Claude Haas+ 11 - - - 11 32 - - - 32 Sir Simon Hornby 25 - - - 25 25 25 - - 25 Gill Lewis 25 - - - 25 30 - - - 30 Reuben Mark 32 - - - 32 32 - - - 32 Vernon Sankey 25 - - - 25 25 - - - 25 Dennis Stevenson 25 - - - 25 25 - - - 25 David Verey+ 17 - - - 17 - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
*The incentive share plan release relating to the three-year period 1993-1995 is included in the total 1995 remuneration figure. +David Bell, Greg Dyke and John Makinson were appointed to the board on 15 March 1996. David Verey became a non-executive director on 3 May 1996. Jean-Claude Haas retired from the board on 3 May 1996. In the case of David Bell, Greg Dyke and John Makinson, the emoluments shown relate to the ten-month period from March to December 1996, with the exception of bonus, which relates to the full year. A sum of pound 250,000 was paid to James Joll as compensation for early termination of his contract, which had a three-year notice period. In addition his pension was augmented with effect from his retirement date at a capital cost of pound 250,000. Marjorie Scardino joined the board and became chief executive on 1 January 1997, at a base salary of pound 396,500, although for pension and bonus purposes, her salary is deemed to be pound 425,000 (so as to include an element of the housing benefit referred to below). She received a joining bonus of pound 130,000 in consideration of the loss of potential benefits with her previous employer. She participates in the annual bonus plan and the incentive share plan, under which she will be conditionally awarded shares to the value of pound 300,000 in 1997, pound 200,000 in 1998 and pound 200,000 in 1999. Housing is provided at an initial annual cost to the Company of pound 60,500 and she receives a pension supplement of 25% of salary to provide for benefits in excess of the pensions earnings cap. Dennis Stevenson will receive annual fees of pound 240,000 on becoming chairman on 2 May 1997. He will also participate in the incentive share plan, under which he will be conditionally awarded shares to the value of pound 300,000 upon appointment and pound 200,000 one year later, each vesting over five years. Dennis Stevenson's fees for 1996 were paid to SRU Limited. Frank Barlow was the highest paid director in 1996. His total remuneration, including pension contributions, amounted to pound 421,346. The chairman's total remuneration, including pension contributions, amounted to pound 352,979. 19 REPORT OF THE REMUNERATION COMMITTEE
Table 3 - ------------------------------------------------------------------------------------------------------------------------------------ Increase in Accrued pension accrued pension Years of 31.12.95* 31.12.96 over the period pensionable pound pound pound DIRECTORS' PENSIONS: service 000's pa 000's pa 000's pa - ------------------------------------------------------------------------------------------------------------------------------------ Michael Blakenham 31 231.1 248.7 17.6 Frank Barlow 29 216.9 250.1 33.2 David Bell 24 91.6 95.6 4.0 Mark Burrell 34 157.4 166.3 8.9 Greg Dyke 2 1.2 2.3 1.1 James Joll 17 185.0 205.6 20.6 John Makinson 3 5.7 7.1 1.4 David Veit 35 116.8 128.2 11.4 - ------------------------------------------------------------------------------------------------------------------------------------
*Or date of director's appointment, if later. The accrued pension figures in the above table relate only to the normal entitlements (excluding the effect of augmentations and supplements paid to `capped' directors) from the Pearson Group Pension Plan in respect of each of the directors other than David Veit, whose pension arrangements are based in the United States. For further information relating to pensions generally, please refer to page 18 of this report. 20
Table 4 - ------------------------------------------------------------------------------------------------------------------------------------ Maximum number of shares in lieu of Options Incentive share plan+- adjustment on INTERESTS OF Ordinary shares Ordinary shares Ordinary shares Royal Doulton DIRECTORS WERE: 31.12.96* 1.1.96** 31.12.96* 1.1.96** 31.12.96* 1.1.96** Demerger - ------------------------------------------------------------------------------------------------------------------------------------ Michael Blakenham 138,214 101,580 417,454 417,454 31,926 72,919 12,908 (non beneficial) 129,040 129,040 - - - - - Frank Barlow 38,750 6,939 419,794 419,794 25,107 72,919 11,235 David Bell 9,303 8,348 111,156 85,469 6,790 6,620 628 Mark Burrell 791,674 1,032,504 283,339 282,799 15,222 50,276 9,840 (non beneficial) 65,040 65,040 - - - - - Michel David-Weill+ 48,129,727 48,129,727 - - - - - Greg Dyke - - 106,900 73,300 6,790 6,620 - Pehr Gyllenhammar - - - - - - - Jean-Claude Haas 29,537 29,537 - - - - - Sir Simon Hornby 4,000 4,000 - - - - - James Joll 25,494 2,093 155,846 155,847 9,160 50,276 4,541 Gill Lewis - - - - - - - John Makinson 1,000 - 103,784 68,000 - - - Reuben Mark 7,600 7,600 - - - - - Vernon Sankey - - - - - - - Dennis Stevenson 38,000 8,000 - - - - - David Veit 253,602 107,712 245,380 348,869 31,892 50,276 - David Verey - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
+Mr David-Weill's interests include 48,088,523 ordinary shares owned by companies associated with Lazard Freres et Cie., Paris. *Or date of retirement, if earlier. **Or date of appointment, if later. ++A full explanation of this plan is given on page 17. The number of shares shown represents the maximum number of shares, plus accumulated scrip dividend shares, comprised in the original award which may be transferred to the individual concerned. Executive directors of the Company, as possible beneficiaries, are also deemed to be interested in the Pearson Employee Share Trust, the trustee of which held 149,933 Pearson ordinary shares of 25 pence each at 31 December 1996 and 148,395 ordinary shares at 17 March 1997, the latest practicable date prior to the printing of this report. Marjorie Scardino was appointed to the board with effect from 1 January 1997, at which date she had no interests in Pearson securities. On 16 January 1997, she acquired 10,000 ordinary shares of 25 pence each in the Company. Also on 16 January 1997, John Makinson acquired a further 2,000 ordinary shares of 25 pence each, taking his total holding to 3,000 shares. 21 REPORT OF THE REMUNERATION COMMITTEE
Table 5 - ------------------------------------------------------------------------------------------------------------------- Options Exercise Market price* OPTIONS MOVEMENTS IN DIRECTORS' Date of held price Options Options on day of HELD AT INTERESTS IN SHARE OPTIONS Grant at 1.1.96 (pence)+ granted exercised exercise 31.12.96 - ------------------------------------------------------------------------------------------------------------------- Michael Blakenham 21.04.89 150,000 353 - - - 150,000 UK Executive 24.04.90 220,000 329 - - - 220,000 06.05.94 4,300 635 - - - 4,300 20.04.95 39,400 545 - - - 39,400 SAYE 04.10.91 3,754 299 - - - 3,754 - ------------------------------------------------------------------------------------------------------------------- 417 454 417,454 - ------------------------------------------------------------------------------------------------------------------- Frank Barlow UK Executive 21.04.89 100,000 353 - - - 100,000 24.04.90 220,000 329 - - - 220,000 06.05.94 63,900 635 - - - 63,900 20.04.95 29,800 545 - - - 29,800 SAYE 04.10.91 3,754 299 - - - 3,754 08.10.92 1,549 242 - - - 1,549 19.05.95 791 436 - - - 791 - ------------------------------------------------------------------------------------------------------------------- 419,794 419,794 - ------------------------------------------------------------------------------------------------------------------- David Bell 06.05.94 50,000 635 - - - 50,000 UK Executive 24.04.95 29,300 545 - - - 29,300 08.08.96 - 654 26,500 - - 26,500 SAYE 12.10.90 1,409 265 - 1,409 728 - 04.10.91 1,250 299 - - - 1,250 08.10.92 2,324 242 - - - 2,324 19.05.95 1,186 436 - - - 1,186 23.05.96 - 578 596 - - 596 - ------------------------------------------------------------------------------------------------------------------- 85,469 111,156 - ------------------------------------------------------------------------------------------------------------------- Mark Burrell 21.04.89 100,000 353 - - - 100,000 UK Executive 24.04.90 180,000 329 - - - 180,000 SAYE 04.10.91 1,250 299 - 1,250 711 - 08.10.92 1,549 242 - - - 1,549 23.05.96 - 578 1,790 - - 1,790 - ------------------------------------------------------------------------------------------------------------------- 282,799 283,339 - ------------------------------------------------------------------------------------------------------------------- Greg Dyke 20.04.95 73,300 545 - - - 73,300 UK Executive 08.08.96 - 654 33,600 - - 33,600 - ------------------------------------------------------------------------------------------------------------------- 73,300 106,900 - ------------------------------------------------------------------------------------------------------------------- James Joll 24.04.90 120,000 329 - 1 717 119,999 UK Executive 06.05.94 2,400 635 - - - 2,400 20.04.95 25,700 545 - - - 25,700 SAYE 08.10.92 7,747 242 - - - 7,747 - ------------------------------------------------------------------------------------------------------------------- 155,847 155,846 - -------------------------------------------------------------------------------------------------------------------
22
Table 5 continued - ------------------------------------------------------------------------------------------------------------------- Options Exercise Market price* OPTIONS MOVEMENTS IN DIRECTORS' Date of held price Options Options on day of HELD AT INTERESTS IN SHARE OPTIONS Grant at 1.1.96 (pence)+ granted exercised exercise 31.12.96 - ------------------------------------------------------------------------------------------------------------------- John Makinson 06.05.94 50,000 635 - - - 50,000 UK Executive 20.04.95 18,000 545 - - - 18,000 08.08.96 - 654 32,800 - - 32,800 SAYE 23.05.96 - 578 2,984 - - 2,984 - ------------------------------------------------------------------------------------------------------------------- 68,000 103,784 - ------------------------------------------------------------------------------------------------------------------- David Veit 21.04.89 103,489 341 - 103,489 661 - US Executive 24.04.90 103,489 317 - - - 103,489 11.05.90 82,791 334 - - - 82,791 20.04.95 59,100 545 - - - 59,100 - ------------------------------------------------------------------------------------------------------------------- 348,869 245,380 - -------------------------------------------------------------------------------------------------------------------
+The exercise prices have been rounded down to the nearest whole penny for ease of reference. *Mid-market quotation at close of business on the date of exercise, rounded down to the nearest whole penny. No options lapsed during the year. The mid-market price of the shares at 31 December 1996 was 749p and the range during 1996 was 601p to 760p. Outstanding UK executive options become exercisable on the third anniversary of the grant and lapse if they remain unexercised after the tenth. Outstanding US executive options granted before May 1990 became exercisable on the third anniversary of the grant and lapse if they remain unexercised after the seventh. Options granted from May 1990 onwards become exercisable on the third anniversary of the grant and lapse if they remain unexercised after the tenth. SAYE options become exercisable on the fifth or seventh anniversary of the grant and lapse if not exercised within six months of that anniversary. In all the above cases, special rules apply if a director ceases to be employed by the Company.
Table 6 - ------------------------------------------------------------------------------------------------------------------- Maximum conditional MOVEMENTS IN No. of awards in No. of Market NO. OF DIRECTORS' INTERESTS shares 1996 including shares No. of price on SHARES UNDER THE INCENTIVE outstanding scrip dividend vested and shares date of OUTSTANDING SHARE PLAN at 1.1.96* on Plan shares+ released lapsed release AT 31.12.96 - ------------------------------------------------------------------------------------------------------------------- Michael Blakenham 72,919 19,139 60,132 - 648p 31,926 Frank Barlow 72,919 12,320 60,132 - 648p 25,107 David Bell 6,620 170 - - - 6,790 Mark Burrell 50,276 6,705 41,759 - 648p 15,222 Greg Dyke 6,620 170 - - - 6,790 James Joll 50,276 643 41,759 - 648p 9,160 John Makinson - - - - - - David Veit 50,276 23,375 41,759 - 648p 31,892 - -------------------------------------------------------------------------------------------------------------------
*Or the date of appointment, if later. +The award as stated is the maximum number of shares which may vest, subject to various performance conditions as described on page 17 being fulfilled. 23 REPORT OF THE AUDITORS ON CORPORATE GOVERNANCE MATTERS TO THE DIRECTORS OF PEARSON PLC In addition to our audit of the financial statements we have reviewed your statements in the Directors' Report on pages 14 and 15 concerning the Group's compliance with the paragraphs of the Cadbury Code of Best Practice specified for our review by the London Stock Exchange and the adoption of the going concern basis in preparing the financial statements. The objective of our review is to draw attention to non-compliance with Listing Rules 12.43(j) and 12.43(v), if not otherwise disclosed. BASIS OF OPINION We carried out our review having regard to guidance issued by the Auditing Practices Board. That guidance does not require us to perform the additional work necessary to, and we do not, express any opinion on the effectiveness of either the Group's system of internal financial control or corporate governance procedures nor on the ability of the Group to continue in operational existence. OPINION In our opinion, your statements on internal financial control and on going concern on pages 14 and 15 have provided the disclosures required by the Listing Rules referred to above and are consistent with the information which came to our attention as a result of our audit work on the financial statements. In our opinion, based on enquiry of certain directors and officers of the Company and examination of relevant documents, your statement on page 14 appropriately reflects the Group's compliance with the other aspects of the Code specified for our review by Listing Rule 12.43(j). PRICE WATERHOUSE Chartered Accountants London, 17 March 1997 REPORT OF THE AUDITORS TO THE MEMBERS OF PEARSON PLC We have audited the financial statements on pages 25 to 57 (including the additional disclosures on pages 17 to 23 relating to the remuneration of the directors of Pearson plc specified for our review by the London Stock Exchange) which have been prepared under the historical cost convention and the accounting policies set out on pages 29 and 30. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 16, the Company's directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 December 1996 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PRICE WATERHOUSE Chartered Accountants and Registered Auditors London, 17 March 1997 24 Financial statements Consolidated Profit and Loss Account for the year ended 31 December 1996 - ------------------------------------------------------------------------------------------------------------------------------------
________________________________ 1996 ______________ ________________________ 1995 ________________ OPERATING OTHER Operating Other ACTIVITIES ITEMS TOTAL activities items Total Notes POUNDS MILLION POUNDS MILLION POUNDS MILLION Pounds million Pounds million Pounds million - ------------------------------------------------------------------------------------------------------------------------------------ SALES Continuing operations 1,845.9 -- 1,845.9 1,687.1 -- 1,687.1 Acquisitions 203.0 -- 203.0 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 2,048.9 -- 2,048.9 1,687.1 -- 1,687.1 Discontinued operations 137.1 -- 137.1 143.3 -- 143.3 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SALES 2 2,186.0 -- 2,186.0 1,830.4 -- 1,830.4 Cost of sales 3 (1,064.1) -- (1,064.1) (939.7) -- (939.7) - ------------------------------------------------------------------------------------------------------------------------------------ GROSS PROFIT 1,121.9 -- 1,121.9 890.7 -- 890.7 Net operating expenses - normal 3 (853.3) -- (853.3) (627.7) -- (627.7) Net operating expenses - exceptional 3 (40.4) (100.0) (140.4) (46.7) -- (46.7) Net income from partnerships and associated undertakings 11 53.1 -- 53.1 43.3 -- 43.3 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING PROFIT Continuing operations 219.9 (100.0) 119.9 237.6 -- 237.6 Acquisitions 26.1 -- 26.1 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 246.0 (100.0) 146.0 237.6 -- 237.6 Discontinued operations 35.3 -- 35.3 22.0 -- 22.0 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING PROFIT 2 281.3 (100.0) 181.3 259.6 -- 259.6 Continuing operations: Profit/(loss) on sale of fixed assets 4 -- (14.1) (14.1) -- 123.4 123.4 Profit/(loss) on sale of businesses 5 -- (1.9) (1.9) -- 6.0 6.0 Discontinued operations: Profit on sale of Westminster Press 5 -- 231.3 231.3 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT BEFORE INTEREST 281.3 115.3 396.6 259.6 129.4 389.0 NET INTEREST PAYABLE 6 (29.5) -- (29.5) (23.9) -- (23.9) Loan stock redemption premium 6 -- (10.3) (10.3) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT BEFORE TAXATION 251.8 105.0 356.8 235.7 129.4 365.1 Taxation 7 (72.6) (36.0) (108.6) (64.8) (28.0) (92.8) - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT AFTER TAXATION 179.2 69.0 248.2 170.9 101.4 272.3 Equity minority interests (7.7) -- (7.7) (11.3) -- (11.3) - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT FOR THE FINANCIAL YEAR 171.5 69.0 240.5 159.6 101.4 261.0 DIVIDENDS ON EQUITY SHARES 8 (102.7) -- (102.7) (91.8) -- (91.8) - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT RETAINED 22 68.8 69.0 137.8 67.8 101.4 169.2 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED EARNINGS/ TOTAL EARNINGS PER EQUITY SHARE 30.6 pence 12.3 pence 42.9 pence 28.8 pence 18.3 pence 47.1 pence - ------------------------------------------------------------------------------------------------------------------------------------ DIVIDENDS PER EQUITY SHARE 18.0 pence -- 18.0 pence 16.5 pence -- 16.5 pence - ------------------------------------------------------------------------------------------------------------------------------------ Average number of shares (millions) 560.8 560.8 560.8 554.4 554.4 554.4 - ------------------------------------------------------------------------------------------------------------------------------------
In order to show results from operating activities an adjusted earnings per equity share has been calculated which excludes profits on the sale of fixed assets and businesses (see notes 4 and 5), the loan stock redemption premium (see note 6), the Pounds 100 million charge for improper accounting at Penguin USA (see note 2) and the tax consequences of these items. 25 Financial statements Consolidated Balance Sheet as at 31 December 1996 - ---------------------------------------------------------------------------------------------------------
1996 1995 Notes POUNDS MILLION Pounds million - --------------------------------------------------------------------------------------------------------- FIXED ASSETS Tangible assets 10 484.0 530.1 Investments: Partnerships and associated undertakings 11 182.6 167.3 Other 12 242.0 228.2 - --------------------------------------------------------------------------------------------------------- 908.6 925.6 - --------------------------------------------------------------------------------------------------------- CURRENT ASSETS Stocks 13 360.7 289.9 Debtors 14 669.8 672.0 Investments 15 7.9 8.3 Cash and liquid funds 16 299.0 672.0 - --------------------------------------------------------------------------------------------------------- 1,337.4 1,642.2 - --------------------------------------------------------------------------------------------------------- Creditors - amounts falling due within one year: Short-term borrowing 17 (174.2) (261.0) Other creditors 18 (919.8) (826.7) - --------------------------------------------------------------------------------------------------------- (1,094.0) (1,087.7) - --------------------------------------------------------------------------------------------------------- NET CURRENT ASSETS 243.4 554.5 - --------------------------------------------------------------------------------------------------------- TOTAL ASSETS LESS CURRENT LIABILITIES 1,152.0 1,480.1 Creditors - amounts falling due after more than one year: Medium and long-term borrowing 17 (555.2) (474.4) Other creditors 18 (15.1) (15.9) - --------------------------------------------------------------------------------------------------------- (570.3) (490.3) Deferred taxation 19 (30.3) (0.6) Other provisions for liabilities and charges 20 (159.1) (133.8) - --------------------------------------------------------------------------------------------------------- Net assets 392.3 855.4 - --------------------------------------------------------------------------------------------------------- CAPITAL AND RESERVES Called up share capital 21 142.8 139.1 Share premium account 22 129.5 48.7 Revaluation reserve 22 5.4 6.9 Other reserves 22 1.2 1.4 Profit and loss account 22 109.7 637.1 - --------------------------------------------------------------------------------------------------------- EQUITY SHAREHOLDERS' FUNDS 388.6 833.2 EQUITY MINORITY INTERESTS 3.7 22.2 - --------------------------------------------------------------------------------------------------------- 392.3 855.4 - ---------------------------------------------------------------------------------------------------------
The financial statements were approved by the board of directors on 17 March 1997 and signed on its behalf by BLAKENHAM J MAKINSON 26 Financial statements Consolidated Statement of Cash Flows for the year ended 31 December 1996 - ----------------------------------------------------------------------------------------------------------------------------- 1996 1995 restated Notes POUNDS MILLION Pounds million - ----------------------------------------------------------------------------------------------------------------------------- NET CASH INFLOW FROM OPERATING ACTIVITIES 25 291.2 236.4 - ----------------------------------------------------------------------------------------------------------------------------- Interest received 45.6 37.7 Interest paid (76.0) (67.7) Dividends paid to minority interests (6.1) (10.8) - ----------------------------------------------------------------------------------------------------------------------------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (36.5) (40.8) - ----------------------------------------------------------------------------------------------------------------------------- TAXATION (80.8) (69.7) - ----------------------------------------------------------------------------------------------------------------------------- Purchase of tangible fixed assets (89.8) (100.2) Sale of tangible fixed assets 13.2 40.2 Purchase of investments (33.5) (132.1) Sale of investments 53.7 633.9 - ----------------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (56.4) 441.8 - ----------------------------------------------------------------------------------------------------------------------------- Purchase of subsidiary undertakings (697.9) (359.8) Net cash acquired with subsidiary undertakings 4.5 8.6 Purchase of associated undertakings (36.0) (57.1) Sale of businesses 307.2 3.9 Net cash disposed with subsidiary undertakings (5.5) (1.1) - ----------------------------------------------------------------------------------------------------------------------------- ACQUISITIONS AND DISPOSALS 23/24 (427.7) (405.5) - ----------------------------------------------------------------------------------------------------------------------------- EQUITY DIVIDENDS PAID (96.0) (86.3) - ----------------------------------------------------------------------------------------------------------------------------- Cash (outflow)/inflow before management of liquid resources and financing (406.2) 75.9 Disposal/(purchase) of asset backed securities 204.1 (172.7) Liquid resources acquired (65.1) (304.3) Liquid resources disposed 212.4 252.0 - ----------------------------------------------------------------------------------------------------------------------------- MANAGEMENT OF LIQUID RESOURCES 25 351.4 (225.0) - ----------------------------------------------------------------------------------------------------------------------------- Issue of equity share capital 14.1 11.8 Loan stock redemption premium (10.3) -- Capital element of finance lease rentals (1.1) (1.7) US medium term notes - repayable 1999 157.8 -- Net movement in other borrowings (138.9) 256.6 - ----------------------------------------------------------------------------------------------------------------------------- FINANCING 21.6 266.7 - ----------------------------------------------------------------------------------------------------------------------------- (DECREASE)/INCREASE IN CASH IN THE YEAR 25 (33.2) 117.6 - -----------------------------------------------------------------------------------------------------------------------------
27 Financial statements Statement of Total Recognised Gains and Losses for the year ended 31 December 1996 - --------------------------------------------------------------------------------
1996 1995 POUNDS MILLION Pounds million - -------------------------------------------------------------------------------- Profit for the financial year 240.5 261.0 Other net gains and losses recognised in reserves: Unrealised surplus on revaluations -- 2.0 Exchange translation effect on: Profit for the financial year (0.4) 1.8 Foreign currency net assets (35.5) 5.7 - -------------------------------------------------------------------------------- (35.9) 9.5 - -------------------------------------------------------------------------------- TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR 204.6 270.5 - --------------------------------------------------------------------------------
Note of Historical Cost Profits and Losses for the year ended 31 December 1996 - --------------------------------------------------------------------------------
1996 1995 POUNDS MILLION Pounds million - -------------------------------------------------------------------------------- Reported profit before taxation 356.8 365.1 Realisation of fixed investment revaluations -- 458.3 Realisation of property revaluations (1.2) 0.9 - -------------------------------------------------------------------------------- Historical cost profit on ordinary activities before taxation 355.6 824.3 - -------------------------------------------------------------------------------- Deferred tax on fixed investment revaluations -- (150.8) - -------------------------------------------------------------------------------- HISTORICAL COST PROFIT RETAINED AFTER TAXATION, EQUITY MINORITY INTERESTS AND DIVIDENDS 136.6 477.6 - --------------------------------------------------------------------------------
Reconciliation of Movements in Equity Shareholders' Funds for the year ended 31 December 1996 - --------------------------------------------------------------------------------
1996 1995 POUNDS MILLION Pounds million - -------------------------------------------------------------------------------- Profit for the financial year 240.5 261.0 Dividends on equity shares (102.7) (91.8) - -------------------------------------------------------------------------------- 137.8 169.2 Other net recognised gains and losses relating to the year (see above) (35.9) 9.5 Goodwill arising (632.4) (393.4) Goodwill written back 1.4 -- Shares issued 84.5 11.8 - -------------------------------------------------------------------------------- Net movement for the year (444.6) (202.9) Equity shareholders' funds at beginning of year 833.2 1,036.1 - -------------------------------------------------------------------------------- EQUITY SHAREHOLDERS' FUNDS AT END OF YEAR 388.6 833.2 - --------------------------------------------------------------------------------
28 Financial statements Notes to the Accounts 1 ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Accounting policies have been consistently applied. FRS 1 (Revised 1996) "Cash Flow Statements" has been adopted early and comparative figures, including associated notes, have been restated. FRS 8 "Related Party Disclosures" has been adopted. Comparative figures in the profit and loss account have been restated to reflect the revised presentation of results. Balance sheet presentation has been restated to show advance corporation tax recoverable in debtors rather than in deferred taxation. A BASIS OF ACCOUNTING The accounts are prepared under the historical cost convention, modified by the revaluation of certain land and buildings and investments, and in accordance with applicable accounting standards. A summary of the significant accounting policies is set out below. B BASIS OF CONSOLIDATION (i) The consolidated accounts include the accounts of all subsidiary undertakings made up to 31 December. Where companies have become or ceased to be subsidiary or associated undertakings during the year the Group profit includes profits for the period during which they were subsidiary or associated undertakings. (ii) Goodwill - Goodwill, being either the net excess of the cost of shares in subsidiary undertakings, partnerships and associated undertakings over the value attributable to their net tangible assets on acquisition or the cost of other goodwill by purchase, is deducted from reserves in the year of acquisition. On disposal or closure, goodwill previously charged to reserves is written back and the profit or loss is adjusted accordingly. (iii) Partnerships and associated undertakings - The profit of the Group includes the Group's share of the profit of partnerships and associated undertakings, and the consolidated balance sheet includes the Group's interest in partnerships and associated undertakings at the book value of attributable net tangible assets. The figures included in the financial statements have been based on audited accounts, adjusted where necessary by reference to unaudited management accounts for the subsequent period to 31 December. C SALES Sales represent amounts invoiced during the period, net of valued added tax and other sales taxes, and excluding trade discounts, to external customers and associated undertakings for the provision of goods and services. D FOREIGN CURRENCIES Profit and loss accounts in overseas currencies are translated into sterling at weighted average rates. Balance sheets are translated into sterling at the rates ruling at 31 December. Exchange differences arising on consolidation are taken directly to reserves. Other exchange differences are taken to the profit and loss account where they relate to trading transactions and directly to reserves where they relate to investments. The principal overseas currencies for the Group affecting these translations are the US dollar and the Spanish peseta. The weighted average rates for the year against sterling were $1.58 and Pts 199.6 (1995: $1.57 and Pts 194.9) and the year end rates were $1.71 and Pts 222.6 (1995: $1.55 and Pts 188.4). E PENSION COSTS The regular pension cost of the Group's defined benefit pension schemes is charged to the profit and loss account in order to apportion the cost of pensions over the service lives of employees in the schemes. Variations arising from a significant reduction in the number of employees are adjusted in the profit and loss account to the extent that the year's regular pension cost, reduced by other variations, exceeds contributions payable for that year. Other variations are apportioned over the expected service lives of current employees in the schemes. F POST-RETIREMENT BENEFITS OTHER THAN PENSIONS Post-retirement benefits other than pensions are accounted for on an accruals basis to recognise this obligation over the expected working lives of the employees concerned. G CHANNEL 5 The Group's share of certain Channel 5 initial costs will be amortised by the end of the 10 year licence period. The Group's share of other profits and losses is being equity accounted. 29 Financial statements Notes to the Accounts 1 ACCOUNTING POLICIES continued - -------------------------------------------------------------------------------- H TANGIBLE FIXED ASSETS The cost or subsequent valuation of tangible fixed assets other than freehold land and investment properties is depreciated over estimated economic lives in equal annual amounts at the rates indicated in note 10. I LEASES Finance lease rentals are capitalised at the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated in accordance with policy H above. Finance charges are written off over the period of the lease in reducing amounts in relation to the written down carrying cost. Operating lease rentals are written off as incurred. J FIXED ASSET INVESTMENTS Fixed asset investments are stated at cost less provisions for diminution in value, or as revalued by the directors. K STOCKS Stocks and work in progress are valued at the lower of cost and net realisable value, after deducting progress payments. Stocks and work in progress include direct costs incurred in the development of product prior to its publication which are amortised over their estimated economic lives not exceeding four years. L DEFERRED TAXATION Deferred taxation is provided, using the liability method, at the expected applicable rates, on all timing differences between accounting and taxation treatments, including those arising from the revaluation of fixed assets, which are expected to reverse in the foreseeable future. Deferred taxation relief is accounted for in full on long-term timing differences in respect of provisions for unfunded retirement benefits. M CAPITAL INSTRUMENTS Capital instruments are included at cost, adjusted for discount accretion or premium amortisation where the intention is to hold them to maturity. Interest receivable thereon and the premium or discount where relevant is taken to the profit and loss account so as to produce a constant rate of return over the period to the date of expected redemption. Forward foreign exchange contracts and other off-balance sheet instruments are valued at the market prices prevailing at the balance sheet date. Borrowing is classified according to the maturity date of the respective individual holdings. N LIQUID RESOURCES Liquid resources comprise short-term deposits of less than one year and investments which are readily realisable and held on a short-term basis. O RETAINED PROFITS OF OVERSEAS SUBSIDIARY AND ASSOCIATED UNDERTAKINGS No provision is made for any additional taxation, less double taxation relief, which would arise on the remittance of profits retained. 30 Financial statements Notes to the Accounts 2(a) ANALYSIS OF SALES AND OPERATING PROFIT - ---------------------------------------------------------------------------------------------------------------------------------
---------- Sales ------------ ----------------------- Operating profit ---------------------- BEFORE AFTER Before After EXCEPTIONAL EXCEPTIONAL exceptional exceptional ITEMS ITEMS items items 1996 1995 1996 1996 1995 1995 BUSINESS SECTORS POUNDS MILLION Pounds million POUNDS MILLION POUNDS MILLION Pounds million Pounds million - --------------------------------------------------------------------------------------------------------------------------------- Information 691.6 615.8 108.3 99.1 95.0 83.3 Education 554.3 358.9 83.7 68.1 33.9 31.8 Entertainment 803.0 712.4 65.1 (47.5) 116.7 110.9 Investment Banking -- -- 40.8 40.8 39.9 39.9 Corporate expenses less other income -- -- (12.3) (14.5) (6.9) (28.3) - --------------------------------------------------------------------------------------------------------------------------------- Continuing operations 2,048.9 1,687.1 285.6 146.0 278.6 237.6 Discontinued operations 137.1 143.3 36.1 35.3 27.7 22.0 - --------------------------------------------------------------------------------------------------------------------------------- 2,186.0 1,830.4 321.7 181.3 306.3 259.6 - --------------------------------------------------------------------------------------------------------------------------------- GEOGRAPHICAL MARKETS SUPPLIED UK 601.4 544.0 90.7 80.7 112.9 89.1 Continental Europe 419.4 351.6 73.4 71.5 72.1 69.9 North America 798.3 591.4 96.6 (30.5) 76.1 63.2 Asia Pacific 185.2 163.0 20.6 20.0 11.3 9.2 Rest of World 44.6 37.1 4.3 4.3 6.2 6.2 - --------------------------------------------------------------------------------------------------------------------------------- Continuing operations 2,048.9 1,687.1 285.6 146.0 278.6 237.6 Discontinued operations 137.1 143.3 36.1 35.3 27.7 22.0 - --------------------------------------------------------------------------------------------------------------------------------- 2,186.0 1,830.4 321.7 181.3 306.3 259.6 - ---------------------------------------------------------------------------------------------------------------------------------
Exceptional items comprise restructuring costs for both 1995 and 1996 (see below) and the Pounds 100 million charge to profits in 1996 arising from improper accounting at Penguin USA. Entertainment profits in 1996 include BSkyB/BSBH income of Pounds 2.4 million (1995: Pounds 32.5 million). Discontinued operations relate to the withdrawal of the Group from the UK regional newspaper business upon its disposal of Westminster Press in December 1996. Prior year figures have been restated to seperately identify discontinued operations. Analyses of the profits of partnerships and associated undertakings are shown in note 11. - ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 RESTRUCTURING COSTS POUNDS MILLION Pounds million - --------------------------------------------------------------------------------------------------------------------------------- Post acquisition: HarperCollins Educational 15.0 -- Putnam Berkley 4.4 -- Grundy -- 2.0 Mindscape 5.4 -- Shared Services initiative -- 16.7 Financial Times cost cutting measures (including the closure of the Financial Times printing facility at East India Dock in 1995) 5.8 7.9 Cost cutting measures at Westminster Press 0.8 5.7 Other 9.0 14.4 - --------------------------------------------------------------------------------------------------------------------------------- 40.4 46.7 - ---------------------------------------------------------------------------------------------------------------------------------
31 Financial statements Notes to the Accounts 2(a) ANALYSIS OF SALES AND OPERATING PROFIT CONTINUED - -------------------------------------------------------------------------------- The table on page 31 shows sales and operating profit analysed by the destination to which products and services are supplied. The table below analyses sales by the geographic region from which the products and services originate. Inter-regional sales are those made between the Group companies in different regions. - ------------------------------------------------------------------------------------------------------------------------------------
------ Total by source ------- ------- Inter-regional ------- ----------- Sales ------------ 1996 1995 1996 1995 1996 1995 GEOGRAPHICAL SOURCE OF SALES POUNDS MILLION Pounds million POUNDS MILLION Pounds million POUNDS MILLION Pounds million - ------------------------------------------------------------------------------------------------------------------------------------ Continuing operations: UK 822.7 754.2 (51.2) (51.6) 771.5 702.6 Continental Europe 330.2 284.6 (9.0) (11.8) 321.2 272.8 North America 820.8 599.1 (20.0) (12.6) 800.8 586.5 Asia Pacific 149.0 123.3 (4.4) (5.6) 144.6 117.7 Rest of World 10.9 7.5 (0.1) -- 10.8 7.5 - ------------------------------------------------------------------------------------------------------------------------------------ 2,133.6 1,768.7 (84.7) (81.6) 2,048.9 1,687.1 - ------------------------------------------------------------------------------------------------------------------------------------
2(b) ANALYSIS OF CAPITAL EMPLOYED - ------------------------------------------------------------------------------------------------------------------------------------
-------- Capital employed -------- 1996 1995 Business Sectors POUNDS MILLION Pounds million - ------------------------------------------------------------------------------------------------------------------------------------ Information 142.7 156.6 Education 354.3 260.9 Entertainment 454.5 470.2 Investment Banking 113.9 122.1 Corporate expenses less other income (53.3) (22.1) - ------------------------------------------------------------------------------------------------------------------------------------ Continuing operations 1,012.1 987.7 Discontinued operations -- 65.5 - ------------------------------------------------------------------------------------------------------------------------------------ 1,012.1 1,053.2 - ------------------------------------------------------------------------------------------------------------------------------------ LOCATION OF CAPITAL EMPLOYED UK 342.4 299.8 Continental Europe 106.6 105.8 North America 411.4 423.6 Asia Pacific 144.2 150.6 Rest of World 7.5 7.9 - ------------------------------------------------------------------------------------------------------------------------------------ Continuing operations 1,012.1 987.7 Discontinued operations -- 65.5 - ------------------------------------------------------------------------------------------------------------------------------------ 1,012.1 1,053.2 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 RECONCILIATION OF CAPITAL EMPLOYED TO NET ASSETS POUNDS MILLION Pounds million - ------------------------------------------------------------------------------------------------------------------------------------ Capital employed 1,012.1 1,053.2 Less: deferred taxation (30.3) (0.6) other provisions (159.1) (133.8) net debt (430.4) (63.4) - ------------------------------------------------------------------------------------------------------------------------------------ Net assets 392.3 855.4 - ------------------------------------------------------------------------------------------------------------------------------------
32 Financial statements Notes to the Accounts 3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------ CONTINUING DISCONTINUED TOTAL Continuing Discontinued Total 1996 1996 1996 1995 1995 1995 POUND MILLION POUND MILLION POUND MILLION Pound million Pound million Pound million - ------------------------------------------------------------------------------------------------------------------------------------ COST OF SALES (982.0) (82.1) (1,064.1) (850.4) (89.3) (939.7) - ------------------------------------------------------------------------------------------------------------------------------------ Distribution costs (114.3) (12.5) (126.8) (105.9) (16.9) (122.8) Administration and other expenses (932.6) (8.9) (941.5) (641.2) (17.6) (658.8) Other operating income (see below) 72.9 1.7 74.6 104.7 2.5 107.2 - ------------------------------------------------------------------------------------------------------------------------------------ NET OPERATING EXPENSES (974.0) (19.7) (993.7) (642.4) (32.0) (674.4) - ------------------------------------------------------------------------------------------------------------------------------------ Analysed as: Net operating expenses - normal (834.4) (18.9) (853.3) (601.4) (26.3) (627.7) - exceptional expense (139.6) (0.8) (140.4) (41.0) (5.7) (46.7) - ------------------------------------------------------------------------------------------------------------------------------------ NET OPERATING EXPENSES (974.0) (19.7) (993.7) (642.4) (32.0) (674.4) - ------------------------------------------------------------------------------------------------------------------------------------
The following amounts relating to acquisitions included in the 1996 totals are: cost of sales Pound 8.2 million and net operating expenses of Pound 88.7 million. The exceptional expense of Pound 140.4 million is included in administration and other expenses in 1996 which comprises restructuring costs and the Pound 100 million Penguin USA charge for improper accounting (see note 2).
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 OTHER OPERATING INCOME POUND MILLION Pound million - ------------------------------------------------------------------------------------------------------------------------------------ Income from other investments: Listed 2.9 2.3 Unlisted 8.5 8.5 BSkyB dividend -- 5.2 BSBH loan stock interest 2.4 27.3 Other operating income (mainly royalties, rights and commission income) 60.8 63.9 - ------------------------------------------------------------------------------------------------------------------------------------ 74.6 107.2 - ------------------------------------------------------------------------------------------------------------------------------------ PROFIT BEFORE TAXATION IS ARRIVED AT AFTER CHARGING: Depreciation 63.2 61.5 Operating lease rentals: Plant and machinery 16.5 13.8 Properties 32.7 29.3 Auditors' remuneration: Audit (Company Pound 0.1 million; 1995: Pound 0.1 million) 1.6 2.2 Non-audit - UK (Company Pound nil; 1995: Pound nil) 0.4 0.9 - Other 0.2 0.7 - ------------------------------------------------------------------------------------------------------------------------------------
33 Financial statements NOTES TO THE ACCOUNTS
4 PROFIT/(LOSS) ON SALE OF FIXED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 POUND MILLION Pound million - ------------------------------------------------------------------------------------------------------------------------------------ CONTINUING OPERATIONS: Loss on fixed assets at East India Dock (8.0) (24.9) Net (loss)/profit on other investments and property interests (6.1) 5.6 Sale of direct investment in BSkyB and redemption of BSBH loan stock -- 133.3 Sale of investment in Yorkshire-Tyne Tees Television (YTTV) -- 9.4 - ------------------------------------------------------------------------------------------------------------------------------------ (14.1) 123.4 - ------------------------------------------------------------------------------------------------------------------------------------ 5 PROFIT/(LOSS) ON SALE OF BUSINESSES - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 POUND MILLION Pound million - ------------------------------------------------------------------------------------------------------------------------------------ CONTINUING OPERATIONS: Other (1.9) 6.0 - ------------------------------------------------------------------------------------------------------------------------------------ DISCONTINUED OPERATIONS: Sale of Westminster Press (see note 24) 231.3 -- - ------------------------------------------------------------------------------------------------------------------------------------ 6 NET INTEREST PAYABLE - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 POUND MILLION Pound million - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST PAYABLE: On borrowing repayable wholly within five years not by instalments (18.4) (18.0) On borrowing repayable wholly or partly after five years (52.2) (51.3) Partnerships and associated undertakings (0.3) -- Finance lease charges (0.1) (0.2) Interest capitalised 0.2 2.0 - ------------------------------------------------------------------------------------------------------------------------------------ (70.8) (67.5) INTEREST RECEIVABLE: On deposits and liquid funds 38.8 41.1 Amortisation of swap proceeds (see note 18) 2.5 2.5 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST PAYABLE (29.5) (23.9) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST COVER x6 x11 - ------------------------------------------------------------------------------------------------------------------------------------
1995 interest payable has been restated to reflect the interest on the 9.5% Euro-sterling Bonds 2004 in borrowing repayable wholly or partly after five years rather than wholly within five years. Interest cover is calculated by dividing net interest payable into operating profit. A Pound 10.3 million premium was paid on the redemption of the Pounds 25 million (13.625%) 2007 Unsecured Loan Stock. 34 Notes to the Accounts
7 Taxation - -------------------------------------------------------------------------------- 1996 1995 Taxation on profit on ordinary activities (Pounds in millions) - -------------------------------------------------------------------------------- United Kingdom: Corporation tax at 33% 46.8 217.1 Deferred taxation (5.5) (156.1) BSkyB consortium relief (8.8) (8.8) Double taxation relief (2.2) (3.4) Partnerships and associated undertakings 10.2 10.6 Tax on franked investment income 0.2 1.8 Overseas: Overseas tax 25.3 32.6 Deferred taxation 41.2 (3.6) Partnerships and associated undertakings 1.4 2.6 - -------------------------------------------------------------------------------- 108.6 92.8 - -------------------------------------------------------------------------------- 1996 1995 Tax rate reconciliation % % - -------------------------------------------------------------------------------- UK tax rate 33.0 33.0 Effect of BSkyB/BSBH income (3.5) (3.8) Other items (0.7) (1.7) - -------------------------------------------------------------------------------- Tax rate reflected in adjusted earnings 28.8 27.5 Effect of profits/(losses) excluded from adjusted earnings 1.6 (2.1) - -------------------------------------------------------------------------------- Tax rate reflected in earnings 30.4 25.4 - --------------------------------------------------------------------------------
The 1996 tax rate has been affected by several significant factors: a) The rate reflected in adjusted earnings has been reduced by Pounds 8.8 million of consortium relief now recognised in the profit and loss account following renegotiation with the other partners in BSBH. b) There is no tax payable on the profit of Pounds 231.3 million arising on the sale of Westminster Press. c) The Group has tax losses, arising in the US, which have not been utilised or recognised in 1996 but are available to carry forward against taxable profits in future years. Accordingly the Group has decided not to recognise tax relief on the Pounds 100 million charge for improper accounting at Penguin USA and has also written off to profit deferred tax assets totalling Pounds 36.6 million. The 1995 tax rate was reduced by two significant factors: a) Consortium relief of Pounds 8.8 million was released to offset tax payable on BSBH income. b) The disposal of YTTV resulted in a write back of a deferred tax provision of Pounds 4.5 million.
8 Dividends - ------------------------------------------------------------------------------------------------------ 1996 1996 1995 1995 pence per pence per share (Pounds in millions) share (Pounds in millions) - ------------------------------------------------------------------------------------------------------ Interim paid 6.9 39.4 6.325 35.1 Final proposed 11.1 63.3 10.175 56.7 - ------------------------------------------------------------------------------------------------------ Dividends per equity share 18.0 102.7 16.5 91.8 - ------------------------------------------------------------------------------------------------------
35 Notes to the Accounts 9 Employee information - -------------------------------------------------------------------------------- The details of the emoluments of the directors of Pearson plc are shown on pages 17 to 23 and form part of these audited financial statements. - -------------------------------------------------------------------------------- 1996 1995 Staff costs (Pounds in millions) - -------------------------------------------------------------------------------- Wages and salaries 454.1 408.3 Social security costs 47.5 45.1 Post-retirement costs 6.1 8.9 - -------------------------------------------------------------------------------- 507.7 462.3 - -------------------------------------------------------------------------------- Discontinued operations total staff costs were Pounds 38.7 million (1995: Pounds 50.7 million. - -------------------------------------------------------------------------------- Average number employed 1996 UK USA Other Total - -------------------------------------------------------------------------------- Information 3,078 903 1,786 5,767 Education 823 2,352 1,348 4,523 Entertainment 4,272 1,607 1,080 6,959 Other 114 19 1 134 - -------------------------------------------------------------------------------- Continuing operations 8,287 4,881 4,215 17,383 - -------------------------------------------------------------------------------- Average number employed 1995 UK USA Other Total - -------------------------------------------------------------------------------- Information 3,072 592 1,669 5,333 Education 787 1,651 1,247 3,685 Entertainment 4,179 1,738 960 6,877 Other 91 19 3 113 - -------------------------------------------------------------------------------- Continuing operations 8,129 4,000 3,879 16,008 - -------------------------------------------------------------------------------- Discontinued operations employed on average 2,564 (1995: 3,414) in the UK (Information sector). - -------------------------------------------------------------------------------- 1996 1995 Post-retirement costs (Pounds in millions) - -------------------------------------------------------------------------------- Defined benefit pension schemes: UK Group plan: Regular pension cost 12.6 13.1 Amortisation of surplus (17.1) (13.1) - -------------------------------------------------------------------------------- Net pension credit (4.5) - Other defined benefit pension schemes 5.0 3.9 Defined contribution pension schemes 4.4 3.8 Medical benefits 1.2 1.2 - -------------------------------------------------------------------------------- 6.1 8.9 - -------------------------------------------------------------------------------- 36 Notes to the Accounts 9 Employee information continued - -------------------------------------------------------------------------------- Pension schemes The Group operates a number of pension schemes throughout the world. The major schemes are self-administered and the schemes' assets are held independently of the Group's finances. Pension costs are assessed in accordance with the advice of independent qualified actuaries. The principal schemes are primarily of the defined benefit type. There is also a closed defined benefit scheme in the UK, which now receives neither employers' nor members' contributions, and a number of non-UK defined contribution schemes. The results of the most recent actuarial valuation, using the projected unit method of valuation, of the principal funded UK scheme, are shown in the table below. The principal assumptions used are also shown in the table below. The net assets of the UK Group plan at 31 December 1996 are included in the pension plan accounts at Pounds 848 million (unaudited).
UK Group plan - ---------------------------------------------------------------------------------------------------------- Assets at market value at latest full actuarial valuation on 1 January 1996* Pounds 774 million Real return on investments per annum 4.8% Real increase in earnings per annum 1.9% Real increase in pensions in payment per annum 0% Level of funding** 122% - -----------------------------------------------------------------------------------------------------------
* Stated after a transfer of Pounds 2 millions to the scheme of a former subsidiary. **Actuarial value of assets expressed as a percentage of the actuarial value of the liabilities. In view of these results, all employers' contributions remain suspended for the time being and the valuation surplus is being apportioned, in accordance with SSAP24, over the expected remaining service lives of the current employees, resulting in a credit to the profit and loss account of Pounds 4.5 million (1995: Pounds nil). The total market value of the assets of the non UK defined benefit schemes (mainly in the United States), valued this year, was Pounds 40.3 million (1995: Pounds 38.0 million). Other post-retirement benefits The principal assumptions affecting the provision for other post retirement benefits were: medical inflation rates of between 5.5% and 10.0% and a discount rate of 7.25%. 37 Notes to the Accounts
10 Tangible fixed assets - ----------------------------------------------------------------------------------------- Freehold Assets in and leasehold Plant and course of property equipment construction Total (Pounds in millions) - ----------------------------------------------------------------------------------------- Cost or as valued At 31 December 1995 324.5 487.3 29.9 841.7 Exchange differences (10.3) (16.9) (1.4) (28.6) Reclassifications 9.0 10.9 (19.9) - Permanent diminution in value (4.4) (5.0) - (9.4) Owned by subsidiary undertakings acquired 14.7 9.7 - 24.4 Capital expenditure 14.0 65.7 10.4 90.1 Capitalised interest 0.2 - - 0.2 Disposals (5.2) (22.5) - (27.7) Owned by subsidiary undertakings disposed (30.2) (70.2) (0.9) (101.3) - ----------------------------------------------------------------------------------------- At 31 December 1996 312.3 459.0 18.1 789.4 - ----------------------------------------------------------------------------------------- Depreciation At 31 December 1995 60.1 251.5 - 311.6 Exchange differences (2.4) (9.8) - (12.2) Permanent diminution in value (0.2) - - (0.2) Provided in the year 10.0 53.2 - 63.2 Subsidiary undertakings acquired 2.4 4.0 - 6.4 Disposals (0.5) (15.7) - (16.2) Owned by subsidiary undertakings disposed (6.0) (41.2) - (47.2) - ----------------------------------------------------------------------------------------- At 31 December 1996 63.4 242.0 - 305.4 - ----------------------------------------------------------------------------------------- Net book value At 31 December 1995 264.4 235.8 29.9 530.1 - ----------------------------------------------------------------------------------------- At 31 December 1996 248.9 217.0 18.1 484.0 - -----------------------------------------------------------------------------------------
Freehold and leasehold property Net book value includes: short leases of Pounds 23.1 million (1995: Pounds 17.8 millions) and long leases of Pounds 4.8 million (1995: Pounds 17.4 million). On an original cost basis, cost would have been included at Pounds 319.4 million, and accumulated depreciation at Pounds 54.1 million. The net book value included at valuation is Pounds 8.0 million. Permanent diminution in value Freehold and leasehold property and plant and equipment include Pounds 8.4 million and Pounds 5.0 million respectively of assets held for sale. Of the charge for permanent diminution in value, Pounds 8.0 million (1995: Pounds 36.6 million and Pounds 11.7 million in depreciation) in cost relates to the loss on assets at East India Dock. At 31 December 1996 the provision for permanent diminution in value amounted to Pounds 66.0 million in cost and Pounds 11.9 million in depreciation. Depreciation Except for Pounds 70.7 million of land, fixed assets are depreciated over their estimated economic lives in equal annual amounts. Generally, freeholds are depreciated at 1% to 5% per annum, leaseholds at 2% per annum, or over the period of the lease if shorter, and plant and equipment at various rates between 5% and 33% per annum. Capital commitments The Group had capital commitments for fixed assets, including finance leases, amounting to Pounds 126.7 million at 31 December 1996. This represented Pounds 22.0 million already under contract and Pounds 104.7 million authorised but not yet contracted. Other notes The net book value of Group tangible fixed assets includes Pounds 1.8 million in respect of assets held under finance leases. Depreciation on these assets charged in 1995 was Pounds 1.0 million. The net book value of Group tangible fixed assets includes Pounds 4.2 million in respect of capitalised interest. 38 Notes to the Accounts 11 Partnerships and associated undertakings - ------------------------------------------------------------------------------- Valuations Book values 1996 1995 1996 1995 (Pounds in millions) - ------------------------------------------------------------------------------- Analysis Partnership interests 200.0 200.0 113.9 122.1 Unlisted associated undertakings 122.6 104.7 3.9 (4.1) Loans 64.8 49.3 64.8 49.3 - ------------------------------------------------------------------------------- 387.4 354.0 182.6 167.3 - ------------------------------------------------------------------------------- Principal associated undertakings are listed on page 57. The valuations of unlisted partnerships and associated undertakings are at directors' valuations as at 31 December 1996. If realised at these values there would be an estimated liability for taxation, at year end rates, of Pounds 42.9 million. The Group had no capital commitments to subscribe for further capital and loan stock. - ------------------------------------------------------------------------------- Share of Equity loans Reserves Total Summary of movements (Pounds in millions) - ------------------------------------------------------------------------------- At 31 December 1995 97.9 49.3 20.1 167.3 Exchange differences (7.8) (2.2) (8.9) (18.9) Additions 11.8 24.2 - 36.0 Goodwill written off (0.6) - - (0.6) Transfer from fixed asset investments - (6.5) 5.0 (1.5) Retained profit for the year - - 0.5 0.5 Provision for losses and diminution in value (0.2) - - (0.2) - ------------------------------------------------------------------------------- At 31 December 1996 101.1 64.8 16.7 182.6 - -------------------------------------------------------------------------------
Profit Net assets 1996 1995 1996 1995 Analysis of partnerships and associated undertakings (Pounds in millions) - -------------------------------------------------------------------------------------------- Business sectors Information 10.9 10.9 (7.1) (13.8) Education 3.0 4.2 5.1 6.4 Entertainment (1.6) (11.7) 70.7 52.6 Investment Banking 40.8 39.9 113.9 122.1 - -------------------------------------------------------------------------------------------- 53.1 43.3 182.6 167.3 - -------------------------------------------------------------------------------------------- Geographical markets supplied and location of net assets UK 20.6 18.6 103.9 85.1 Continental Europe 12.9 7.1 38.1 35.7 North America 17.2 14.0 36.7 42.0 Rest of World 2.4 3.6 3.9 4.5 - -------------------------------------------------------------------------------------------- 53.1 43.3 182.6 167.3 - -------------------------------------------------------------------------------------------- 1996 Reconciliation to retained profit (Pounds in millions) - -------------------------------------------------------------------------------------------- Net income from partnerships and associated undertakings 53.1 UK taxation (10.2) Overseas taxation (1.4) Distributions receivable in respect of the year from partnership interests (34.2) Dividends (including tax credits) from unlisted associated undertakings (6.8) - -------------------------------------------------------------------------------------------- Retained profit for the year 0.5 - --------------------------------------------------------------------------------------------
39 Notes to the Accounts 11 Partnerships and associated undertakings continued - -------------------------------------------------------------------------------- Interests in Lazard Partners Limited Partnership and the three Lazard Houses - --------------------------------------------------------------------------------
Net assets 1996 1995 restated* A summary of the aggregate net tangible assets at 31 December is as follows: (Pounds in millions) - ----------------------------------------------------------------------------------------------------------- Total assets 8,013 5,573 Total liabilities (7,632) (5,179) - ----------------------------------------------------------------------------------------------------------- Net tangible assets 381 394 - ----------------------------------------------------------------------------------------------------------- Attributable to Pearson 114 122 - -----------------------------------------------------------------------------------------------------------
During 1995 Lazard Freres & Co. became a New York Limited Liability Company and Pearson's indirect general partnership interest with unlimited liability interest is now restricted to Lazard Freres et Cie and Maison Lazard et Cie held directly and indirectly through Lazard Partners Limited Partnership. Pearson holds these partnership interests through a subsidiary undertaking registered in England, with no other material assets. The aggregate liabilities of these partnerships included above are Pounds 831 million (1995: Pounds 863 million). Pearson also holds direct interests in Lazard Freres & Co.
- --------------------------------------------------------------------------------------------------------------------- Country of Share incorporation Beneficial Class capital Interests in the Lazard Houses of registration interest % of share million - --------------------------------------------------------------------------------------------------------------------- Lazard Partners Limited Partnership (which, with direct interests in the US and French partnerships gives the following interests in the Lazard Houses): USA 50 Partnership Lazard Brothers & Co., Ltd England 37.2 Ord Pound 1 25.3 80 Def Pound 1 5.0 50 Sw Fr 1 0.4 Lazard Freres & Co., 'LLC' USA 11.6 Limited Liability Company Lazard Freres et Cie Maison Lazard et Cie France 9.6 Partnership - ---------------------------------------------------------------------------------------------------------------------
The beneficial percentages held for the investment banking partnership interests are interests in partnership profits. With effect from 1 January 1996, Lazard Freres & Co., 'LLC', Lazard Freres et Cie, Maison Lazard et Cie and Lazard Brothers & Co Limited (together known as the three Lazard Houses) created a new system of inter-house profit sharing through the establishment of the Three Houses Pooling Partnership (the 'Pool') which became a limited partner of Lazard Partners Limited Partnership. As a result, in 1996 the members, directors or partners in a particular Lazard House received a greater interest in the profits of the other Lazard Houses in exchange for part of their existing profit entitlement in their own House. Pearson received additional income (the 'Pearson Adjustment') to reflect the reduction in its profit entitlements from its direct holding in Lazard Freres & Co., 'LLC', Lazard Freres et Cie and Maison Lazard et Cie, and accordingly did not receive any income through the Pool. The share of net distributable profits of Lazard Partners Limited Partnership (after the Pools profit share and the Pearson adjustment) is divided in accordance with the respective capital interests of the original partners (Pearson plc - 50%). *Following the introduction of the open gilt repo market on 2 January 1996, there has been a shift in Lazard Brothers & Co. Ltd money markets business from gilt stock borrowing to gilt repo contracts which has led to an increase in the balance sheet footings and a restatement of the 1995 comparatives on the balance sheet to show the cash loan elements of stock loans gross, when previously they were shown net. Interest in The Economist Newspaper Ltd The net liabilities of The Economist Newspaper Ltd as at 31 March 1996 were Pounds 33.3 million (1995: net assets Pounds 26.5 million); profit before taxation amounted to Pounds 24.0 million (1995: Pounds 19.8 million). 40 Notes to the Accounts 12 Other fixed asset investments - -------------------------------------------------------------------------------- Valuations Book values 1996 1995 1996 1995 (Pounds in millions) - -------------------------------------------------------------------------------- Listed abroad 111.8 112.2 100.2 110.6 Unlisted 355.0 266.8 141.8 117.6 - -------------------------------------------------------------------------------- 466.8 379.0 242.0 228.2 - -------------------------------------------------------------------------------- Subsequent to the year end, Pearson's 10% equity share investment in Television Broadcasts Limited (TVB) was sold for Pounds 111.1 million (see note 31). If all investments were realised at valuation there would be no liability for taxation. Details of the principal investments in which the Group held more than 10% of the equity share capital are shown on page 57. - -------------------------------------------------------------------------------- BSBH TVB Other Total Summary of movements (Pounds in millions) - -------------------------------------------------------------------------------- At 31 December 1995 67.2 109.2 51.8 228.2 Exchange differences - (10.2) (3.0) (13.2) Additions 26.5 - 6.0 32.5 Owned by subsidiary undertakings acquired - - 30.2 30.2 Transfer to partnerships and associated undertakings - - 1.5 1.5 Provisions for permanent diminution in value and losses - - (6.4) (6.4) Disposals and redemptions - - (30.8) (30.8) - -------------------------------------------------------------------------------- Book value at 31 December 1996 93.7 99.0 49.3 242.0 - -------------------------------------------------------------------------------- Valuation at 31 December 1996 280.0 111.1 75.7 466.8 - -------------------------------------------------------------------------------- 13 Stocks - -------------------------------------------------------------------------------- 1996 1995 (Pounds in millions) - -------------------------------------------------------------------------------- Raw materials 22.3 29.4 Work in progress 79.6 72.6 Finished stock 258.8 187.9 - -------------------------------------------------------------------------------- 360.7 289.9 - -------------------------------------------------------------------------------- The replacement cost of stocks and work in progress is not materially different from book value. 14 Debtors - -------------------------------------------------------------------------------- 1996 1995 (Pounds in millions) - -------------------------------------------------------------------------------- Amounts falling due within one year Trade debtors 382.3 408.7 Partnerships and associated undertakings 14.1 8.3 Other debtors 179.8 158.2 Prepayments and accrued income 53.5 61.2 - -------------------------------------------------------------------------------- 629.7 636.4 Amounts falling due after one year Other debtors 23.8 21.1 Prepayments and accrued income 0.4 0.3 ACT recoverable 15.9 14.2 - -------------------------------------------------------------------------------- 40.1 35.6 - -------------------------------------------------------------------------------- 669.8 672.0 - -------------------------------------------------------------------------------- The Pearson Employee Share Trust holds 149,933 (1995: 293,800) Pearson plc ordinary shares with a market value of Pounds 1.1 million (1995: Pounds 1.8 million) inclusive of accumulated scrip dividend shares. Amounts included within other debtors for own shares are Pounds 0.6 million (1995: Pounds 0.4 million). 41 Notes to the Accounts 15 Current asset investments - -------------------------------------------------------------------------------- Valuations Book values 1996 1995 1996 1995 (Pounds in millions) - -------------------------------------------------------------------------------- Listed abroad - 16.1 - - Unlisted 7.9 9.8 7.9 8.3 - -------------------------------------------------------------------------------- 7.9 25.9 7.9 8.3 - -------------------------------------------------------------------------------- Listed investment valuations are at middle market quotation and unlisted investments are at directors' valuations. If all investments were realised at valuation there would be no liability for taxation. Details of the principal investments in which the Group held more than 10% of the equity share capital are shown on page 57. - -------------------------------------------------------------------------------- Summary of movements (Pounds in millions) - -------------------------------------------------------------------------------- At 31 December 1995 8.3 Exchange differences (0.7) Additions 1.0 Disposals (0.7) - -------------------------------------------------------------------------------- At 31 December 1996 7.9 - --------------------------------------------------------------------------------
16 Cash and liquid funds - ------------------------------------------------------------------------------------------ Group Company 1996 1995 1996 1995 (Pounds in millions) - ------------------------------------------------------------------------------------------ Cash, bank current accounts and overnight deposits 138.8 155.5 24.5 54.3 Certificates of deposit and commercial paper 6.0 63.9 - 50.4 Money market fund units - 8.4 - 8.4 UK government securities 1.0 22.6 - 21.6 Listed sterling asset backed floating rate notes 45.9 156.5 15.3 105.2 Listed US dollar asset backed floating rate notes 42.1 139.7 42.1 139.8 Other listed securities - 60.1 - 50.1 Term bank deposits 51.2 49.7 1.4 40.4 Other 14.0 15.6 14.0 15.5 - ------------------------------------------------------------------------------------------ 299.0 672.0 97.3 485.7 - ------------------------------------------------------------------------------------------ Listed securities, dealt on recognised Stock Exchanges, included above: Cost 89.0 378.9 57.4 316.7 Market value 89.0 378.8 57.4 316.6 - ------------------------------------------------------------------------------------------
42 Notes to the Accounts
17 Borrowings - -------------------------------------------------------------------------------------------- Group Company 1996 1995 1996 1995 Borrowing summary (by maturity) (Pounds in millions) - -------------------------------------------------------------------------------------------- Short term Loans or instalments due within one year 8.5 12.1 3.0 7.3 Bank loans, overdrafts and commercial paper 165.7 248.9 167.3 282.0 - -------------------------------------------------------------------------------------------- Total due within one year 174.2 261.0 170.3 289.3 Medium and long term Loans or instalments thereof repayable: From one to two years 7.8 0.1 - - From two to five years 6.3 24.5 4.8 14.4 After five years not by instalments 541.1 449.8 184.3 224.8 - -------------------------------------------------------------------------------------------- Total due after more than one year 555.2 474.4 189.1 239.2 - -------------------------------------------------------------------------------------------- Total borrowing 729.4 735.4 359.4 528.5 - --------------------------------------------------------------------------------------------
In the absence of enforceable contracts from the relevant lenders to refinance current advances as they fall due, at the balance sheet date Pounds 84.3 of debt currently classified from two to five years and after five years would be repayable within one year. - -------------------------------------------------------------------------------- Group 1996 1995 Borrowing summary (by currency) (Pounds in millions) - -------------------------------------------------------------------------------- US dollars 379.3 340.5 Sterling 210.2 239.1 Hong Kong dollars 56.1 61.3 Spanish pesetas 33.7 36.2 French francs 19.1 24.0 Canadian dollars 16.5 19.2 Other currencies 14.5 15.1 - -------------------------------------------------------------------------------- 729.4 735.4 - -------------------------------------------------------------------------------- Group Company 1996 1995 1996 1995 Borrowing summary (by instrument) (Pounds in millions) - -------------------------------------------------------------------------------- Secured Bank loans and overdrafts 0.1 0.1 - - Unsecured 10.5% Euro-sterling Bonds 2008 100.0 100.0 100.0 100.0 13.625% fixed rate loan stock 2007 (see note 6) - 25.0 - 25.0 9.5% Euro-sterling Bonds 2004 113.2 124.9 - - 10.75% Euro-sterling Bonds 2002 100.0 100.0 - - Other unsecured borrowings 8.5 12.8 3.0 7.8 Unsecured bank loans and overdrafts, commercial paper and medium term notes 407.6 372.6 256.4 395.7 - -------------------------------------------------------------------------------- Total borrowing 729.4 735.4 359.4 528.5 - -------------------------------------------------------------------------------- 43 Notes to the Accounts 17 Borrowings continued - -------------------------------------------------------------------------------- Forward foreign exchange contracts Foreign currency transactional cash flows are hedged using forward foreign exchange contracts. At 31 December 1996, the UK Group had contracted to exchange the equivalent of Pounds 22 million and the estimated mark-to-market loss on these contracts at 31 December 1996 was Pounds 0.8 million. In addition, the UK Group enters into foreign exchange swaps in order to hedge surplus cash invested in US dollars back into sterling. At 31 December 1996, Pounds 50 million of these contracts were held with a mark-to-market gain of Pounds 1.2 million.
- ----------------------------------------------------------------------------------------------- Mark-to Notional Weighted market principal average rate value Interest rate hedging transactions (Pounds in millions) % (Pounds in millions) - ----------------------------------------------------------------------------------------------- Swaps in force at 31 December 1996 US dollars: converting fixed debt to floating 146 7.23 6 US dollars: converting floating debt to fixed 156 5.77 2 Sterling: converting fixed debt to floating 150 7.86 4 Converting fixed sterling debt to floating US dollars 113 10.41 11 - ----------------------------------------------------------------------------------------------- 23 - -----------------------------------------------------------------------------------------------
Of the total mark-to-market gain on the above transactions of Pounds 23 million, Pounds 17 million arises from transactions that hedge debt issues for their entire lives. There is a mark-to-market loss on those issues of Pounds 32 million included in the footnote below. The following shows the amount of these contracts which are in force at the end of each year. - -------------------------------------------------------------------------------- 1996 1997 1998 1999 (Pounds in millions) - -------------------------------------------------------------------------------- US dollars: converting fixed debt to floating 146 146 146 146 US dollars: converting floating debt to fixed 156 135 117 117 Sterling: converting fixed debt to floating 150 100 100 100 Converting fixed sterling debt to floating US dollars 113 113 113 113 - -------------------------------------------------------------------------------- During the year, a cap setting a maximum cost of 9% on $50 million of variable US dollar borrowings for the period 1998 to 2001 was terminated. As a result of the above transactions, the interest rate exposure of the borrowings of the Group at 31 December 1996 was as follows: - -------------------------------------------------------------------------------- Total gross borrowing Fixed rate Floating rate (Pounds in millions) - -------------------------------------------------------------------------------- Sterling 210 50 160 US dollars 379 164 215 Other currencies 140 - 140 - -------------------------------------------------------------------------------- 729 214 515 - -------------------------------------------------------------------------------- Of this total, Pounds 541 million relates to long-term borrowings with a maturity of over five years. The current value of this debt at 31 December 1996, considering only the movements in risk-free interest rates, is Pounds 573 million. The difference between the current and book values of these borrowings is partially offset by the mark-to-market gain on the related swaps detailed above. 44 Notes to the Accounts 18 Other creditors - -------------------------------------------------------------------------------- 1996 1995 Amounts falling due within one year (Pounds in millions) - -------------------------------------------------------------------------------- Trade creditors 288.2 222.6 Taxation 232.3 245.6 Social security and other taxes 26.7 27.5 Other creditors 72.4 89.5 Accruals and deferred income 230.5 177.2 Obligations under finance leases 0.8 1.5 Payments received on account 5.1 3.6 Dividends 63.8 59.2 - -------------------------------------------------------------------------------- 919.8 826.7 - -------------------------------------------------------------------------------- Amounts falling due after one year Obligations under finance leases 0.6 1.1 Other creditors 3.2 1.0 Accruals and deferred income 11.3 13.8 - -------------------------------------------------------------------------------- 15.1 15.9 - -------------------------------------------------------------------------------- Accruals and deferred income includes Pounds 12.6 million (1995: Pounds 15.1 million) relating to the unamortised profit arising out of the unwinding of a sterling interest rate swap in 1994. The swap was arranged in 1992 in connection with the issue of Pounds 100 million 10.75% Euro-sterling Bonds 2002. The profit is being amortised over the remaining life of the Bonds. Pounds 10.2 million is due after one year, within which the amount falling due after five years is Pounds 0.2 million. 19 Deferred taxation - -------------------------------------------------------------------------------- Summary of movements (Pounds in millions) - -------------------------------------------------------------------------------- At 31 December 1995 0.6 Exchange differences 2.7 Subsidiary undertakings acquired/disposed (6.8) Net charge for the year 35.7 Transfer to current taxation (1.9) - -------------------------------------------------------------------------------- At 31 December 1996 30.3 - -------------------------------------------------------------------------------- 1996 1995 Deferred taxation derives from (Pounds in millions) - -------------------------------------------------------------------------------- Capital allowances 21.6 27.6 Revalued assets 1.1 1.1 Other timing differences 7.6 (28.1) - -------------------------------------------------------------------------------- 30.3 0.6 - -------------------------------------------------------------------------------- Deferred taxation not provided Relating to revalued assets and timing differences 7.2 13.0 Relating to gains subject to rollover relief 18.9 20.1 - -------------------------------------------------------------------------------- 26.1 33.1 - -------------------------------------------------------------------------------- 45 Notes to the Accounts
20 Other provisions for liabilities and charges - ------------------------------------------------------------------------------------------------------------------------------- Post-retirement Other Total (Pounds in millions) (Pounds in million) (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- At 31 December 1995 32.8 101.0 133.8 Exchange differences (3.5) (10.5) (14.0) Subsidiary undertakings acquired/disposed 6.7 24.9 31.6 Deferred consideration arising on acquisitions - 12.9 12.9 Transfers (0.2) (4.0) (4.2) Released (5.8) (4.3) (10.1) Provided 11.9 45.4 57.3 Utilised (6.8) (41.4) (48.2) - ------------------------------------------------------------------------------------------------------------------------------- At 31 December 1996 35.1 124.0 159.1 - -------------------------------------------------------------------------------------------------------------------------------
Post-retirement provisions are in respect of pensions, Pounds 21.9 million and post-retirement medical benefits, Pounds 13.2 million. Other provisions are mainly in respect of future costs relating to the purchase of subsidiary and associated undertakings Pounds 57.4 million, litigation Pounds 3.5 million, reorganisations and redundancies Pounds 37.5 million, disposals and closures Pounds 1.6 million, and lease commitments Pounds 12.5 million. Amounts utilised include Pounds 9.3 million, and amounts released Pounds 2.1 million, in respect of provisions relating to subsidiary undertakings acquired.
21 Share capital of Pearson plc - ------------------------------------------------------------------------------------------------------------------------------- Number Authorised (000's) (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- Ordinary shares of 25 pence each 816,000 204.0 - ------------------------------------------------------------------------------------------------------------------------------- 816,000 204.0 - ------------------------------------------------------------------------------------------------------------------------------- Called up and allotted Ordinary shares of 25 pence each fully paid 31 December 1995 556,164 139.1 Issued on acquisition of Recoletos 11,314 2.8 Issued under share option and employee share schemes 2,655 0.7 Issued under scrip dividend scheme 868 0.2 - ------------------------------------------------------------------------------------------------------------------------------- At 31 December 1996 571,001 142.8 - -------------------------------------------------------------------------------------------------------------------------------
Ordinary shares issued on the acquisition of the increased shareholding in Recoletos were issued for aggregate consideration of Pounds 70.4 million based on a share price of 622.6 pence per share. The ordinary shares referred to above, as defined in the memorandum and articles of association of the Company, are equivalent to equity shares as defined by FRS 4. The consideration received in respect of shares issued during the year was Pounds 84.5 million (1995: Pounds 11.8 million). Options granted under certain of the Company's employee share option schemes were adjusted following the demerger of Royal Doulton plc. In the case of those 'Save As You Earn' and Executive share options which were not adjustable, compensation is to take the form of additional Pearson shares distributed from an employee share trust, when the options are exercised. If all these options are exercised the maximum amount of equity shares to be issued is estimated at 97,839 under the 'Save As You Earn' scheme and 51,603 under the Executive schemes. 46 Notes to the Accounts
21 Share capital of Pearson plc continued - ------------------------------------------------------------------------------------------------------------------------------- Number Original When of shares subscription Exercise Options outstanding at 31 December 1996 granted (000's) price (pence) period - ------------------------------------------------------------------------------------------------------------------------------- 'Save As You Earn' share option schemes 1989 129 301 1994-1997 1990 453 265 1995-1998 1991 640 299 1996-1999 1992 2,103 242 1997-2000 1994 833 509 1999-2002 1995 1,043 436 2000-2003 1996 883 578 2001-2004 - ------------------------------------------------------------------------------------------------------------------------------- Executive share option schemes 1988 66 342 1991-1998 1989 405 341-376 1992-1999 1990 1,045 307-334 1993-2000 1991 245 364-377 1994-2001 1992 684 327-379 1995-2002 1993 150 396-410 1996-2003 1994 1,779 629-635 1997-2004 1995 1,683 545-606 1998-2005 1996 1,769 654-682 1999-2006 - ------------------------------------------------------------------------------------------------------------------------------- 13,910 - ------------------------------------------------------------------------------------------------------------------------------- The subscription prices have been rounded down to the nearest whole penny. 22 Reserves - ------------------------------------------------------------------------------------------------------------------------------- Share Profit premium Revaluation Other and loss account reserve reserves account Total Summary of movements (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- At 31 December 1995 48.7 6.9 1.4 637.1 694.1 Exchange differences - (0.3) (0.2) (35.4) (35.9) Premium on issue of 3.5m equity shares 13.2 - - - 13.2 Premium arising on equity shares issued on Recoletos acquisition 67.6 - - - 67.6 Goodwill arising (see note 23) - - - (632.4) (632.4) Goodwill written back (see note 24) - - - 1.4 1.4 Realisation of revaluation reserve - (1.2) - 1.2 - Profit retained for the year - - - 137.8 137.8 - ------------------------------------------------------------------------------------------------------------------------------- At 31 December 1996 129.5 5.4 1.2 109.7 245.8 - ------------------------------------------------------------------------------------------------------------------------------- Analysed as: Partnerships and associated undertakings - 0.2 1.2 15.3 16.7 Group excluding partnerships and associated undertakings 129.5 5.2 - 94.4 229.1 - ------------------------------------------------------------------------------------------------------------------------------- The cumulative net goodwill written off is Pounds 1,896.4 million.
47 Financial Statements Notes to the Accounts 23 Acquisitions - -------------------------------------------------------------------------------- On 1 April 1996 the Group acquired HarperCollins Educational and, on 1 December 1996, Putnam Berkley. During the year the Group increased its shareholding in Recoletos from 56.7% at 31 December 1995 to 94.2%. All acquisitions have been consolidated applying acquisition accounting principles. - --------------------------------------------------------------------------------
Harper Collins Putnam 1996 1995 Acquisition analysis of subsidiary undertakings Educational Berkley Recoletos Other Total Total and businesses (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------- Tangible fixed assets 6.0 9.9 - 2.1 18.0 4.3 Investments - - - 30.2 30.2 - Associated undertakings - - - - - 2.8 Stocks 86.4 21.8 - 3.3 111.5 5.1 Debtors 12.4 67.8 - 11.1 91.3 45.9 Creditors (29.4) (60.4) - (16.4) (106.2) (43.9) Provisions (27.3) (3.3) - (2.0) (32.6) (1.0) Deferred taxation - - - 0.3 0.3 9.2 Equity minority interests - - 19.6 0.7 20.3 (0.9) Net cash/(borrowing) acquired - (0.2) - 4.7 4.5 8.6 Net assets acquired at fair value 48.1 35.6 19.6 34.0 137.3 30.1 Fair value of consideration: Cash (369.2) (200.9) (31.0) (84.6) (685.7) (348.6) Shares issued - - (70.4) - (70.4) - Deferred cash consideration - 0.7 (7.9) (5.7) (12.9) (28.2) Costs accrued - (0.8) - (0.4) (1.2) - Net prior year adjustments - - - 1.1 1.1 (1.4) - ------------------------------------------------------------------------------------------------------------------------------- Total consideration (369.2) (201.0) (109.3) (89.6) (769.1) (378.2) - ------------------------------------------------------------------------------------------------------------------------------- Goodwill arising 321.1 165.4 89.7 55.6 631.8 348.1 - -------------------------------------------------------------------------------------------------------------------------------
Shares issued consisted of 11,313,908 ordinary shares (see note 21).
- ------------------------------------------------------------------------------------------------------------------------------- Harper Collins Putnam Educational Berkley Recoletos Other Total Acquisition goodwill and fair values (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- Acquisition cost 369.2 201.0 109.3 89.6 769.1 - ------------------------------------------------------------------------------------------------------------------------------- Book value of net tangible assets acquired 253.7 65.7 19.6 12.5 351.5 - ------------------------------------------------------------------------------------------------------------------------------- Fair value adjustments (205.6) (30.1) - 21.5 214.2) - ------------------------------------------------------------------------------------------------------------------------------- Fair value to the Group 48.1 35.6 19.6 34.0 137.3 - ------------------------------------------------------------------------------------------------------------------------------- Goodwill arising written off to reserves 321.1 165.4 89.7 55.6 631.8 - -------------------------------------------------------------------------------------------------------------------------------
Other fair value adjustments comprise the revaluation of the investment in Meridian following the acquisition of SelecTV of Pounds 22.7 million and other sundry adjustments of Pounds 1.2 million. 48 Financial Statements Notes to the Accounts
23 Acquisitions continued - ------------------------------------------------------------------------------------------------------------------------------- Accounting Revaluations Book policy and other Fair value alignment adjustments value HarperCollins Educational Note (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------- Tangible fixed assets 5.5 - 0.5 6.0 Stocks a 240.9 (124.7) (29.8) 86.4 Debtors b 38.4 (18.9) (7.1) 12.4 Creditors c (25.4) - (4.0) (29.4) Provisions d (5.7) - (21.6) (27.3) - ------------------------------------------------------------------------------------------------------------------------------- Net assets acquired 253.7 (143.6) (62.0) 48.1 - -------------------------------------------------------------------------------------------------------------------------------
Provisional fair value adjustments: Accounting policy alignment a) Pre-publication expenditure for still to be published and published books has been reduced by Pounds 124.7 million to comply with the Pearson accounting policy which capitalises fewer internal costs and also amortises this expenditure over a shorter time period. b) The reserve for returns has been increased by Pounds 3.9 million, and Pounds 15.0 million of capitalised promotion and complimentary product cost has been written off in line with Pearson accounting policy. Revaluations and other adjustments a) Inventory has been written down by Pounds 15.0 million to net realisable value. A further adjustment of Pounds 14.8 million has been made to write pre- publication expenditure down to net realisable value. b) The reserve against debtors has been increased by Pounds 0.8 million to reflect potential bad debts; the reserve for royalty advances has been increased by Pounds 3.6 million to reflect net realisable value; capitalised software costs amounting to Pounds 2.7 million have been written down to their net realisable value. c) Additional accruals have been made for sundry liabilities identified at the time of purchase. d) Aprovision has been recognised for onerous property related liabilities.
- ------------------------------------------------------------------------------------------------------------------------------- Accounting Revaluations Book policy and other Fair value alignment adjustments value Putnam Berkley Note (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------- Tangible fixed assets 10.1 - (0.2) 9.9 Stocks 21.8 - - 21.8 Debtors a 81.6 (5.4) (8.4) 67.8 Creditors b (47.6) - (12.8) (60.4) Provisions c - - (3.3) (3.3) Net cash acquired (0.2) - - (0.2) - ------------------------------------------------------------------------------------------------------------------------------- Net assets acquired 65.7 (5.4) (24.7) 35.6 - -------------------------------------------------------------------------------------------------------------------------------
Provisional fair value adjustments: Accounting policy alignment a) To establish a backlist reserve for returns in line with existing Pearson accounting policy. Revaluations and other adjustments a) A provision of Pounds 7.1 million has been made against irrecoverable royalty advances and the reserve against debtors has been increased by Pounds 1.3 million to reflect potential bad debts. b) A provision of Pounds 9.3 million has been established against irrecoverable royalty advances, committed prior to purchase, and Pounds 3.5 million has been provided for sundry liabilities identified at the time of purchase. c) A provision has been recognised for onerous property related liabilities. 49 Notes to the Accounts
23 Acquisitions continued - ------------------------------------------------------------------------------------------------------------------------------- 1 July 1995 to Year to 31 March 30 June 1996 1995 HarperCollins Educational financial information (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- Profit and loss Sales 107.7 204.1 Gross profit 52.4 104.0 Operating profit - 32.9 - -------------------------------------------------------------------------------------------------------------------------------
The above results are shown using the accounting policies of HarperCollins Educational prior to acquisition. Profit before taxation and taxation numbers are not available, as the taxation of HarperCollins Educational was accounted for as part of a larger group. Accordingly no statement of total recognised gains and losses is presented. Operating profit for the period 1 July 1995 to 31 March 1996 is not available. The profit after tax of Putnam Berkley from 1 July 1996, the beginning of its financial year, to 1 December 1996, the effective date of acquisition was Pounds 8.2 million (1996 financial year Pounds 12.8 million). These results are based on the accounting policies of Putnam Berkley prior to acquisition.
- ------------------------------------------------------------------------------------------------------------------------------- Net assets Cost acquired Goodwill Total goodwill arising on acquisitions (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- Subsidiary undertakings and businesses (see page 48) 769.1 137.3 631.8 Associated undertakings 36.0 35.4 0.6 - ------------------------------------------------------------------------------------------------------------------------------- 805.1 172.7 632.4 - ------------------------------------------------------------------------------------------------------------------------------- 1996 1995 Cash flow from acquisitions (Pounds in million) - ------------------------------------------------------------------------------------------------------------------------------- Cash - current year acquisitions (see page 48) 685.7 348.6 Deferred payments for prior year acquisitions and other items 12.2 11.2 - ------------------------------------------------------------------------------------------------------------------------------- Net cash outflow 697.9 359.8 - -------------------------------------------------------------------------------------------------------------------------------
Contributions to the cash flow from acquisitions in 1996 are as follows: net cash inflow from operating activities Pounds 18.7 million, returns on investments and servicing of finance Pounds 20.5 million, taxation Pounds nil; and investing activities Pounds 30.1 million. Notes to the Accounts
24 Disposals - ------------------------------------------------------------------------------------------------------------------------------- Westminister 1996 Press Other Total 1995 Disposals of subsidiary undertakings and businesses (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------- Tangible fixed assets (53.7) (0.4) (54.1) (0.7) Goodwill written back - (1.4) (1.4) - Stocks (1.9) - (1.9) (6.4) Debtors (24.5) (0.4) (24.9) (4.2) Creditors and taxation 6.9 0.5 7.4 3.6 Provisions 1.0 - 1.0 (0.2) Deferred tax 6.5 - 6.5 - Net cash (5.0) (0.5) (5.5) (1.1) - ------------------------------------------------------------------------------------------------------------------------------- Net assets (70.7) (2.2) (72.9) (9.0) - ------------------------------------------------------------------------------------------------------------------------------- Proceeds 305.0 0.8 305.8 15.0 Costs paid (3.0) (0.5) (3.5) - - ------------------------------------------------------------------------------------------------------------------------------- Profit/(loss) on sale 231.3 (1.9) 229.4 6.0 - ------------------------------------------------------------------------------------------------------------------------------- Cash flow: Cash - current year disposals 302.3 3.9 Deferred receipts from prior year disposals 4.9 - - ------------------------------------------------------------------------------------------------------------------------------- 307.2 3.9 - -------------------------------------------------------------------------------------------------------------------------------
Contributions to the cash flow from disposals in 1996 are as follows: Net cash inflow from operating activities Pounds 38.4 million, returns on investments and servicing of finance Pounds 0.8 million, taxation Pounds 14.1 million and capital expenditure and financial investment Pounds 7.5 million.
25 Notes to consolidated statement of cash flows - -------------------------------------------------------------------------------------------------------------------------------- Continuing Discontinued Total Continuing Discontinued Total a) Reconciliation of operating profit to net 1996 1996 1996 1995 1995 1995 cash inflow from operating activities (Pounds in million) - --------------------------------------------------------------------------------------------------------------------------------- Operating profit 146.0 35.3 181.3 237.6 22.0 259.6 Depreciation charges 56.8 6.4 63.2 54.7 6.8 61.5 Share of profit of partnerships and associated undertakings (53.1) - (53.1) (43.3) - (43.3) Dividends from partnerships and associated undertakings 33.5 - 33.5 30.7 - 30.7 Decrease/(increase) in stocks 4.6 1.9 6.5 (34.6) (1.9) (36.5) Decrease/(increase) in debtors 21.8 (1.0) 20.8 (80.3) (0.2) (80.5) Increase/(decrease) in creditors 59.9 1.0 60.9 20.2 (2.0) 18.2 (Decrease)/increase in operating provisions 1.6 (3.5) (1.9) 29.2 (0.2) 29.0 Exchange adjustments (7.7) - (7.7) 2.8 - 2.8 Other (10.6) (1.7) (12.3) (5.1) - (5.1) - --------------------------------------------------------------------------------------------------------------------------------- Net cash inflow from operating activities* 252.8 38.4 291.2 211.9 24.5 236.4 - --------------------------------------------------------------------------------------------------------------------------------- Purchase of fixed assets and finance leases (85.9) (5.0) (90.9) (97.6) (4.3) (101.9) Sale of operating tangible fixed assets 6.5 0.4 6.9 31.6 0.5 32.1 Other 10.0 1.8 11.8 (20.1) - (20.1) - --------------------------------------------------------------------------------------------------------------------------------- Operating cash flow 183.4 35.6 219.0 125.8 20.7 146.5 - ---------------------------------------------------------------------------------------------------------------------------------
*Cash inflow for 1996 includes a Pounds 20.9 million outflow relating to exceptional items charged in 1996 and a Pounds 12.5 million outflow relating to exceptional items charged in prior years. Notes to the Accounts
25 Notes to consolidated statement of cash flows continued - ------------------------------------------------------------------------------------------------------------------------------------ Cash at Current Debt due Debt due bank and asset within after in hand Overdrafts Sub total investments one year one year Total b) Analysis of net debt (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1995 155.5 (50.7) 104.8 516.5 (210.3) (474.4) (63.4) Exchange differences (8.2) 6.8 (1.4) (4.9) 19.6 23.2 36.5 Net cash flow (8.5) (24.7) (33.2) (351.4) 85.1 (104.0) (403.5) - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1996 138.8 (68.6) 70.2 160.2 (105.6) (555.2) (430.4) - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1994 75.8 (85.3) (9.5) 290.8 (70.5) (357.2) (146.4) Exchange differences (0.3) (3.0) (3.3) - (0.3) (0.1) (3.7) Net cash flow 80.0 37.6 117.6 225.0 (139.5) (117.1) 86.0 Deferred cash flow - - - 0.7 - - 0.7 - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1995 155.5 (50.7) 104.8 516.5 (210.3) (474.4) (63.4) - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 c) Reconciliation of net cash flow to movement in net debt (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ (Increase)/decrease in net debt from cash flows (33.2) 117.6 (Increase)/decrease in net debt from management of liquid resources (351.4) 225.7* (Increase)/decrease in net debt from other borrowings (18.9) (256.6) Exchange differences 36.5 (3.7) - ------------------------------------------------------------------------------------------------------------------------------------ Movement in net debt in the year (367.0) 83.0 Net debt at 1 January (63.4) (146.4) - ------------------------------------------------------------------------------------------------------------------------------------ Net debt at 31 December (430.4) (63.4)
*Net cash flow of Pounds 225.0 million and deferred cash flow of Pounds 0.7 million. d) Tax paid Tax paid includes Pounds 30.1 million (1995: Pounds 2.5 million of credits) relating to items excluded from operating profit.
26 Commitments under leases - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1996, the Group had commitments under leases, other than finance leases, to make payments in 1997 as follows: - ------------------------------------------------------------------------------------------------------------------------------------ Land and buildings Other For leases expiring: (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ In 1997 5.2 0.6 Between 1998 and 2001 9.1 8.3 Thereafter 19.7 6.8 - ------------------------------------------------------------------------------------------------------------------------------------ 34.0 15.7 - ------------------------------------------------------------------------------------------------------------------------------------
27 Contingent liabilities - -------------------------------------------------------------------------------- There are contingent Group and Company liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiary undertakings and in respect of guarantees in relation to subsidiary and associated undertakings. In addition there are contingent liabilities of the Group in respect of legal claims and general partnership interests (see note 11). None of these claims is expected to result in a material gain or loss to the Group. 52 Notes to the Accounts 28 Related parties - -------------------------------------------------------------------------------- Partnerships and associated undertakings Loans and equity advanced to associated undertakings during the year and at the balance sheet date are shown in note 11. Amounts falling due from partnerships and associated undertakings are set out in note 14. Dividends received from partnerships and associated undertakings are set out in note 11. Details of individually significant transactions are shown below. Troll Communications Inc The Group has a 44% interest in the equity of Troll Communications Inc. During the year Pounds 2.5 million in interest income was received on the subordinated debt and Pounds 1.4 million dividend income was received on the preferred stock. As at 31 December 1996 Pounds 3.6 million (1995: Pounds 1.4 million) in interest was outstanding and Pounds 2.1 million (1995: Pounds 0.8 million) in dividend was outstanding. Port Aventura SA The Group has a 40% interest in the equity of Port Aventura SA. During the year Pounds 5.2 million equity was provided. Management fees of Pounds 2.5 million were earned during the year of which Pounds 1.0 million (1995: Pounds 1.2 million) was outstanding at the year end. Channel 5 Television Group Ltd The Group has a 24% economic interest in the equity of Channel 5 Television Group Ltd. During the year Pounds 4.6 million equity was provided and Pounds 19.2 million loans advanced. It is intended that the Group will provide programming to Channel 5 Broadcasting Ltd, a wholly owned subsidiary of Channel 5 Television Group Ltd, and undertake transmission for Channel 5 Engineering Services Ltd, a subsidiary of Channel 5 Television Group Ltd. In 1996 the Group contracted to provide programming to the value of Pounds 24.0 million for transmission in 1997 and beyond. European Channel Management Ltd The Group has a 45% interest in the redeemable unsecured loan stock of European Channel Management Ltd. During the year Pounds 4.1 million loans were advanced. In addition the Group paid Pounds 3.1 million during the year for Pounds 10.3 million of start up tax losses. UK Gold/UK Living The Group has 20% and 25% economic interests respectively in the equity of UK Gold and UK Living. During the year the Group provided programmes and services to the value of Pounds 5.4 million and Pounds 9.4 million respectively to UK Gold and UK Living of which Pounds 1.4 million and Pounds 0.4 million were outstanding at the year end (see note 31). Grundy associated undertakings During the year the Group received Pounds 4.4 million for management fees, format rights and royalties from a number of associated undertakings of Grundy Worldwide Ltd, of which Pounds 0.4 million was outstanding at the year end. No individual transactions were material to the Group. Lazard Partnership Details of the ownership structure and profit sharing arrangements are set out in note 11. The Group periodically places funds on deposit with the Lazard Houses. The investments are made on an arm's length basis and no transactions are individually material in the context of the group treasury transactions. The Group also uses the Lazard Houses to provide professional advice. Fees for such services for the year to 31 December 1996 totalled Pounds 4.4 million. Recoletos Transactions with directors and officers of the company are set out on page 15 of the Directors' Report. In September 1996, Pearson purchased approximately 30% of the issued share capital of Recoletos Compania Editorial SA (Recoletos) from five Recoletos directors (Juan Kindelan Jaquotot, Alejandro Kindelan Jaquotot, Jose Maria Garcia-Hoz Rosales, Luis Infante Brave and Jaime Castellanos Borreo). The consideration totalled Pounds 17.6 million in cash and 11.3 million new Pearson ordinary shares. An agreement exists between the five Recoletos directors and Union Bank of Switzerland (UBS) whereby UBS will compensate the directors as shareholders if, by 5 October 1999, the Pearson share price is lower than 95% of the share price on 16 January 1997 (the date the transaction was entered into). Similarly the directors as shareholders will compensate UBS if the share price is greater than 111% of the share price on the date of the transaction. This can be settled in cash or Pearson shares. Notes to the Accounts
29 COMPANY BALANCE SHEET AS AT 31 DECEMBER 1996 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 Notes (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ FIXED ASSETS Tangible assets - 0.4 Investments: Subsidiary undertakings 1,798.4 1,742.9 - ------------------------------------------------------------------------------------------------------------------------------------ 1,798.4 1,743.3 - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS Debtors: Advance corporation tax recoverable 15.9 14.2 Subsidiary undertakings - due within one year 696.9 627.8 - due after one year 521.6 557.7 Other debtors 6.8 6.6 Prepayments and accrued income 5.6 10.7 Investments 0.7 0.7 Cash and liquid funds 16 97.3 485.7 - ------------------------------------------------------------------------------------------------------------------------------------ 1,344.8 1,703.4 - ------------------------------------------------------------------------------------------------------------------------------------ CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR: Short term borrowing 17 (170.3) (289.3) Subsidiary undertakings (958.7) (1,394.8) Taxation (23.1) (19.6) Other creditors (0.2) (2.6) Accruals and deferred income (11.0) (13.8) Dividends (63.3) (56.7) - ------------------------------------------------------------------------------------------------------------------------------------ (1,226.6) (1,776.8) - ------------------------------------------------------------------------------------------------------------------------------------ NET CURRENT ASSETS/(LIABILITIES) 118.2 (73.4) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS LESS CURRENT LIABILITIES 1,916.6 1,669.9 Creditors - amounts falling due after more than one year: Medium and long term borrowing 17 (189.1) (239.2) Subsidiary undertakings (225.0) (225.0) Accruals and deferred income (10.2) (13.5) Deferred taxation (0.6) (3.8) Other provisions for liabilities and charges (10.5) (2.0) - ------------------------------------------------------------------------------------------------------------------------------------ (435.4) (483.5) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS 1,481.2 1,186.4 - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL AND RESERVES Called up share capital 21 142.8 139.1 Share premium 129.5 48.7 Special reserve 397.2 397.2 Other reserves 50.1 50.1 Profit and loss account 761.6 551.3 - ------------------------------------------------------------------------------------------------------------------------------------ EQUITY SHAREHOLDERS' FUNDS 1,481.2 1,186.4 - ------------------------------------------------------------------------------------------------------------------------------------
The financial statements were approved by the board of directors on 17 March 1997 and signed on its behalf by BLAKENHAM J MAKINSON 54 Financial Statements Notes to the Accounts
30 NOTES TO THE COMPANY BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ TANGIBLE FIXED ASSETS (LEASEHOLD PROPERTY) Cost 0.6 0.6 Depreciation (0.6) (0.2) - ------------------------------------------------------------------------------------------------------------------------------------ Net book value - 0.4 - ------------------------------------------------------------------------------------------------------------------------------------ There were no capital commitments for fixed assets at 31 December 1996. - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT IN SUBSIDIARY UNDERTAKINGS (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ At 31 December 1995 1,742.9 Acquisition from subsidiary undertaking 234.4 Disposals to subsidiary undertaking (30.9) Subscription for additional share capital in subsidiary undertaking 87.9 Repayment of capital by subsidiary undertaking (211.0) External disposal (23.0) Revaluations (1.9) - ------------------------------------------------------------------------------------------------------------------------------------ AT 31 DECEMBER 1996 1,798.4 - ------------------------------------------------------------------------------------------------------------------------------------ Shares are stated at cost less provisions for diminution in value or directors' 1969 valuations. - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED TAXATION (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF MOVEMENTS At 31 December 1995 (3.8) Charge for the year 3.2 - ------------------------------------------------------------------------------------------------------------------------------------ AT 31 DECEMBER 1996 (0.6) - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 DEFERRED TAXATION DERIVES FROM (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ OTHER TIMING DIFFERENCES (0.6) (3.8) - ------------------------------------------------------------------------------------------------------------------------------------
Current investments The investments are unlisted, valued by the directors at book value and if realised at valuation there would be no liability for taxation on disposal. ACCRUALS AND DEFERRED INCOME Accruals and deferred income includes Pounds 12.6 million (1995: Pounds 15.1 million relating to the unamortised profit arising out of the unwinding of a sterling interest rate swap in 1994. The swap was arranged in 1992 in connection with the issue of Pounds 100 mllion 10.75% Euro- sterling Bonds 2002. The profit is being amortised over the remaining life of the Bonds. Pounds 10.2 million is due after one year, within which the amount falling due after five years is Pounds 0.2 million. 55 Notes to the Accounts
30 NOTES TO THE COMPANY BALANCE SHEET CONTINUED - ------------------------------------------------------------------------------------------------------------------------------------ Share Profit premium Special Other and loss account reserve reserves account Total RESERVES (Pounds in millions) - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF MOVEMENTS At 31 December 1995 48.7 397.2 50.1 551.3 1,047.3 Premium on issue of 3.5 million equity shares 13.2 - - - 13.2 Premium arising on equity shares issued on Recoletos acquisition 67.6 - - - 67.6 Profit for the financial year - - - 313.0 313.0 Dividends - - - (102.7) (102.7) - ------------------------------------------------------------------------------------------------------------------------------------ AT 31 DECEMBER 1996 129.5 397.2 50.1 761.6 1,338.4 - ------------------------------------------------------------------------------------------------------------------------------------
The special reserve represents the cumulative effect of cancellation of the Company's share premium account. As permitted by Section 230(4) of the Companies Act 1985, only the Group's profit and loss account has been presented. 31 POST BALANCE SHEET EVENTS - -------------------------------------------------------------------------------- DISPOSAL OF INVESTMENT IN TELEVISION BROADCASTS LIMITED On 27 February 1997 Pearson sold its 10% interest in Television Broadcasts Limited ("TVB") for Pounds 111.1 million. Pearson originally purchased this investment for Pounds 106.2 million but the carrying value has subsequently been reduced as a result of exchange rate fluctuations. The profit on disposal, to be recognised in 1997, is Pounds 6.3 million. In 1996 operating profit included Pounds 2.8 million (1995: Pounds 0.7 million) in respect of TVB dividends. ACQUISITION OF STAKE IN SOUTH AFRICAN BUSINESS NEWSPAPERS On 1 February 1997 Pearson acquired a 50% stake in Business Day and Financial Mail, the leading daily and weekly financial and business publications in South Africa for Pounds 11.5 million. FLEXTECH On 17 March 1997 Pearson agreed to sell its interests in the satellite and cable channels, UK Gold (20%) and UK Living (25%), to Flextech as part of joint venture agreements between Flextech and the BBC. The sale of these interests involves the payment by Flextech, between now and December 1998, of Pounds 7.8 million representing the repayment of UK Living loan stock, and Pearson Television receiving 8.8 million Flextech ordinary shares - a total consideration of approximately Pounds 76 million based on a Flextech share price of 772 pence. Following completion of the transaction, Pearson will own 5.6% of the enlarged share capital of Flextech. 56 Principal Subsidiary and Associated Undertakings and Investments
- ------------------------------------------------------------------------------------------------------------------------------ Country of incorporation or Business Subsidiary undertakings registration sector - ------------------------------------------------------------------------------------------------------------------------------ The principal operating subsidiary undertakings are listed below. They operate mainly in the countries of incorporation or registration, the investments are in equity share capital and they are all 100% owned unless stated otherwise. Financial Times Group Ltd* England Information Interactive Data Corporation USA Les Echos SA France Recoletos Compania Editorial SA (94.2%) Spain Pearson Professional Ltd England Addison-Wesley Publishing Co Inc USA Education Addison Wesley Longman Ltd England HarperCollins Educational Publishers USA Penguin Putnam Inc USA Entertainment The Penguin Publishing Co Ltd England Mindscape Inc USA Future Publishing Ltd England Pearson Television Limited* England Grundy Worldwide Limited Australia Thames Television Ltd England The Tussauds Group Ltd* England
- ------------------------------------------------------------------------------------------------------------------------------ Share Country of capital incorporation or Beneficial pound Accounting Associated undertakings registration interest % Class of share million year end - ------------------------------------------------------------------------------------------------------------------------------- Information The Economist Newspaper Ltd England 50 Ord 5p 1.1 March 100 `B' 5p) 0.1 ) Nil `A' 5p) Nil Trust 5p - Entertainment Port Aventura SA Spain 40 Pts 10,000 52.8 December Troll Communications Inc USA 44 Common 0.6 December equity Channel 5 Television Group Ltd England 24 Ord 1p - December Def 1p - Pref 1p - - ------------------------------------------------------------------------------------------------------------------------------ Investments - ------------------------------------------------------------------------------------------------------------------------------ The Group held 10% or more of the following: Entertainment Television Broadcasts Limited (sold February 1997) Hong Kong 10.0 Ord HK 5c 1.8 December - -----------------------------------------------------------------------------------------------------------------------------
The principal partnerships are shown on page 40. * Direct investment of Pearson plc 57 Five Year Summary
- ------------------------------------------------------------------------------------------------------------------------------ 1992 1993 1994 1995 1996 pound pound pound pound pound million million million million million - ------------------------------------------------------------------------------------------------------------------------------ Sales Continuing operations 1,022.3 1,193.8 1,413.3 1,687.1 2,048.9 Discontinued operations 613.4 676.3 136.8 143.3 137.1 - ------------------------------------------------------------------------------------------------------------------------------ 1,635.7 1,870.1 1,550.1 1,830.4 2,186.0 - ------------------------------------------------------------------------------------------------------------------------------ Profits Information 39.9 31.1 69.0 83.3 99.1 Education 42.5 55.8 51.2 31.8 68.1 Entertainment 41.6 62.2 129.5 110.9 (47.5) Investment Banking 23.7 36.4 30.2 39.9 40.8 Corporate expenses less other income (4.5) (4.3) (23.2) (28.3) (14.5) - ------------------------------------------------------------------------------------------------------------------------------ Continuing operations 143.2 181.2 256.7 237.6 146.0 Discontinued operations 12.4 34.9 15.7 22.0 35.3 - ------------------------------------------------------------------------------------------------------------------------------ Operating profit 155.6 216.1 272.4 259.6 181.3 Profit/(loss) on disposals of businesses - (68.4) 15.2 6.0 229.4 Profit/(loss) on sales of fixed assets 8.8 4.4 26.4 123.4 (14.1) Provision on investment in BSkyB - 71.4 - - - - ------------------------------------------------------------------------------------------------------------------------------ Profit before interest 164.4 223.5 314.0 389.0 396.6 Net interest payable (13.6) (14.9) (16.2) (23.9) (29.5) Loan stock redemption premium - - - - (10.3) - ------------------------------------------------------------------------------------------------------------------------------ Profit before taxation 150.8 208.6 297.8 365.1 356.8 Taxation (44.4) (60.3) (74.3) (92.8) (108.6) - ------------------------------------------------------------------------------------------------------------------------------ Profit after taxation 106.4 148.3 223.5 272.3 248.2 Equity minority interests (1.1) (0.3) (0.6) (11.3) (7.7) - ------------------------------------------------------------------------------------------------------------------------------ Profit for the financial year 105.3 148.0 222.9 261.0 240.5 - ------------------------------------------------------------------------------------------------------------------------------ Earnings per equity share 19.3p 27.0p 40.4p 47.1p 42.9p - ------------------------------------------------------------------------------------------------------------------------------ Adjusted earnings per equity share 17.3p 27.9p 34.1p 28.8p 30.6p - ------------------------------------------------------------------------------------------------------------------------------ Dividends per equity share 12.0p 13.0p 15.0p 16.5p 18.0p - ------------------------------------------------------------------------------------------------------------------------------
+Adjusted in accordance with page 25. 58 Five Year Summary
- ------------------------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 pound pound pound pound pound Capital employed million million million million million - ------------------------------------------------------------------------------------------------------------------------------ Net assets 1,058.3 1,000.1 1,051.9 855.4 392.3 Deferred tax and other provisions 85.6 67.6 233.8 34.4 189.4 Net debt 121.3 1.3 146.4 63.4 430.4 - ------------------------------------------------------------------------------------------------------------------------------ Capital employed 1,265.2 1,069.0 1,432.1 1,053.2 1,012.1 - ------------------------------------------------------------------------------------------------------------------------------ Cumulative goodwill written off 670.7 700.2 1,042.5 1,437.8 1,896.4 - ------------------------------------------------------------------------------------------------------------------------------ Gearing Debt/equity 11% N/A 14% 7% 110% Debt/adjusted equity (including goodwill) 7% N/A 7% 3% 19% Interest cover x11 x15 x17 x11 x6 - ------------------------------------------------------------------------------------------------------------------------------ Share statistics Equity shares - weighted average 545.5m 547.6m 551.6m 554.4m 560.8m Share price - Year end 390p 608p 555p 624p 750p Share price - High 459p 614p 725p 684p 760p Share price - Low 302p 356p 554p 543p 601p - ------------------------------------------------------------------------------------------------------------------------------ Average number employed Continuing operations 11,534 11,823 13,562 16,008 17,383 Discontinued operations 16,432 15,453 3,653 3,414 2,564 - ------------------------------------------------------------------------------------------------------------------------------ 27,966 27,276 17,215 19,422 19,947 - ------------------------------------------------------------------------------------------------------------------------------
59
Index to the Financial Statements Accounting policies pp29 Geographical analysis pp31, 32, 36, Acquisitions pp48, 49, 50 Goodwill pp48, 50 Adjusted earnings per share p25 Historical cost profits and losses p28 Auditors Interest p34 Remuneration p33 Interest rate hedging p44 Report to members p24 Investments pp41, 42 Balance sheets Leases p52 Company p54 Net cash inflow from operating activities p51 Group p26 Net debt p52 Borrowings p43, 44 Other income p33 Capital commitments p38 Partnerships and associates pp39 Capital employed p32 Pensions pp36, 37 Capital expenditure p38 Post balance sheet events p56 Cash flow pp27, 51, 52 Post-retirement costs pp36, 37 Cash and liquid funds p42 Principal group companies p57 Contingent liabilities p53 Profit and loss account p25 Creditors, other p45 Provisions p46 Debtors p41 Recognised gains and losses p28 Deferred taxation p45 Related parties p53 Depreciation p38 Reserves p47 Disposals p51 Sales pp31,32 Dividends p35 Sector analysis pp31, 32, 36, 39 Earnings per share p25 Share capital and options pp46, Employee information pp36, 37 Shareholders funds p28 Fair value pp48, 49 Stocks p41 Forward exchange p44 Subsidiaries p57 Five year summary pp58, 59 Taxation pp35, 45 Fixed assets, tangible p38 Treasury information pp43, 44
Designed and produced by Michael Peters Limited. Type origination by Wordwork plc. Printed in England by CTD Printers Limited. EX-99.(H) 19 POWER OF ATTORNEY EXHIBIT (h) POWER OF ATTORNEY ----------------- A POWER OF ATTORNEY made on the 7/th/ day of October 1997 by PEARSON plc, a company registered in England whose registered office is at 3 Burlington Gardens, London W1X 1LE (the "Company"). 1. (i) The Deed is governed by English law (ii) In this Deed:- "Attorney" means the persons named in Clause 2 "person" includes a corporation and an unincorporated body of persons; the singular includes the plural and vice versa. 2. The Company hereby appoints any one director of the Company, John Davis of 50th Floor, 30 Rockefeller Plaza, New York, NY 10112-5095, USA, Tom Wharton, also of 50th Floor, 30 Rockefeller Plaza, New York, NY 10112-5095, USA and Paul Vickers of 3 Burlington Gardens, London W1X 1LE, severally, as its Attorney on its behalf and in its name or otherwise to do all acts and to approve, execute, deliver and/or file all agreements and other documents which any such Attorney considers necessary or desirable in connection with an offer to purchase for cash all of the outstanding shares of common stock of All American Communications Inc., including without limitation filings on Schedule 14D-1 and 13D required to be made pursuant to the Securities Exchange Act 1934 and all amendments thereto. IN WITNESS whereof the Company has executed this Deed in accordance with its constitution and the laws of England the day and year first before written. THE COMMON SEAL of ) PEARSON plc ) was hereunto affixed in the presence of:- ) /s/ Marjorie Scardino -------------------------- Director /s/ Anette Lawless -------------------------- Secretary -----END PRIVACY-ENHANCED MESSAGE-----