-----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, GMkrz1ypwQt7ZHr7+nIsLWXDATeOYXi38HZGFTYz12K5yX+7tVBq15xyzElmU0I0 ewNz1oCTwAOe24eHXV9cyg== /in/edgar/work/20000807/0000912057-00-035038/0000912057-00-035038.txt : 20000921 0000912057-00-035038.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-035038 CONFORMED SUBMISSION TYPE: F-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20000807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEARSON PLC CENTRAL INDEX KEY: 0000938323 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FILING VALUES: FORM TYPE: F-1 SEC ACT: SEC FILE NUMBER: 333-43198 FILM NUMBER: 687554 BUSINESS ADDRESS: STREET 1: 3 BURLINGTON GARDENS CITY: LONDON UK W1X 1LE STATE: X0 ZIP: 00000 BUSINESS PHONE: 442074412000 MAIL ADDRESS: STREET 1: 3 BURLINGTON GARDENS CITY: LONDON UK W1X 1LE STATE: X0 ZIP: 00000 F-1 1 f-1.txt F-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ PEARSON PLC (Exact name of registrant as specified in its charter) ENGLAND AND WALES 2731 NOT REQUIRED (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
3 BURLINGTON GARDENS PEARSON INC. LONDON, ENGLAND W1X 1LE 1330 AVENUE OF THE AMERICAS 44-20-7411-2000 NEW YORK, NEW YORK 10019 (Address, including zip code, and telephone number, (212) 641-2400 including area code, of registrant's principal executive (Name, address, including zip code, and telephone offices) number, including area code, of agent for service)
------------------------------ COPIES TO: CHARLES E. ENGROS ROBERT M. THOMAS, JR. MORGAN, LEWIS & BOCKIUS LLP SULLIVAN & CROMWELL 101 PARK AVENUE 125 BROAD STREET NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10004 (212) 309-6000 (212) 558-4000 FAX: (212) 309-6273 FAX: (212) 558-3588
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE Ordinary Shares, 25p per share 22,100,000 $15 $331,500,000 $87,516 Share Rights and ADS Rights(3) (4) None None None
(1) Includes approximately 17,600,000 Ordinary Shares that may be offered and sold to holders of American Depositary Shares and to holders of Ordinary Shares in the United States. This amount also includes up to 4,500,000 additional Ordinary Shares which (i) are to be offered and sold in the United Kingdom and elsewhere outside the United States, but which may be resold from time to time in the United States during the distribution and (ii) may be sold or re-offered by the underwriters in the United States. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457; based upon an exchange rate of L1.00=$1.50, the Noon Buying Rate on July 28, 2000. (3) American Depositary Shares evidenced by American Depositary Receipts issuable upon deposit of Ordinary Shares registered hereby will be registered under a separate Registration Statement on Form F-6. (4) Share rights to subscribe for Ordinary Shares as reflected in Provisional Allotment Letters, and ADS Rights to subscribe for American Depositary Shares pursuant to Warrants, each as described in the Prospectus contained herein. No separate consideration will be received for Share Rights and ADS Rights. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION. DATED AUGUST 7, 2000. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] Rights Offering of Ordinary Shares and American Depositary Shares ------------------ Pearson plc is offering holders of its ordinary shares transferable rights to subscribe for new ordinary shares at a price of L10 per share. Pearson plc is also offering holders of its American Depositary Shares, or ADSs, each of which represents one ordinary share, transferable rights to subscribe for new ADSs at the US dollar equivalent of L10 per share. A UK tax of 1.5% per share is payable by approximately each holder of an ADS who exercises an ADS right. At current exchange rates, L10 represents $15. We intend to use the net proceeds of this rights offering to finance our pending acquisition of National Computer Systems, Inc., or NCS. - We will grant three transferable share rights for every 11 ordinary shares you own of record on July 28, 2000. - We will grant three transferable ADS rights for every 11 ADSs you own of record on July 28, 2000. - We have made arrangements for you to elect to pay the subscription price in US dollars. - Share rights expire on September 1, 2000 and ADS rights expire on August 30, 2000. Goldman Sachs International and Cazenove & Co. have agreed, severally, to underwrite up to 150,000,000 of the 170,528,278 shares offered in the rights offering. A portion of the underwritten shares may be sold or resold by the underwriters under this prospectus in the United States by selling agents of the underwriters. Our ordinary shares are traded on the London Stock Exchange and the ADSs have been trading in the over-the-counter market in the US. On July 28, 2000, the last reported sale of an ordinary share on the London Stock Exchange was L20.10. We will apply to list the ADRs evidencing ADSs on the New York Stock Exchange under the symbol "PSO". We do not intend to list the ADS rights, but you may trade them in the over-the-counter market. The share rights will trade on the London Stock Exchange. SEE "RISK FACTORS" ON PAGE 11 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING ORDINARY SHARES OR ADSS. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Assuming the rights are exercised in full, our gross proceeds from the rights offering will be approximately L1.7 billion or $2.6 billion. We estimate that our expenses in connection with the offering, including the underwriting fee we expect to pay, will be approximately L15 million or $22.5 million. As a result, the net proceeds to us will be approximately L1.69 billion or $2.54 billion. JOINT GLOBAL COORDINATORS GOLDMAN SACHS INTERNATIONAL CAZENOVE & CO. ---------------- GOLDMAN, SACHS & CO. CAZENOVE INC. Prospectus dated , 2000. PRESENTATION OF FINANCIAL INFORMATION; EXCHANGE RATE INFORMATION We have prepared the financial information contained in this prospectus in accordance with UK GAAP, which differs in significant respects from US GAAP. We describe these differences in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Principles", and in Note 34 to our consolidated financial statements included in this prospectus. Unless we indicate otherwise, any reference in this prospectus to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this prospectus. We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this prospectus: - references to "sterling", "pounds", "pence" or "L" are to the lawful currency of the United Kingdom, - references to "euro" or "[EURO]" are to the euro, the single currency established by the European Monetary Union, and - references to "US dollars", "cents" or "$" are to the lawful currency of the United States. For convenience and except where we specify otherwise, we have translated some sterling figures into US dollars at the rate of L1.00 = $1.51, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on June 30, 2000. We do not make any representation that the amounts of sterling have been, could have been or could be converted into US dollars at the rates indicated. The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in US dollars per sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period, and on the last day of each month during an annual period.
MONTH HIGH LOW END AVERAGE RATE - ----- -------- -------- -------- ------------- August (through August 4)........................ $1.50 $1.49 $1.50 $1.50 July 2000........................................ $1.52 $1.49 $1.50 $1.51 June 2000........................................ $1.52 $1.49 $1.51 $1.51 May 2000......................................... $1.56 $1.47 $1.50 $1.51 April 2000....................................... $1.60 $1.56 $1.56 $1.58 March 2000....................................... $1.59 $1.57 $1.59 $1.58 February 2000.................................... $1.62 $1.58 $1.58 $1.60 January 2000..................................... $1.65 $1.62 $1.62 $1.64
SIX MONTHS ENDED JUNE 30, 2000 HIGH LOW END AVERAGE RATE - ------------------------------ -------- -------- -------- ------------- $1.65 $1.47 $1.51 $1.57
YEAR ENDED DECEMBER 31 HIGH LOW END AVERAGE RATE - ---------------------- -------- -------- -------- ------------- 1999............................................. $1.68 $1.55 $1.62 $1.62 1998............................................. $1.72 $1.61 $1.66 $1.66 1997............................................. $1.70 $1.58 $1.64 $1.64 1996............................................. $1.71 $1.49 $1.71 $1.57 1995............................................. $1.64 $1.53 $1.55 $1.58
ii PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THIS ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE ACQUIRING ANY ORDINARY SHARES OR ADSS. IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "WE", "US", "OUR" AND "PEARSON" REFER TO PEARSON PLC AND ITS SUBSIDIARIES. INTRODUCTION Pearson is a global media company with its principal operations in the education, business information, consumer publishing and television markets. We have significant operations in the United States and generate more than half our revenues from that market. On July 31, 2000, we announced an agreement to acquire National Computer Systems, or NCS, for a purchase price of approximately $2.5 billion. NCS, which trades on the NASDAQ market under the symbol "NLCS", is a leading testing and educational services company in the US. The combination of NCS and our Pearson Education division will create an integrated education company with strong market positions in curricular content, online learning, assessment, enterprise applications for US schools and professional accreditation. We intend to finance the acquisition of NCS through the rights offering to existing shareholders. We believe the rights offering to be the most efficient means for us to raise the necessary funds. PEARSON PLC We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers, television programs and internet services. We use online capabilities in our back office, our supply chains, our base businesses and new businesses we create. The internet is already both an integral part of each of our businesses and a facilitator of new product and distribution opportunities. Although we seek to build businesses that are worth more together than apart because of the synergies they offer each other, our operations break down into four core areas: - PEARSON EDUCATION is a leading international publisher of textbooks, supplementary materials and electronic education programs for elementary and secondary school, higher education and business and professional markets. In the US, our Scott Foresman, Addison Wesley Longman, Prentice Hall and Allyn & Bacon brands have enabled us to capture significant shares in the kindergarten through 12th grade markets. Our higher education business has been pre-eminent in the US for many years. Our international education business is the global leader in the English language teaching materials market and has a major position in the textbook and educational materials market outside the US, including being the largest textbook and school program provider in a number of local markets. In addition, we are a leader in using technology to educate, including online assessment and digital courseware through the Computer Curriculum Corporation, as well as products such as the Waterford Early Reading Program and the KnowZone. Our education offerings also extend to business education, where FT Knowledge provides distance learning for the corporate and post-secondary markets and has entered into several agreements with major business schools and other educational institutions in the US and worldwide. We are currently developing the Learning Network, a vertically integrated, internet-delivered community linking parents, 1 teachers and students with educational opportunities. On June 29, 2000, we announced the purchase of an 87% interest in FamilyEducation Network, Inc., an online network for parents, teachers and students. We are working to form strategic alliances with other internet content providers, to put in place the necessary technological infrastructure and management team for the Learning Network and to develop a marketing program. We expect to launch the Learning Network in the Fall of 2000. NCS, which will become a part of Pearson Education upon completion of the acquisition, is the United States' largest commercial processor of student assessment tests for kindergarten through 12th grade. NCS offers secure internet-based electronic testing delivery and reporting capability, allowing it to participate in the professional certification market. It also provides software, services, systems applications and internet-based technologies for the collection, management and interpretation of data in education. NCS seeks to use internet-based technologies to increase its market penetration and offer additional innovative products and services to its customers in the education field. - THE FT GROUP consists of our international newspaper, print and online financial information, business magazine and professional publishing interests. Our flagship product is the FINANCIAL TIMES, known internationally for its premium editorial content and international scope. Building upon the success of the FINANCIAL TIMES, we have developed a global information portal (FT.com), an online personal finance resource (FTYourMoney.com), and a European online financial news website (FTMarketWatch.com). We have also developed a pan-European network of leading business newspapers and related online business portals, including FINANCIAL TIMES DEUTSCHLAND, LES ECHOS and EXPANSION, for the German, French and Spanish-speaking markets. We own Recoletos, a Spanish media group which, in addition to EXPANSION, publishes MARCA, the leading Spanish sports newspaper, and we hold a 50% stake in THE ECONOMIST, an international weekly current affairs and business magazine. We also own 60% of Data Broadcasting Corporation, a supplier of electronic database services to US and UK securities professionals. Data Broadcasting Corporation has a 34% ownership interest in MarketWatch.com, whose web properties, CBS.MarketWatch.com and bigcharts.com, are among the most popular destinations for financial and market news on the web. - THE PENGUIN GROUP is one of the premier English language publishers in the world, with brand imprints such as Penguin, Avery, Dutton, Putnam and Viking. We publish an extensive portfolio of fiction and non-fiction, literary and commercial works from authors such as Tom Clancy, Clive Cussler, Dick Francis, Patricia Cornwell and Nick Hornby. We are one of the pre-eminent classics publishers and own or have rights to some of the most highly prized and enduring brands in children's publishing, featuring the books of Roald Dahl and such popular characters as Spot, Peter Rabbit and Madeline. We have a strong frontlist of new books by bestselling authors, and a backlist of more than 25,000 popular titles. In 1999, titles published by Penguin Putnam, as we are known in the US, spent a record 262 weeks on THE NEW YORK TIMES bestseller list. Our recent acquisition of Dorling Kindersley, or DK, a leading international publisher of illustrated reference books, will add breadth to our portfolio. DK offers many products with illustrations and graphics that are particularly well-suited for online delivery, and DK has invested in converting its properties into a digital format. As a result, this acquisition also gives us many more opportunities for online rights exploitation. - PEARSON TELEVISION was recently merged with CLT-Ufa, the television and broadcasting business owned by Germany's Bertelsmann AG, and Belgium's Audiofina, to create the RTL Group. The combined company is an integrated pan-European company with activities in television production, online delivery and broadcasting, including the well-known RTL television stations. The RTL Group is Europe's largest radio and television broadcast 2 company by revenue and its shares are traded on the London Stock Exchange. The terms of the merger, which closed on July 25, 2000, provide us with a 22% interest in the RTL Group and representation on its board. COMPETITIVE STRENGTHS We have achieved leading positions in our markets by capitalizing on our competitive strengths: - POWERFUL BRANDS--We have made a substantial investment to develop and promote our quality brands. Our brands create customer loyalty and facilitate the use of new distribution channels and our entry into new markets. - RICH CONTENT--Each of our businesses creates and manages informative, educational and entertaining content. The quality, depth and originality of our products reinforce the strength of our brands and attract customers, partners and talented employees. - INTERNATIONAL SCALE--We have operations around the world and publications in English, French, Spanish, German and many other languages. Our large business presence in many local markets enables us to move rapidly to capitalize on international opportunities. - ATTRACTIVE CUSTOMER BASE--Our products appeal to a range of customers--institutions, businesses and a broad group of consumers of all ages and interests. We have a highly educated customer base with a substantial discretionary spending capacity. - PROVEN MANAGEMENT TEAM--Since 1997, a new management team has transformed the company into a simpler, more integrated media enterprise focused on our core businesses. Since we started this process, we have publicly set clear financial goals and consistently met or exceeded them. OUR STRATEGIES We focus on media businesses in growing markets and categories where we have or we can attain strong, sustainable market positions. We use our content and brands in our existing businesses and to develop new ones. We have integrated the internet into each of our businesses to enhance our customers' experiences, improve our ability to reach customers and increase the value of our content. - PEARSON EDUCATION constantly seeks ways to make products more attractive to teachers, students, parents and professionals. Over 1,200 of our approximately 49,000 college textbooks have interactive companion websites with online study guides to elaborate on text concepts, and chat rooms and bulletin boards to facilitate interaction between students and faculty. We continue to invest in a range of electronic learning tools to support our programs. We are also developing the Learning Network, an interactive online community of parents, students and teachers, to further expand the distribution of our content and generate new revenue streams. In addition, we are seeking to expand our international reach to benefit from our market expertise and build scale. Our acquisition of NCS will transform Pearson Education into an integrated education company. The combined business will be well-placed to create new market opportunities through developing customized learning in which testing and curriculum work together. The combined business will connect schools and homes, enabling parents to play a more active role in the education of their children. - THE FT GROUP aims to be the leading source of strategic information, intelligence, analysis and commentary for senior managers and institutional and individual investors around the 3 world. We are building on the strength of our flagship brand, the FINANCIAL TIMES, to create a pan-European network of national business newspapers and websites, including LES ECHOS in France, EXPANSION in Spain and FINANCIAL TIMES DEUTSCHLAND in Germany. With THE WALL STREET JOURNAL, we have also launched VEDOMOSTI, a Russian language business newspaper. We use the well recognized brand and premium content of the FINANCIAL TIMES to develop new websites with diverse revenue models. We continue to invest in FT.com, our leading global business information portal, to further enhance its content, include more international company and market information and add more sophisticated tools intended to increase the "stickiness" of the site. We have launched FTYourMoney.com, to capitalize on the rapidly growing personal finance market in the UK, and FTMarketWatch.com, to capture the expanding market of European investors who make their investment decisions online or look to the internet for quick, market-oriented news. - THE PENGUIN GROUP continues to strengthen its frontlist, working globally to extend its stable of bestselling authors and identify new talent. We are digitizing our business--all of our new titles and over half of our backlist titles have been converted to an electronic digital format to enable "printing on demand" and "e-book" delivery. We are also building online communities around authors and genres to strengthen our relationship with our readers and to create new revenue streams. We recently acquired DK, a publisher of illustrated products such as travel and children's reference books. We believe that DK's high quality illustrated publications, many of which have been converted to a digital format permitting online delivery, will provide us access to new customers and markets, expand our product offerings and enhance our online marketing efforts. - PEARSON TELEVISION'S recently completed merger to form the RTL Group offers Pearson Television the opportunity to take its quality content into new distribution channels that are offered by our new media partners. The RTL Group will continue Pearson Television's development of online versions of television shows, such as THE PRICE IS RIGHT, and the building of online communities around popular serial dramas. We are working to capture the full synergistic potential that exists among our media businesses through the sharing of content and distribution channels. For example, FT Knowledge, our online distance learning business, results from the merger of Pearson Education's higher education textbooks and professional publishing resources with the FT Group's distance learning and management education resources. Longman Penguin Readers are simplified classics for new English speakers, combining Pearson Education's English language training resources and Penguin's classics library. Content from Penguin and the FT Group will be featured on our Learning Network. STRATEGIC DEVELOPMENTS In 1997, new management undertook a comprehensive review of our business and established core financial targets for sales growth, cash flow, earnings per share and operating margins. Management has since implemented a number of strategic and operating initiatives in order to streamline and interrelate our portfolio of businesses and increase employee share ownership. As part of the initiatives undertaken by management since 1997, we have completed approximately 120 divestitures and acquisitions. We have divested businesses with a total value of over L2.0 billion. To increase the strength of our core businesses, in addition to the NCS acquisition discussed below, we have acquired businesses with a total value of over approximately L3.7 billion, 4 including Simon & Schuster's educational, business & professional and reference publishing businesses in 1998. NCS ACQUISITION NCS is a leading testing and educational services company in the US. For its fiscal year ended January 29, 2000, NCS had revenues of $630 million, compared to $505 million for the prior fiscal year, and income from operations of $70 million, compared to $55 million for the prior fiscal year. At January 29, 2000, NCS had total assets of $450 million, total long-term debt of $2 million, total cash and cash equivalent of $27 million and total stockholders' equity of $276 million. We have agreed to acquire all of the outstanding shares of NCS common stock for approximately $2.5 billion, or $73 per share. Our merger agreement requires us to launch a cash tender offer for all of the issued and outstanding shares of NCS's common stock on or before August 7, 2000. The tender offer will remain open for 23 business days, unless extended in accordance with the merger agreement, and will be conditioned on the tender of a sufficient number of shares to give us ownership of at least a majority of the fully diluted outstanding shares of NCS. After the completion of the tender offer, NCS will merge with us, and the remaining shareholders of NCS other than us will receive the same cash consideration per share as offered in the tender offer. We intend to finance the NCS acquisition with the proceeds of the rights offering. We believe the acquisition of NCS is an important step in the development of our Pearson Education business, providing the following opportunities: - INTEGRATING EDUCATIONAL PROGRAMS. The combination of curricular content, testing and educational applications will create opportunities to provide schools, universities, colleges and professional and training organizations a comprehensive range of education solutions, encompassing curricular and training programs, assessment and testing and educational services, including student curriculum, instructional and financial management software. - CUSTOMIZING LEARNING. Combining NCS's assessment tools with our curricular content will enable us to create customized learning programs individually tailored for each student. - EXTENDING CUSTOMER REACH. Our salesforce will market NCS's instructional management software, assessment tools and school administrative software to kindergarten through 12th grade school districts to supplement NCS's own direct salesforce. - ACCELERATING THE DEVELOPMENT OF NEW ONLINE PRODUCTS. NCS's online business will complement our business by enabling us to offer electronic end-to-end learning solutions. - DEVELOPING A NEW MARKET, WITH PARENTS AS CUSTOMERS. NCS's products will enable us to reach parents with new educational content, creating new revenue opportunities for our educational publishing business. It will also extend the scale and reach of our Learning Network, enabling it to reach directly a much bigger audience of parents and students. - MOVING INTO NEW PROFESSIONAL MARKETS. Our professional publishing and corporate training business will enable NCS to market its testing and assessment skills to meet the growing demand for accreditation in a wide range of professions and disciplines. - WIDENING INTERNATIONAL SPREAD. With major educational publishing operations around the world, Pearson Education will enhance NCS's international presence. 5 As a publicly traded company, NCS is subject to the informational requirements of the Securities Exchange Act, and files reports and other information with the SEC. The contents of these filed documents do not form a part of this prospectus. ------------------------ Our principal place of business is located at 3 Burlington Gardens, London W1X 1LE, England. Our telephone number is +44-20-7411-2000 and our registration number in England is 53723. 6 RIGHTS OFFERING SUMMARY ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OUTSTANDING ON THE RIGHTS OFFERING RECORD DATE................ 625,270,356 ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OFFERED............... 170,528,278 ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OUTSTANDING AFTER THE RIGHTS OFFERING, ASSUMING FULL SUBSCRIPTION............................... 795,798,634 ordinary shares, excluding approximately 15,400,000 ordinary shares to be issued pursuant to outstanding options under employee stock incentive plans. UNDERWRITING................................. Goldman Sachs International and Cazenove & Co. have agreed, severally, to act as standby underwriters for up to an aggregate of 150,000,000 ordinary shares. To the extent the underwriters are obligated to take up ordinary shares, their selling agents may sell or resell them in the United States under this prospectus. USE OF PROCEEDS.............................. We intend to use the anticipated L1.7 billion ($2.6 billion) proceeds from the rights offering to finance the NCS acquisition and pay the associated expenses. HOLDERS OF ORDINARY SHARES: Share rights............................... We will grant three transferable share rights for every 11 ordinary shares owned at the close of business in London on the share right record date. Share subscription price................... L10 Share right record date.................... July 28, 2000 Share right expiration date................ September 1, 2000 Share right subscription period............ August 10, 2000 through September 1, 2000 Share certificates......................... We will mail certificates representing new ordinary shares to the holders by October 2, 2000. Unexercised share rights................... The new ordinary shares relating to unexercised share rights may be sold on behalf of the unexercising holders through arrangements with the underwriters. If they are sold at a price in excess of the share subscription price and the expenses of sale, the aggregate premium will be paid pro rata to the unexercising holders of share rights. Listing.................................... Our ordinary shares are traded on the London Stock Exchange under the symbol "PSON". The share rights will also trade on the London Stock Exchange.
7 HOLDERS OF ADSS: ADS rights................................. We will grant three transferable ADS rights for every 11 ADSs owned on the ADS right record date. ADS subscription price..................... L10, which does not include a 1.5% UK tax for which you will be responsible if you exercise your rights. The ADS subscription price must be paid in US dollars as outlined below. Estimated US dollar ADS subscription Estimated at $16.50. As described in "The US price.................................... Rights Offering", we have made arrangements with The Bank of New York, as ADS subscription agent, for you to pay the ADS subscription price at this estimated US dollar amount. To the extent the estimated US dollar price is less than the actual US dollar equivalent of the ADS subscription price as of August 31, 2000, plus the 1.5% UK tax, you will be required to pay the difference. To the extent the estimated US dollar price is higher, you will receive a refund of the excess. ADS right record date...................... July 28, 2000 ADS right expiration date.................. 12:00 noon (New York City time) on August 30, 2000 ADS subscription period.................... August 10, 2000 through August 30, 2000 ADS subscription agent..................... The Bank of New York ADR delivery............................... The Bank of New York will provide you with American Depositary Receipts, or ADRs, evidencing your new ADSs as soon as practicable after October 2, 2000. Unexercised ADS rights..................... The new ordinary shares underlying unexercised ADS rights may be sold on behalf of the unexercising holders, through arrangements with the underwriters. If they are sold at a price in excess of the share subscription price and the expenses of sale, any premium attributable to the unexercising ADS holders will be paid to the ADS depositary. The ADS depositary will pay any amounts received by it, net of expenses and commission, pro rata to the unexercising holders of ADS rights. ADS depositary............................. The Bank of New York Listing.................................... We will apply to list the ADRs representing the ADSs that you will receive in this rights offering on the New York Stock Exchange under the symbol "PSO". The ADS rights will not be listed but you may trade them in the over-the-counter market.
8 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of Pearson should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. For convenience, we have translated the six months ended June 30, 2000 and year ended December 31, 1999 amounts into US dollars at the rate of L1.00=$1.51, the noon buying rate in The City of New York on June 30, 2000.
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 ------------------------------ --------------------------------------------------------------- 2000 2000 1999 1999 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- $M LM LM $M LM LM LM LM LM (UNAUDITED) UK GAAP INFORMATION: CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA Total sales.................... 2,333 1,545 1,306 5,031 3 ,332 2,395 2,293 2,186 1,830 Total sales from continuing operations................... 2,333 1,545 1,306 5,031 3,332 2,251 2,011 1,830 1,484 Operating profit from continuing operations(1)..... (29) (19) 25 408 270 187 252 132 192 Total operating profit......... (17) (11) 46 480 318 250 328 189 267 Profit after taxation.......... 137 91 (38) 453 300 441 40 248 272 Operating profit before internet enterprises, goodwill amortization and other items(2)............... 236 156 133 888 588 389 328 289 267 Earnings per equity share(3)... 21.4 CENTS 14.2p (6.6)p 72.8 CENTS 48.2p 74.1p 6.6p 42.8p 47.1p Adjusted earnings per equity share after internet enterprises(4)............... (0.9) (0.6) 6.3 73.2 48.5 42.0 34.9 30.6 28.8 Adjusted earnings per equity share before internet enterprises(5)............... 15.1 10.0 7.1 80.5 53.3 42.0 34.9 30.6 28.8 Diluted earnings per equity share(6)..................... 20.8 13.8 (6.5) 71.7 47.5 73.3 6.4 42.5 46.4 CONSOLIDATED BALANCE SHEET DATA $M LM LM $M LM LM LM LM LM Total assets (Fixed Assets plus Current Assets).............. 9,817 6,501 5,447 8,079 5,350 5,317 2,253 2,246 2,568 Net assets..................... 2,935 1,944 1,107 2,004 1,327 1,084 156 393 856 Long-term obligations(7)....... 3,059 2,026 2,312 3,452 2,286 2,562 609 556 475 Capital Stock.................. 236 156 153 231 153 152 144 143 139 Number of equity shares outstanding (millions of ordinary shares)............. 625 625 611 613 613 610 577 571 556
9
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1999 1998 -------- -------- -------- $M LM LM US GAAP Information:(8) Profit for the financial year............................... 299 198 444 Profit from continuing operations for the financial year.... 254 168 122 Basic earnings per equity share............................. 48.9 CENTS 32.4p 75.3p Diluted earnings per equity share........................... 48.5 32.1 74.6 Basic earnings from continuing operations per equity share..................................................... 41.5 27.5 20.7 Diluted earnings from continuing operations per equity share..................................................... 41.1 27.2 20.5 $M LM LM Shareholders' funds......................................... 3,949 2,615 2,468
- ------------------------------ (1) Continuing operations represent those operations carried on by us as at June 30, 2000. Operating profit from continuing operations consists of operating profit--Group, plus the Group's share of operating profit from continuing operations for Group associates, as disclosed on page F-3 of the consolidated profit and loss account. (2) Other items include a L100 million charge for Penguin improper accounting in 1996, Year 2000 compliance costs of L5 million in 1999 and L7 million in 1998, integration costs in connection with our acquisition of Simon & Schuster's educational, business & professional and reference publishing business of L95 million in 1999 and L120 million in 1998 and integration costs in connection with our acquisition of DK of L3 million in the first six months of 2000. (3) Earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period. (4) Adjusted earnings per equity share is based on adjusted earnings for the financial period and the weighted average number of ordinary shares in issue during the period. Adjusted earnings excludes profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs and integration costs in respect of the Simon & Schuster acquisition and the DK acquisition and, following the prospective implementation of FRS10 "Goodwill and Intangible Assets" in 1998, goodwill amortization. In 1996, the L100 million exceptional charge for improper accounting in Penguin and the loan stock redemption premium have also been excluded. In the first six months of 2000, the accelerated amortization of a financing arrangement fee has also been excluded. (5) Due to expenditures of L84 million in the first six months of 2000 and L39 million in 1999 on new internet enterprises, a second adjusted earnings per equity share in accordance with UK GAAP is presented in which the results of these internet enterprises are also excluded from earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General Overview--Internet Enterprises". (6) Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options. (7) Long-term obligations are comprised of medium and long-term borrowings plus amounts falling due after more than one year related to obligations under finance leases. (8) See Note 34 to the consolidated financial statements included in this prospectus entitled "Summary of principal differences between United Kingdom and United States generally accepted accounting principles". 10 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED BELOW, AS WELL AS THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE ACQUIRING ORDINARY SHARES OR ADSS. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED BY ANY OR ALL OF THESE RISKS. RISKS RELATED TO OUR BUSINESS OUR RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS THAT MAY NOT BE ADEQUATELY PROTECTED UNDER CURRENT LAWS IN SOME JURISDICTIONS MAY ADVERSELY AFFECT OUR RESULTS AND OUR ABILITY TO GROW Our products are largely comprised of intellectual property content delivered through a variety of media, including newspapers, books, the internet and television. We rely on trademark, copyright and other intellectual property laws to establish and protect our proprietary rights in these products. However, we cannot assure you that our proprietary rights will not be challenged, invalidated or circumvented. Our intellectual property rights in jurisdictions such as the US and UK, which are the jurisdictions with the largest proportions of our operations, are well-established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect our future growth. Moreover, despite trademark and copyright protection, third parties may be able to copy, infringe or otherwise profit from our proprietary rights without our authorization. These unauthorized activities may be more easily facilitated by the internet. In addition, the lack of internet-specific legislation relating to trademark and copyright protection creates an additional challenge for us in protecting our proprietary rights relating to our online business processes and other digital technology rights. WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT THAT IS SUBJECT TO RAPID CHANGE AND WE MUST CONTINUE TO INVEST AND ADAPT TO REMAIN COMPETITIVE Our education, business information, book publishing and television businesses operate in highly competitive markets. These markets continue to change in response to technological innovations and other factors. We cannot predict with certainty the changes that may occur and affect the competitiveness of our businesses. In particular, the means of delivering various of our products may be subject to rapid technological change. Although we have undertaken several initiatives to adapt to and benefit from these changes, we cannot predict whether technological innovations will, in the future, make some of our products, particularly those printed in traditional formats, wholly or partially obsolete. If this were to occur, we may be required to invest significant resources to further adapt to the changing competitive environment. WE CANNOT ASSURE YOU WHETHER, OR WHEN, OUR SUBSTANTIAL INVESTMENT IN OUR INTERNET INITIATIVES WILL PRODUCE RETURNS We are investing, at increasing levels, significant amounts of capital to develop and promote our internet initiatives. We believe that the success of our internet initiatives will be an important component of our continued growth. We can offer no assurance that our internet initiatives will result in revenue streams developing to the same or a greater extent, or within the same time frames, as alternative internet initiatives undertaken by our competitors. This is due to a variety of factors, many of which are beyond our control. These factors may include: - the ability of our internet initiatives to achieve leadership positions in their respective markets, - competition from comparable and new technologies, and - the public's acceptance and continued use of the internet. 11 In addition, as a consequence of our internet and other technological initiatives, we are increasingly dependent on the performance of the internet and our systems. CONSOLIDATION IN THE MARKETS IN WHICH WE OPERATE COULD POTENTIALLY PLACE US AT A COMPETITIVE DISADVANTAGE Recently, some of the markets in which we operate have experienced significant consolidation. In particular, the combinations of traditional media content companies and new media distribution companies have resulted in new valuation methods, business models and strategies. We cannot predict with certainty the extent to which these types of business combinations may occur or the success that they may achieve. Although we currently have strong positions in each of our market segments, these combinations could potentially place us at a competitive disadvantage with respect to scale, resources and our ability to develop and exploit new media technologies. PEARSON EDUCATION, OUR LARGEST DIVISION, MAY NOT ACHIEVE CONTINUED GROWTH IN EMERGING MARKETS DUE TO POLITICAL AND ECONOMIC FORCES BEYOND OUR CONTROL A variety of factors beyond our control may inhibit the growth of Pearson Education's operations in the emerging markets of Latin America, Africa, the Far East and Eastern Europe. These factors include foreign currency exchange rate risk, regulatory, political or economic conditions in a specific country or region, trade protection measures and other regulatory requirements and government spending patterns. Any or all of these factors could have a material adverse impact on Pearson Education's and our growth and future international business. WE MAY NOT BE ABLE TO RETAIN OR ATTRACT THE KEY MANAGEMENT PERSONNEL AND CREATIVE AND EDITORIAL TALENT THAT WE NEED TO REMAIN COMPETITIVE AND GROW We operate in a number of highly visible industry segments where there is intense competition for experienced and highly qualified individuals. Our successful operations in these segments may increase the market visibility of members of our management, creative and editorial teams and result in their being recruited by other businesses. In searching for new employees and retaining the current employees in our internet enterprises, such as FT.com, FTYourMoney.com, FTMarketWatch.com and Pearson Education's internet enterprises, we compete with other technology companies, including start-up internet companies that may be perceived as offering significant opportunities to realize wealth. We cannot be certain that we will successfully attract or retain qualified personnel in the future. RISKS RELATED TO THE NCS ACQUISITION THE COMPLETION OF THE NCS ACQUISITION IS NOT A CONDITION TO THE COMPLETION OF THE RIGHTS OFFERING The acquisition of NCS is conditioned upon the consummation of the tender offer, which requires the holders of at least a majority of the outstanding shares of common stock of NCS to tender their shares. The tender offer is also conditioned on certain regulatory clearances and other customary matters. The rights offering is not conditioned upon the acquisition of NCS. In the unlikely event that the NCS acquisition is not completed, we will consider the return of a significant portion of the funds raised from the rights offering in an appropriate manner. However, any such return of funds would be likely to give rise to tax liabilities for some categories of shareholders. The extent of these tax liabilities and the categories of shareholders who would be subject to them would depend on the 12 means by which we return the funds. As a result, we cannot determine them with any greater specificity at this time. WE MAY HAVE TO BORROW FUNDS TO COMPLETE THE NCS ACQUISITION IF THE RIGHTS OFFERING IS NOT FULLY SUBSCRIBED Our agreement to acquire NCS is not conditioned upon the completion of the rights offering. The rights offering is only partially underwritten. If the share rights and ADS rights are not fully subscribed, we may have to borrow under our existing credit facility a portion of the funds needed to complete the NCS acquisition. WE CANNOT ASSURE YOU THAT WE WILL REALIZE ALL OF THE POTENTIAL BENEFITS OF THE NCS ACQUISITION The NCS acquisition will transform Pearson Education into an integrated education company. We can, however, offer no assurance that we will realize the potential benefits of this acquisition to the extent and within the time frame contemplated. RISKS RELATED TO THE OFFERING WE CANNOT PREDICT THE EXTENT TO WHICH A MARKET FOR OUR ADSS WILL CONTINUE TO DEVELOP IN THE US Our ADSs have been traded over-the-counter in the US and our ordinary shares are traded on the London Stock Exchange. We intend to list our ADSs on the New York Stock Exchange. This listing will not, however, guarantee that an active and liquid trading market for ADSs will develop on the New York Stock Exchange. The price of our ordinary shares and our ADSs may fluctuate widely, for reasons including the following: - the investment community's perception of our prospects in general or the prospects of one or more of our businesses in particular, - differences between our actual operating results and those expected by investors and analysts, - changes in analysts' recommendations or projections, - changes in general economic or market conditions and broad market fluctuations, particularly those affecting the prices of securities of companies engaged in businesses similar to ours, and - changes in the exchange rate between sterling and the US dollar. WE MAY OFFER ADDITIONAL ADSS OR ORDINARY SHARES IN THE FUTURE AND THESE AND OTHER SALES MAY ADVERSELY AFFECT THE MARKET PRICE OF OUTSTANDING ORDINARY SHARES AND ADSS Although we have no current plans for a subsequent offering of ordinary shares or ADSs, we continually evaluate the capital markets and may offer additional shares in the future to raise capital or effect acquisitions. In addition, the granting of ordinary shares and employee stock options is an integral element of our compensation policies. An additional offering of shares by us, significant sales of shares by employees, or the public perception that an offering or sales may occur, could have an adverse effect on the market price of outstanding ordinary shares and ADSs. 13 FORWARD-LOOKING STATEMENTS You should not rely unduly on forward-looking statements in this prospectus. This prospectus, including the sections entitled "Prospectus Summary", "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terms such as "may", "will", "should", "expect", "intend", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: - operations and prospects, - growth strategy, - potential benefits of the NCS acquisition, - internet strategy, - funding needs and financing resources, - expected financial position, - market risk, - debt levels, and - general market and economic conditions. These forward-looking statements are only predictions. They involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In evaluating them, you should consider various factors, including the risks outlined under "Risk Factors", which may cause actual events or our or our industry's results to differ materially from those expressed or implied by any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. 14 THE US RIGHTS OFFERING The US rights offering is a part of our international rights offering. We will issue ADS rights to subscribe for new ADSs to holders of ADSs and share rights to subscribe for new ordinary shares to holders of ordinary shares in the US. We are sending to holders of ADSs transferable warrants evidencing ADS rights, instructions relating to the exercise of these ADS rights and this prospectus. We are sending to each holder of ordinary shares whose registered address is in the US a transferable provisional allotment letter evidencing share rights and containing instructions regarding acceptance and payment procedures and this prospectus. We summarize the procedures for subscription by holders of ADSs and by holders of ordinary shares below. As of July 28, 2000, we had 625,270,356 ordinary shares issued and outstanding and, assuming full subscription, we will have 795,798,634 ordinary shares issued and outstanding after completion of the rights offering. Even if all the new ordinary shares offered in the rights offering are not subscribed for, whether by shareholders, the underwriters or otherwise, we will allot those ordinary shares which have been subscribed for if the offering becomes unconditional. SUBSCRIPTION BY HOLDERS OF ADSS This section applies to you if you hold ADSs. If you are a holder of ordinary shares in the US, see "--Subscription by Holders of Ordinary Shares" below. The timetable below lists certain important dates relating to the offering to holders of ADSs. All times referred to are New York City time. Record date for ADS rights--(close of business in New York City)............... July 28, 2000 ADS warrants sent to eligible ADS holders.................................. August 9, 2000 Latest time to give instructions to ADS subscription agent to sell ADS rights.... 5:00 p.m. on August 24, 2000 ADS rights cease trading................... 5:00 p.m. on August 25, 2000 Latest time for exchanging an ADS right for a share.................................. 5:00 p.m. on August 25, 2000 Latest time to transfer an ADS right....... 5:00 p.m. on August 25, 2000 Latest time for acceptance and payment..... 12:00 noon on August 30, 2000 Expected listing date of ADRs on the New York Stock Exchange...................... September 1, 2000 New ADRs evidencing new ADSs provided to holders as soon as practicable after..... October 2, 2000
The holders of ADSs may subscribe for new ADSs representing new ordinary shares as follows: ADS RIGHT RECORD DATE. The record date for determining those holders who are eligible to participate in the rights offering is the close of business in New York City on July 28, 2000. WARRANTS. ADS rights are evidenced by transferable warrants which we will issue to eligible ADS holders. Every 11 ADSs held of record on the ADS right record date will entitle the holder to three ADS rights. The holder of one ADS right is entitled to subscribe for one new ADS at the ADS subscription price. 15 The warrants are to be issued under the terms of an agreement between us and The Bank of New York, which is acting as ADS subscription agent. The Bank of New York is also the depositary for our ADSs. We have filed copies of the deposit agreement and the rights agency agreement relating to the rights offering between us and The Bank of New York as exhibits to the registration statement, and copies are available for inspection at the offices of The Bank of New York in New York and London. FRACTIONAL ENTITLEMENTS. We have not allotted ADS rights for fractions of new ADSs in making the initial allocations of ADS rights to subscribe for new ADSs. These fractional ADS rights will be aggregated and the related new ADSs will be sold in the market for your benefit. ADS SUBSCRIPTION PRICE. The ADS subscription price is the US dollar equivalent of L10. In addition to this ADS subscription price, you will be responsible for a 1.5% UK stamp duty reserve tax per ADS right. If you exercise your ADS rights, you must pay this tax with your subscription price. For information on how to pay, see "--Method of Subscription and Payment" below. ADS RIGHT EXPIRATION DATE. ADS rights will expire at 12:00 noon (New York City time) on August 30, 2000. If unexercised, your ADS rights will be void but you may receive proceeds from the sale of the new ordinary shares attributable to your unexercised ADS rights as described under "--Unexercised ADS Rights" below. We refer to August 30, 2000 as the ADS right expiration date. ADS SUBSCRIPTION AGENT. The Bank of New York, 101 Barclay Street, New York, New York 10286, the depositary for ADSs, is acting as ADS subscription agent to accept subscriptions for new ADSs. METHOD OF SUBSCRIPTION AND PAYMENT. You can exercise your ADS rights by the delivery of a properly executed warrant, together with payment in full of the ADS subscription price, and the applicable UK stamp duty reserve tax, as follows: - - BY MAIL, TO: - BY HAND, EXPRESS MAIL OR OVERNIGHT COURIER, TO: The Bank of New York The Bank of New York Tender and Exchange Department Tender and Exchange Department P.O. Box 11248 101 Barclay Street Church Street Station Receive and Deliver Window--Street Level New York, New York 10286-1248 New York, New York 10286
which must be received no later than 12:00 noon (New York City time) on August 30, 2000. The ADS subscription agent has discretion to refuse any improperly completed or delivered or unexecuted warrant. DEPOSIT IN THE MAIL WILL NOT CONSTITUTE EFFECTIVE DELIVERY. You must pay the ADS subscription price in US dollars. The ADS subscription agent will arrange to convert payments made in US dollars into sterling and pay the appropriate subscription amount in sterling to us. The payment per new ADS, which must be paid by a subscriber to the ADS subscription agent in US dollars, is $16.50. You may pay in US dollars by check, bank draft or postal or express money order, made payable to "The Bank of New York". In addition, you may pay by wire transfer to ABA 021000018, Account Number 8900060603, Ref: Pearson plc. The ADS subscription price will be deemed to have been received by the ADS subscription agent only upon: - clearance of any uncertified check, - receipt by the ADS subscription agent of any certified check, cashier's check or postal or express money order, or - receipt by the ADS subscription agent of a wire transfer. 16 If you pay by uncertified personal check, please note that the funds may take at least five (5) business days to clear. The ADS subscription agent will make the conversion from US dollars into sterling as soon as practicable on or about August 31, 2000 at a commercially reasonable rate. If there is any excess or deficiency in US dollars as a result of such conversion, the ADS subscription agent will refund to you the excess amount without interest in US dollars or bill you for the deficiency, with interest. The estimated US dollar ADS subscription price represents a convenience translation of the sterling subscription price, which has been based on the noon buying rate on July 28, 2000, rounded upwards to 110% of that rate with the expectation that after payment of the US dollar equivalent of L10 and the 1.5% UK stamp duty reserve tax there will be a refund to all subscribers paying in US dollars. We cannot assure that this will be the case. If your payment in US dollars, when converted into sterling, is less than the ADS subscription price in sterling for the number of new ADSs you subscribed for, the ADS subscription agent will pay the amount of the deficiency to us on your behalf. You will then be required to pay promptly the amount of such deficiency, including interest and expenses, and you will not receive new ADSs subscribed for prior to the ADS subscription agent's receipt of payment. If your payment of a deficiency is not received by the ADS subscription agent by September 20, 2000, the ADS subscription agent may sell your new ADSs in an amount sufficient to cover the amount you owe. In that event, the ADS subscription agent will send you an ADR representing any remaining new ADSs, together with a check in the amount of the excess proceeds, if any, from such sale. If you desire to subscribe and time will not permit your warrant to reach the ADS subscription agent before the ADS right expiration date, your subscription will be accepted if, on or before the ADS right expiration date, the ADS subscription agent has received payment in full of the ADS subscription price in US dollars and a completed "Notice of Guaranteed Delivery" in the form provided by the ADS subscription agent. The Notice of Guaranteed Delivery will require that you state your name and the number of new ADSs subscribed for and will contain an irrevocable guarantee of an eligible financial institution of the type specified in the instructions that your properly completed and executed warrant will be delivered by the eligible financial institution to the ADS subscription agent prior to 12:00 noon (New York City time) on August 31, 2000. If the eligible financial institution fails to deliver your properly executed warrant by 12:00 noon (New York City time) on August 31, 2000, the ADS subscription agent will return any funds paid by you without interest and your ADS rights will be treated as unexercised. All questions concerning the timeliness, validity, form and eligibility of any exercise of ADS rights will be determined by the ADS subscription agent in its sole discretion. The ADS subscription agent may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any ADS right. Warrants will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the ADS subscription agent determines. Neither we nor the ADS subscription agent has a duty to give notification of any defect or irregularity in connection with the submission of warrants or incur any liability for failure to give such notification. PARTIAL EXERCISE OF ADS RIGHTS. If you wish to subscribe for a portion of your new ADSs or to transfer a portion of your ADS rights to more than one person, you must follow the instructions included with your warrants. YOUR EXERCISE OF ADS RIGHTS IS IRREVOCABLE AND MAY NOT BE CANCELED OR MODIFIED. TRANSFER OF ADS RIGHTS. ADS rights may be exercised, sold or assigned to others. ADS rights may be bought or sold through banks or brokers. 17 You may place an order with the ADS subscription agent to sell ADS rights, whether or not in connection with a subscription. The ADS subscription agent must receive your order prior to 12:00 noon (New York City time) on August 24, 2000. No ADS right may be sold, assigned or otherwise transferred after 5:00 p.m. (New York City time) on August 25, 2000. If only a portion of the ADS rights are to be sold by the ADS subscription agent, your warrant must include instructions as to the action to be taken with respect to your ADS rights that are not to be sold. The ADS subscription agent's obligation to execute orders is subject to its ability to find buyers. If buyers cannot be found, ADS rights that are not sold will be treated as unexercised. The ADS subscription agent will not be liable to you for its failure to obtain the best market price for any ADS rights it sells at your request. A check for the proceeds from any ADS rights sold, net of fees and commissions, will be sent to you by the ADS subscription agent. NON-US HOLDERS OF ADSS. We will not mail warrants to holders of ADSs with record addresses outside the US, including those whose addresses indicate that they are on military or other government service outside the US. The ADS subscription agent will hold these warrants for the accounts of the holders who may, prior to 12:00 noon (New York City time) on August 25, 2000, instruct the ADS subscription agent in writing as to the disposition of their ADS rights as described above. In the alternative, non-US holders may, prior to 12:00 noon (New York City time) on August 30, 2000, instruct the ADS subscription agent in writing to exercise their ADS rights as described above. If instructions and payment are not received prior to that time, ADS rights held for these holders will be treated as unexercised. ELIGIBILITY. ADS holders with registered addresses in Canada will not be eligible to exercise their ADS rights. These ADS rights will be treated as unexercised ADS rights. UNEXERCISED ADS RIGHTS. The ADS subscription agent will not submit a provisional allotment letter with respect to share rights relating to unexercised ADS rights. New ordinary shares provisionally issued and allotted with respect to unexercised share rights and ADS rights may be sold on behalf of the unexercising holders through arrangements with the underwriters. If the ordinary shares are sold at a price in excess of the subscription price and expenses of sale, any premium will be remitted in sterling pro rata to the holders of ordinary shares to whom the unsubscribed new ordinary shares have been provisionally allotted, including The Bank of New York, as ADS depositary. The Bank of New York will convert these proceeds to US dollars at a commercially reasonable rate and remit them pro rata to the holders of ADSs to whom the unsubscribed new ADSs had been provisionally alloted. Neither we nor the underwriters have any liability to you if ordinary shares respecting unexercised share rights are not sold, or with respect to the price at which they may be sold. DELIVERY OF ADRS. The depositary will provide you an ADR evidencing new ADSs subscribed for as soon as practicable after October 2, 2000, provided that you have paid the ADS subscription agent any shortfall arising from the conversion of a US dollar payment. RANKING. New ADSs will rank equally in all respects with outstanding ADSs except that they will not qualify for the interim dividend in respect of the year ending December 31, 2000, as the new ADSs will be issued after August 11, 2000, the dividend record date. 18 SUBSCRIPTION BY HOLDERS OF ORDINARY SHARES This section applies to you if you hold ordinary shares and not ADSs. The timetable below lists certain important dates relating to the offering to holders of ordinary shares. All times referred to are London time. Record date for ordinary share rights--(close of business in London)............................. July 28, 2000 Mailing of provisional allotment letters.......... August 9, 2000 Dealings in new ordinary shares on the London Stock Exchange expected to commence, unpaid..... 8:00 a.m. on August 10, 2000 Latest time and date for exchanging a share right for an ADS right................................ 3:00 p.m. on August 25, 2000 Latest time and date for splitting, unpaid........ 3:00 p.m. on August 30, 2000 Latest time and date for acceptance and payment in full............................................ 3:00 p.m. on September 1, 2000 Dealings in new ordinary shares on the London Stock Exchange expected to commence, fully paid............................................ 8:00 a.m. on September 4, 2000 Latest time and date for splitting, fully paid.... 3:00 p.m. on September 14, 2000 Latest time and date for registration of transfer........................................ 3:00 p.m. on September 18, 2000 Expected date for mailing of definitive share certificates for new ordinary shares............ October 2, 2000
The holders of ordinary shares may subscribe for new ordinary shares as follows: SHARE RIGHT RECORD DATE. The record date for determination of those holders of ordinary shares who are eligible to participate in the rights offering is the close of business in London on July 28, 2000. PROVISIONAL ALLOTMENT LETTERS. Share rights are evidenced by transferable provisional allotment letters which we will issue to eligible shareholders. Every 11 ordinary shares held of record on the share right record date will entitle the holder to three share rights. The holder of one share right is entitled to subscribe for one new ordinary share at the share subscription price. FRACTIONAL ENTITLEMENTS. We have not allotted share rights for fractions of new ordinary shares in making the initial allocations of share rights to subscribe for new ordinary shares. These fractional share rights will be aggregated and the related new ordinary shares will be sold in the market for your benefit. SHARE SUBSCRIPTION PRICE. The share subscription price of L10 is payable to us in sterling. For information on how to pay, see "--Method of Subscription and Payment" below. SHARE RIGHT EXPIRATION DATE. Share rights will expire at 3:00 p.m. (London time) on September 1, 2000. If unexercised, your share rights will be void but you may receive proceeds from the sale of the new ordinary shares attributable to your unexercised share rights as described under "--Unexercised Share Rights" below. We refer to September 1, 2000 as the share right expiration date. METHOD OF SUBSCRIPTION AND PAYMENT. Provisional allotment letters will contain full details regarding acceptance of and payment for some or all of the new ordinary shares. To subscribe in 19 whole or in part, you should submit the provisional allotment letter in accordance with its instructions together with the full amount payable: - - BY MAIL OR BY HAND - BY HAND TO: DURING NORMAL BUSINESS HOURS Lloyds TSB Registrars WITH OUR RECEIVING AGENT: Antholin House Lloyds TSB Registrars 71 Queen Street The Causeway London EC4N 1SL Worthing, West Sussex BN99 6DA
which must be received no later than 3:00 p.m. (London time) on September 1, 2000. We may, in our sole discretion, treat a provisional allotment letter as valid and binding if it is submitted even if not completed or submitted in accordance with the relevant instructions or not accompanied by a valid power of attorney, where required. In addition, we reserve the right, but shall not be obligated, to treat as valid acceptances in respect of which payments are received prior to 3:00 p.m. (London time) on September 1, 2000 from an authorized person, as defined in the UK Financial Services Act 1986, specifying the new ordinary shares concerned and undertaking to submit the relevant provisional allotment letter duly completed in due course. You should make your check and bank drafts payable to "Lloyds TSB Group Plc A/C Pearson plc" and crossed "A/C Payee only". Payments in sterling must be made for the full amount by check or bank draft drawn on an account at a bank or building society in the UK: - which is a settlement member of the Cheque and Credit Clearing Company Limited, - the CHAPS Clearing Company Limited, - a member of either of the committees of the Scottish or Belfast Clearing Houses, or - that has arranged for its checks and bank drafts to be cleared through the facilities provided by any of those companies or committees. In all cases, the check or bank draft must bear the appropriate sorting code. We will not pay interest if your payment is made early. Your submission of the provisional allotment letter with the appropriate payment in the form of a check will constitute a warranty that the check will be honored on first presentation. We may treat dishonored checks as invalid acceptances. PARTIAL EXERCISE OF SHARE RIGHTS. If you wish to subscribe for a portion of the new ordinary shares represented by your share rights or to transfer a portion of your share rights to more than one person, you must follow the instructions for splitting contained in the provisional allotment letter and submit the properly completed provisional allotment letter to Lloyds TSB Registrars at the above address no later than 3:00 p.m. (London time) on August 30, 2000. YOUR EXERCISE OF SHARE RIGHTS IS IRREVOCABLE AND MAY NOT BE CANCELLED OR MODIFIED. PURCHASE AND SALE OF SHARE RIGHTS AND NEW ORDINARY SHARES. Share rights may be exercised, sold or transferred to others in accordance with the terms of the provisional allotment letter. New ordinary shares may be bought or sold through banks or brokers and will be traded on the London Stock Exchange. 20 UNEXERCISED SHARE RIGHTS. If payment in full for any new ordinary shares provisionally allotted has not been received by 3:00 p.m. (London time) on September 1, 2000, whether from the original allottee or any transferee, the provisional allotment will be deemed to have been declined, in which event it will lapse. The new ordinary shares relating to any unexercised share rights may be sold on your behalf through arrangements with the underwriters, and if they are sold at a price in excess of the share subscription price and expenses of sale, any premium will be paid in sterling pro rata to the holders of ordinary shares to whom the new ordinary shares were provisionally allotted. Neither we nor the underwriters have any liability to you if ordinary shares respecting unexercised share rights are not sold, or with respect to the price at which they may be sold. DELIVERY OF NEW ORDINARY SHARES. We expect to mail definitive certificates for new ordinary shares subscribed for pursuant to the exercise of share rights as soon as practicable after October 2, 2000. RANKING. New ordinary shares will rank equally in all respects with outstanding ordinary shares except that they will not qualify for the interim dividend in respect of the year ending December 31, 2000, as the new ordinary shares will be issued after the relevant dividend record date. MONEY LAUNDERING REGULATIONS. Applicable money laundering regulations may require Lloyds TSB Registrars to establish your identity. These requirements are referred to below as the "verification of identity requirements". If the provisional allotment letter is submitted by, and/or payment is made by, a UK regulated broker or intermediary which is acting as agent and which is itself subject to the money laundering regulations, any verification of identity requirements are the responsibility of such broker or intermediary and not Lloyds TSB Registrars. In this case, the submitting agent's stamp should be inserted on the provisional allotment letter. By sending a provisional allotment letter with payment and accepting the allotment of the new ordinary shares comprised in such provisional allotment letter, you agree to provide Lloyds TSB Registrars with the information and other evidence that Lloyds TSB Registrars may require to satisfy the verification of identity requirements. If within a reasonable period of time following a request for verification of your identity, but in any event no later than 3:00 p.m. (London time) on September 1, 2000, Lloyds TSB Registrars has not received evidence satisfactory to it, we may treat as invalid your provisional allotment letter, in which event your provisional allotment will be deemed to have been declined and will lapse. The money payable on acceptance of the share rights will be returned without interest to the bank from which it was originally debited. We may proceed against you to recover any loss or damage suffered or incurred by us as a result of the failure to produce satisfactory evidence. IF THE VERIFICATION OF IDENTITY REQUIREMENTS APPLY, YOUR FAILURE TO PROVIDE THE NECESSARY EVIDENCE OF IDENTITY WITHIN A REASONABLE TIME MAY RESULT IN YOUR ACCEPTANCE BEING TREATED AS INVALID OR IN DELAYS IN THE MAILING OF A RECEIPTED PROVISIONAL ALLOTMENT LETTER AND A CERTIFICATE FOR NEW ORDINARY SHARES. The verification of identity requirements will not usually apply if: - you are a regulated UK broker or intermediary acting as agent and are subject to the money laundering regulations, - you are an organization required to comply with the Money Laundering Directive (the Council Directive on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC)), - you make payment by way of a check drawn on an account in your name, or 21 - the aggregate share subscription price for the relevant new ordinary shares is less than the equivalent of euro 15,000. In other cases, the identity requirements may apply and you may facilitate the satisfaction of these requirements in the following ways: - if you make payment by building society check not drawn on your account or a bank draft, by the building society or bank endorsing on the check or draft your name and the number of your account at such building society or bank, such endorsement being validated by a stamp and authorized signature, - if you do not make payment by check drawn on your account and the first bullet point of the preceding paragraph does not apply, by you including with your provisional allotment letter evidence of your name and address from an appropriate third party; for example, a recent bill from a gas, electricity or telephone company or a bank statement, in each case bearing your name and address; originals of such documents, not copies, are required; and such documents will be returned in due course, or - if the provisional allotment letter is submitted with payment by an agent which is an organization of the kind referred to in the first bullet point above or which is subject to anti-money laundering regulation in a country that is a member of the Financial Action Task Force, the non-European Union members of which are Australia, Canada, Hong Kong, Iceland, Japan, New Zealand, Norway, Singapore, Switzerland, Turkey and the US, the agent should provide written confirmation that it has that status with the provisional allotment letter and written assurances that it has obtained and recorded evidence of the identity of the persons for whom it acts and that it will, on demand, make such evidence available to Lloyds TSB Registrars or the relevant authority. If your provisional allotment letter involves an aggregate share subscription price of the equivalent of euro 15,000 or more and is submitted by hand by you in person, you should ensure that you can provide evidence of your identity bearing your photograph such as your passport and evidence of your address. Neither we nor Lloyds TSB Registrars shall be responsible for or have any liability for any loss or damage, whether actual or alleged, arising from the treatment of a provisional allotment letter as invalid or the termination of your share rights in the rights offering as a result of Lloyds TSB Registrars not having received from you evidence as to your identity within a reasonable period, but no later than 3:00 p.m. (London time) on September 1, 2000. EXCHANGE PRIVILEGE EXCHANGE OF ADS RIGHTS FOR SHARE RIGHTS. At any time prior to 5:00 p.m. (New York City time) on August 25, 2000, you may surrender a warrant representing ADS rights to the ADS subscription agent at its New York office and the ADS subscription agent will deliver to you or your assignee at its office at One Canada Square, London EI4 5AL, England, a provisional allotment letter representing share rights to subscribe for the appropriate number of new ordinary shares at the issue price. EXCHANGE OF SHARE RIGHTS FOR ADS RIGHTS. At any time prior to 3:00 p.m. (London time) on August 25, 2000, you may surrender a provisional allotment letter representing any amount of share rights to the ADS subscription agent at its New York or London offices and the ADS subscription agent will deliver to you or your assignee at its New York office a warrant representing ADS rights in an amount sufficient to subscribe for the appropriate number of new ADSs covered by such provisional allotment letter. 22 If you deposit a warrant or a provisional allotment letter pursuant to the exchange privilege, you must pay any associated taxes or levies and depositary fees. If you deposit a provisional allotment letter pursuant to the exchange privilege, you will be charged 1.5% of the issue price per new ordinary share so deposited to meet the stamp duty reserve tax payable on the exercise of the ADS rights obtained in the rights offering. SHARE PLANS In the case of our share option plans, we will adjust the number of ordinary shares underlying outstanding options and/or the option exercise price to take account of the rights offering, in such manner as we may decide. This adjustment will be subject to prior confirmation of our auditors that the adjustments are fair and reasonable and, where relevant, to the prior approval of the UK Inland Revenue and to compliance with tax legislation. We will make similar adjustments under those plans which involve stock appreciation rights, and notify participants of such adjustments in due course. Participants in the FT Group's employee share scheme and the Pearson profit sharing plan, on whose behalf ordinary shares are held by a trustee, will be entitled to participate in the rights offering in respect of the ordinary shares held on their behalf. Participants in the Pearson share bonus plan, on whose behalf ordinary shares allocated to them under the plan are held by a trustee, will have additional ordinary shares credited to their holding and/or will receive cash in respect of any fractional entitlement. 23 NCS ACQUISITION On July 30, 2000, we and a wholly owned subsidiary entered into an Agreement and Plan of Merger, which was amended as of August 4, 2000, with NCS. In accordance with the merger agreement, our subsidiary will make a cash tender offer for all of the issued and outstanding shares of NCS's common stock no later than August 7, 2000 at a price per share of $73. NCS's board of directors has recommended that the shareholders accept the tender offer. We will keep the tender offer open for 23 business days and may, under certain circumstances, extend it for additional periods. The tender offer is conditioned upon the tender of at least a majority of the outstanding NCS common stock on a fully diluted basis and other customary conditions. Following completion of the tender offer, NCS will merge with our subsidiary, and each share of NCS common stock not tendered in the tender offer shall be converted into the right to receive $73, subject to dissenters' rights provided under Minnesota law. If at least ninety (90%) percent of the outstanding shares of NCS common stock are tendered, the merger can take place promptly without a shareholders' meeting. If, however, less than ninety (90%) percent of the outstanding shares of NCS common stock are tendered in the tender offer, Minnesota law requires that there be a shareholders' meeting to approve the merger. As we will then own a majority of the outstanding shares of NCS common stock, this meeting would be a mere formality. Those shareholders who do not tender their shares of NCS common stock and do not approve the merger will be entitled to exercise dissenters' rights in accordance with Minnesota law, which entitle them to receive payment for the shares at an appraised fair value. The merger agreement contains standard representations and warranties by NCS and limitations on how NCS may conduct its business prior to the closing of the merger. The merger agreement allows the NCS board of directors to consider takeover proposals from third parties where it would be a breach of the fiduciary duty of the NCS board of directors to fail to consider them. The NCS board of directors may also withdraw its recommendation of our acquisition in favor of a superior takeover proposal. In that event, we may terminate the merger agreement and receive a termination fee in the amount of $98 million. We will also be entitled to the termination fee if, among other things, the merger agreement is terminated as a result of NCS's breach in any material respect of any of its representations or failure to perform in any material respect its covenants. 24 USE OF PROCEEDS Assuming the rights are exercised in full, we estimate that the net proceeds to us from this offering will be approximately $2.5 billion, after deducting estimated expenses related to the offering. We intend to use the net proceeds to finance the NCS acquisition. MARKET INFORMATION The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the US in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York, as depositary. We established this facility in March 1995. Each ADS represents one ordinary share. We do not believe, however, that our ADSs are actively traded in the over-the-counter market. We have applied to list the ADSs on the New York Stock Exchange under the symbol "PSO". The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange: - on an annual basis for our five most recent fiscal years, - on a quarterly basis for our two most recent quarters and our two most recent fiscal years, and - on a monthly basis for the most recent six months.
ORDINARY AVERAGE SHARES TRADING (IN PENCE) VOLUME ------------------- (ORDINARY REFERENCE PERIOD HIGH LOW SHARES) - ---------------- -------- -------- ---------- FIVE MOST RECENT FISCAL YEARS 1999........................................................ 2004 1173 1,910,696 1998........................................................ 1200 762 1,779,335 1997........................................................ 848 665 1,711,711 1996........................................................ 760 601 1,373,446 1995........................................................ 684 543 1,390,806
MOST RECENT QUARTERS AND TWO MOST RECENT FISCAL YEARS 2000: Second quarter............................................. 2360 1649 2,005,332 First quarter.............................................. 2578 1701 2,343,852 1999: Fourth quarter............................................. 2004 1291 1,831,844 Third quarter.............................................. 1368 1216 1,636,981 Second quarter............................................. 1405 1190 2,078,271 First quarter.............................................. 1431 1173 2,109,696 1998: Fourth quarter............................................. 1193 875 2,088,696 Third quarter.............................................. 1200 945 1,668,757 Second quarter............................................. 1186 929 1,658,958 First quarter.............................................. 1001 762 1,703,522
MOST RECENT SIX MONTHS July........................................................ 2079 1948 2,431,075 June........................................................ 2245 1990 1,695,026 May......................................................... 2334 1646 1,951,603 April....................................................... 2359 1863 2,447,280 March....................................................... 2578 2061 2,116,859 February.................................................... 2464 1934 2,369,018
25 DIVIDENDS We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. Our board of directors normally declares an interim dividend in August of each year to be paid in November. Our board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following June, subject to shareholders' approval at our annual general meeting. Our board of directors declared an interim dividend in respect of the year ending December 31, 2000 of 9.2 pence per ordinary share. This dividend will be payable on October 27, 2000 to shareholders and ADS holders of record on August 11, 2000. New ordinary shares and new ADSs issued in the rights offering will not be entitled to this dividend as these ordinary shares and ADSs will be issued after the record date. The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated, and is translated into cents per ordinary share at the noon buying rate in The City of New York on each of the respective payment dates for interim and final dividends.
PENCE PER ORDINARY CENTS PER ORDINARY SHARE SHARE ------------------------------ ------------------------------ FISCAL YEAR INTERIM FINAL TOTAL INTERIM FINAL TOTAL - ----------- -------- -------- -------- -------- -------- -------- 1999........................................ 8.6 13.9 22.5 14.1 21.0 35.1 1998........................................ 8.0 13.0 21.0 13.4 20.9 34.3 1997........................................ 7.5 12.0 19.5 12.6 19.7 32.3 1996........................................ 6.9 11.1 18.0 11.7 18.1 29.8 1995........................................ 6.325 10.175 16.5 10.0 15.7 25.7
Future dividends will be dependent on our future earnings, financial condition and cash flow, as well as other factors affecting us. We currently intend to reduce future dividend payments per share, pro rata, to take account of the rights offering. 26 CAPITALIZATION The following table shows our capitalization and indebtedness as of June 30, 2000, and as adjusted to reflect the full subscription of the rights offering and the use of the proceeds to finance the NCS acquisition. This table should be read in conjunction with our interim results for the six months to June 30, 2000 (unaudited) and the related notes appearing elsewhere in this prospectus. We have prepared the financial information in accordance with UK GAAP, which differs in significant respects from US GAAP. We describe these differences in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Principles" and Note 34 to our consolidated financial statements. Borrowings, cash and liquid resources denominated in currencies other than sterling have been translated into sterling at the exchange rates in effect on June 30, 2000, the most significant of which is US dollars, which has been translated at a rate of L1.00=$1.51. The convenience translation of sterling amounts into US dollars has been made at the same exchange rate.
JUNE 30, 2000 ----------------------------------------- ACTUAL AS ADJUSTED ------------------- ------------------- LM $M LM $M -------- -------- -------- -------- Cash and liquid resources.................................... 369 557 369 557 ===== ====== ====== ====== LM $M LM $M INDEBTEDNESS: Short-term borrowings........................................ 902 1,362 902 1,362 Medium and long-term borrowings.............................. 2,011 3,036 2,011 3,036 ----- ------ ------ ------ Total borrowings........................................... 2,913 4,398 2,913 4,398 ----- ------ ------ ------ SHAREHOLDERS' FUNDS: Ordinary shares authorized: 916,000,000 issued: 625,222,933 (actual); 795,751,211 (as adjusted).... 156 236 199 300 Share premium account........................................ 774 1,169 2,437 3,680 Consolidated reserves........................................ 901 1,360 901 1,360 ----- ------ ------ ------ Total shareholders' funds.................................. 1,831 2,765 3,537 5,340 MINORITY INTERESTS........................................... 113 171 113 171 ----- ------ ------ ------ Total capitalization......................................... 4,857 7,334 6,563 9,909 ===== ====== ====== ======
At June 30, 2000, we had no secured debt outstanding. Obligations under finance leases, which are not included in the table of indebtedness above, amounted to L22 million as at June 30, 2000. On April 7, 2000, we and Bertelsmann AG and GBL/Electrafina announced the intention to combine Pearson Television and CLT-Ufa, the television and broadcasting business owned by Germany's Bertelsmann, into Beligum's Audiofina to form an integrated commercial television and radio broadcast and content group, renamed the RTL Group. In this transaction, which closed on July 25, 2000, we contributed the net assets of Pearson Television, adjusted for cash retained by us in the amount of euros 84 million (L53 million), to the RTL Group in exchange for a 22% equity stake in the RTL Group. The capitalization table takes no account of the effect of this transaction. 27 SELECTED CONSOLIDATED FINANCIAL DATA The table on the following page shows selected consolidated financial data for each of the years in the five-year period ended December 31, 1999. The selected consolidated profit and loss account data for the years ended December 31, 1999, 1998 and 1997, and the selected consolidated balance sheet data as at December 31, 1999 and 1998, have been derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by PricewaterhouseCoopers, independent chartered accountants. The selected consolidated profit and loss account data for the years ended December 31, 1996 and 1995, and the selected consolidated balance sheet data as at December 31, 1997, 1996 and 1995, have been derived from our audited consolidated financial statements for those periods and as of those dates, which are not included in this prospectus. The selected consolidated profit and loss account data for the six month periods ending June 30, 2000 and June 30, 1999 and the selected consolidated balance sheet data as of June 30, 2000, have been derived from our unaudited interim results for the six months to June 30, 2000, included elsewhere in this prospectus. These unaudited financial statements have been prepared on the same basis as our audited financial statements and, in the opinion of management, include all material adjustments, consisting only of normal recurring adjustments, necessary to present the financial position and results of operations for the periods and dates presented. Interim results are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with UK GAAP, which differs from US GAAP in significant respects. The consolidated financial statements contain a reconciliation to US GAAP of profit for the financial year, shareholders' funds and certain other financial data. The information provided below is not necessarily indicative of the results that may be expected from future operations. For convenience, we have translated the June 30, 2000 and December 31, 1999 amounts into US dollars at the rate of L1.00=$1.51, the noon buying rate in The City of New York on June 30, 2000. 28
JUNE 30, DECEMBER 31 ------------------------------------------ ----------------------------------------- 2000 2000 1999 1999 1999 1998 1997 -------- -------------- -------------- -------- -------- -------- -------- $M LM LM $M LM LM LM UK GAAP INFORMATION: CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA Total sales...................... 2,333 1,545 1,306 5,031 3,332 2,395 2,293 Total sales from continuing operations..................... 2,333 1,545 1,306 5,031 3,332 2,251 2,011 Operating profit from continuing operations(1).................. (29) (19) 25 408 270 187 252 Total operating profit........... (17) (11) 46 480 318 250 328 Profit after taxation............ 137 91 (38) 453 300 441 40 Operating profit before internet enterprises, goodwill amortization and other items(2)....................... 236 156 133 888 588 389 328 Earnings per equity share(3)..... 21.4 CENTS 14.2p (6.6)p 72.8 CENTS 48.2p 74.1p 6.6p Adjusted earnings per equity share after internet enterprises(4)................. (0.9) (0.6) 6.3 73.2 48.5 42.0 34.9 Adjusted earnings per equity share before internet enterprises(5)................. 15.1 10.0 7.1 80.5 53.3 42.0 34.9 Diluted earnings per equity share(6)....................... 20.8 13.8 (6.5) 71.7 47.5 73.3 6.4 CONSOLIDATED BALANCE SHEET DATA $M LM LM $M LM LM LM Total assets (Fixed Assets plus Current Assets)................ 9,817 6,501 5,447 8,079 5,350 5,317 2,253 Net assets....................... 2,935 1,944 1,107 2,004 1,327 1,084 156 Long-term obligations(7)......... 3,059 2,026 2,312 3,452 2,286 2,562 609 Capital Stock.................... 236 156 153 231 153 152 144 Number of equity shares outstanding.................... 625 625 611 613 613 610 577 DECEMBER 31 ------------------- 1996 1995 -------- -------- LM LM UK GAAP INFORMATION: CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA Total sales...................... 2,186 1,830 Total sales from continuing operations..................... 1,830 1,484 Operating profit from continuing operations(1).................. 132 192 Total operating profit........... 189 267 Profit after taxation............ 248 272 Operating profit before internet enterprises, goodwill amortization and other items(2)....................... 289 267 Earnings per equity share(3)..... 42.8p 47.1p Adjusted earnings per equity share after internet enterprises(4)................. 30.6 28.8 Adjusted earnings per equity share before internet enterprises(5)................. 30.6 28.8 Diluted earnings per equity share(6)....................... 42.5 46.4 CONSOLIDATED BALANCE SHEET DATA LM LM Total assets (Fixed Assets plus Current Assets)................ 2,246 2,568 Net assets....................... 393 856 Long-term obligations(7)......... 556 475 Capital Stock.................... 143 139 Number of equity shares outstanding.................... 571 556
DECEMBER 31 ------------------------------ 1999 1999 1998 -------- -------- -------- $M LM LM US GAAP INFORMATION:(8) Profit for the financial year............................... 299 198 444 Profit from continuing operations for the financial year.... 254 168 122 Basic earnings per equity share............................. 48.9 CENTS 32.4p 75.3p Diluted earnings per equity share........................... 48.5 32.1 74.6 Basic earnings from continuing operations per equity share..................................................... 41.5 27.5 20.7 Diluted earnings from continuing operations per equity share..................................................... 41.1 27.2 20.5 $M LM LM Shareholders' funds......................................... 3,949 2,615 2,468
(FOOTNOTES ON FOLLOWING PAGE) 29 - ------------------------------ (1) Continuing operations represent those operations carried on by us as at June 30, 2000. Operating profit from continuing operations consists of operating profit--Group, plus the Group's share of operating profit from continuing operations for Group associates, as disclosed on page F-3 of the consolidated profit and loss account. (2) Other items include a L100 million charge for Penguin improper accounting in 1996 and Year 2000 compliance costs of L5 million in 1999 and L7 million in 1998, and integration costs in connection with our acquisition of Simon & Schuster's educational, business & professional and reference publishing business of L95 million in 1999 and L120 million in 1998 and in connection with our acquisition of DK of L3 million in the first six months of 2000. (3) Earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period. (4) Adjusted earnings per equity share is based on adjusted earnings for the financial period and the weighted average number of ordinary shares in issue during the period. Adjusted earnings excludes profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs and integration costs in respect of the Simon & Schuster acquisition and the DK acquisition and, following the prospective implementation of FRS10 "Goodwill and Intangible Assets" in 1998, goodwill amortization. In 1996, the L100 million exceptional charge for improper accounting in Penguin and the loan stock redemption premium have also been excluded. In the first six months of 2000, the accelerated amortization of a financing arrangement fee has also been excluded. (5) Due to expenditures of L84 million in the first six months of 2000 and L39 million in 1999 on new internet enterprises, a second adjusted earnings per equity share in accordance with UK GAAP is presented in which the results of these internet enterprises are also excluded from earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General Overview--Internet Enterprises". (6) Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options. (7) Long-term obligations are comprised of medium and long-term borrowings plus amounts falling due after more than one year related to obligations under finance leases. (8) See Note 34 to the consolidated financial statements included in this prospectus entitled "Summary of principal differences between United Kingdom and United States generally accepted accounting principles". 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON AND SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH UK GAAP, WHICH DIFFERS IN SIGNIFICANT RESPECTS FROM US GAAP. NOTE 34 TO OUR CONSOLIDATED FINANCIAL STATEMENTS PROVIDES A DESCRIPTION OF THE SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP AS THEY RELATE TO OUR BUSINESS AND PROVIDES A RECONCILIATION TO US GAAP. GENERAL OVERVIEW SALES INFORMATION BY OPERATING DIVISION The following table shows sales information for each of the periods specified broken out by operating division:
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, --------------------------------- --------------------------------------------- 2000 1999 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- LM LM LM LM LM Pearson Education............................. 647 554 1,725 702 563 FT Group...................................... 408 330 687 683 676 The Penguin Group............................. 326 263 565 523 525 Pearson Television............................ 164 159 355 343 247 ------------- ------------- ------------- ------------- ------------- Continuing operations......................... 1,545 1,306 3,332 2,251 2,011 Discontinued operations....................... -- -- -- 144 282 ------------- ------------- ------------- ------------- ------------- 1,545 1,306 3,332 2,395 2,293
SALES INFORMATION BY GEOGRAPHIC MARKET SUPPLIED The following table shows sales information for each of the periods specified broken out by geographic region:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- LM LM LM United Kingdom.............................................. 544 497 487 Continental Europe.......................................... 518 461 382 North America............................................... 1,990 1,078 916 Asia Pacific................................................ 200 161 179 Rest of World............................................... 80 54 47 ------------- ------------- ------------- Continuing operations....................................... 3,332 2,251 2,011 Discontinued operations..................................... -- 144 282 ------------- ------------- ------------- 3,332 2,395 2,293
Sales information by geographic market supplied is not available for the six months ended June 30, 2000. INTERNET ENTERPRISES We refer to our discrete internet operations as our internet enterprises. These are significant internet ventures whose activities and results are able to be separately identified from their print-and television-based counterparts. Due to a significant level of expenditure in 1999 on new internet 31 enterprises, we commenced in 1999 reporting our operating profit and earnings per equity share before and after internet enterprises, as well as before goodwill amortization and other items. This presentation is in accordance with UK GAAP. EXCHANGE RATE FLUCTUATIONS We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar, and, to a lesser extent, the euro. Sales and profits are translated into sterling in our consolidated financial statements using average rates. The average rate used for the US dollar was $1.56 for the six months ended June 30, 2000, $1.61 for the six months ended June 30, 1999, $1.61 in 1999, $1.66 in 1998 and $1.63 in 1997. UK GAAP AND US GAAP We prepare our financial statements in accordance with UK GAAP, which differs in significant respects from US GAAP. Our profit for the financial year ended December 31, 1999 under UK GAAP was L294 million compared with profit of L198 million under US GAAP. The profit for the financial year ended December 31, 1998 under UK GAAP was L437 million, compared with profit of L444 million under US GAAP. Equity shareholders' funds at December 31, 1999 under UK GAAP were L1,321 million compared with L2,615 million under US GAAP. Equity shareholders' funds at December 31, 1998 under UK GAAP were L1,048 million compared with L2,468 million under US GAAP. The main differences between UK GAAP and US GAAP relate to goodwill and intangible assets, deferred taxation, acquisition adjustments, derivatives, pensions and stock based compensation, and are discussed in further detail under "--Accounting Principles". In accordance with UK GAAP, we report operating profit and earnings per equity share before and after internet enterprises, goodwill amortization and other items. Under UK GAAP, intangible assets are not separately identified from goodwill. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,1999 CONSOLIDATED SALES. Our total sales, all from continuing operations, increased by L239 million, or 18%, to L1,545 million in the six months ended June 30, 2000, from L1,306 million in the six months ended June 30, 1999. This increase was primarily due to increased sales realized at Pearson Education, the FT Group and the Penguin Group. Pearson Education continued to be our largest business sector in sales terms in the first six months of 2000. Sales at Pearson Education accounted for 42% of our total sales in the first six months of 2000, and 42% in the six months ended June 30, 1999. OPERATING PROFIT. Our total operating profit decreased by L57 million to a loss of L11 million in the six months ended June 30, 2000, from a profit of L46 million in the six months ended June 30, 1999. However, our operating profit before internet enterprises, goodwill amortization and other items increased by L23 million, or 17%, to L156 million in the six months ended June 30, 2000, from L133 million in the six months ended June 30, 1999. This increase in operating profit was primarily due to a decrease in losses realized at Pearson Education and increased profit realized at the FT Group. - Operating loss before internet enterprises, goodwill amortization and other items attributable to Pearson Education decreased by L12 million, or 32%, to L26 million in the six months ended June 30, 2000, from L38 million in the six months ended June 30, 1999, primarily due to a decrease in the loss in the US Schools business. 32 - Operating profit before internet enterprises, goodwill amortization and other items attributable to the FT Group increased by L23 million, or 27%, to L109 million in the six months ended June 30, 2000, from L86 million in the six months ended June 30, 1999, primarily due to increases in advertising at the FINANCIAL TIMES and LES ECHOS newspapers and increases at FT Interactive Data due to the acquisition of the Thompson Financial Securities business in July 1999 and the acquisition of a controlling interest in Data Broadcasting Corporation in February 2000. Our trading margin, which measures the ratio of trading profit, excluding income from investments and associates and losses from internet enterprises, to sales, increased to 9% in the six months ended June 30, 2000, from 7% in the six months ended June 30, 1999, primarily due to our continued effort to decrease overall costs as a percentage of sales. GOODWILL AMORTIZATION AND OTHER ITEMS. Goodwill amortization increased by L9 million to L72 million in the six months ended June 30, 2000, from L63 million in the six months ended June 30, 1999, primarily due to the acquisition of the Thompson Financial Securities business in July 1999. This acquisition resulted in six months of goodwill amortization being included in the figures for the six months ended June 30, 2000 and no amortization being included in the figures for the six months ended June 30, 1999. Other items decreased by L6 million, or 35%, to L11 million in the six months ended June 30, 2000, from L17 million in the six months ended June 30, 1999. Other items comprise a charge in respect of the integration of the businesses acquired from Simon & Schuster which decreased by L7 million, or 47%, to L8 million in the six months ended June 30, 2000, from L15 million in the six months ended June 30, 1999 and a L3 million charge in respect of the integration of DK which was acquired in May 2000. In addition, other items included a L2 million charge in respect of Year 2000 compliance costs in the six months ended June 30, 1999. NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets, investments, businesses and associates was L218 million in the six months ended June 30, 2000, compared to L5 million in the six months ended June 30, 1999. Taxation on these items was L31 million in the six months ended June 30, 2000, and L6 million in the six months ended June 30, 1999. In the six months ended June 30, 2000, the most significant item was a profit of L231 million on the sale of our interest in the Lazard Houses. In the six months ended June 30, 1999, the most significant items were a profit of L16 million on the sale of part of our interest in BSB Holdings Ltd and a loss of L16 million on the sale of our Extel research products business. NET FINANCE COSTS. Our total net finance costs increased by L13 million, or 18%, to L84 million in the six months ended June 30, 2000, from L71 million in the six months ended June 30, 1999, primarily due to the acceleration of the amortization of an arrangement fee in respect of a borrowing facility which was redeemed early. In the six months ended June 30, 2000, our average net debt decreased by L430 million compared to the six months ended June 30, 1999. The decrease in net debt reflected the impact of the equity and asset disposal proceeds received in the six months ended June 30, 2000. However, this decrease in debt was partially offset by an increase in the average interest rate paid. Our net interest rate payable averaged approximately 6.7% in the six months ended June 30, 2000. This interest rate was higher than in the six months ended June 30, 1999, when it was 5.9%, mainly due to a change in market interest rates. For a more detailed discussion of our interest expenses, see "--Quantitative and Qualitative Disclosures about Market Risk". The effect of interest rate increases on us was also mitigated by our existing portfolio of interest rate swaps, which converted over half of our variable rate commercial paper and bank debt to a fixed rate basis. TAXATION. The taxation charge was L32 million in the six months ended June 30, 2000, compared to L18 million in the six months ended June 30, 1999. The taxation charge was 26% of 33 profit before taxation in the six months ended June 30, 2000. In the six months ended June 30, 1999, the taxation charge of L18 million was in respect of a loss before taxation of L20 million. In the six months ended June 30, 2000, a significant proportion of the goodwill amortization was not eligible for taxation relief but was largely offset by the taxation on the profit on the sale of the Lazard Houses being lower than the statutory rate. In the six months ended June 30, 1999, a significant proportion of the goodwill amortization was also not eligible for taxation relief and, in addition, only limited taxation relief was recognized on the Simon & Schuster integration costs. The taxation rate on adjusted earnings, as defined below, remained at 25% in the six months ended June 30, 2000, compared to 25% in the six months ended June 30, 1999. The difference of 5% between the UK statutory taxation rate in the six months ended June 30, 2000, which was 30%, and the effective taxation rate on adjusted earnings in the six months ended June 30, 2000, which was 25%, is primarily due to the availability of tax losses in the US. PROFIT. Profit for the financial period increased by L129 million to L88 million in the six months ended June 30, 2000, from a loss of L41 million in the six months ended June 30, 1999, primarily due to the increase in profits on the sale of businesses and associates. EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect earnings divided by the weighted average number of shares in issue increased to 14.2 pence in the six months ended June 30, 2000, from a loss of 6.6 pence in the six months ended June 30, 1999 based on a weighted average number of shares of 620.4 million in the six months ended June 30, 2000, and 609.7 million in the six months ended June 30, 1999. This increase was primarily due to the increase in profits on the sale of businesses and associates. Adjusted earnings per ordinary share decreased to a loss of 0.6 pence in the six months ended June 30, 2000, from earnings of 6.3 pence in the six months ended June 30, 1999. Adjusted earnings exclude the profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs, integration costs in respect of the Simon & Schuster acquisition and the DK acquisition, goodwill amortization and the accelerated amortization of a financing arrangement fee. Adjusted earnings before internet enterprises per ordinary share increased to 10.0 pence in the six months ended June 30, 2000, from 7.1 pence in the six months ended June 30, 1999. Adjusted earnings before internet enterprises excludes the above-mentioned items and also excludes the losses arising on internet enterprises. Diluted earnings per ordinary share increased to 13.8 pence in the six months ended June 30, 2000, from a loss of 6.5 pence in the six months ended June 30, 1999, primarily due to the increase in profits on the sale of businesses and associates. Earnings dilution included the tax benefit on the conversion of certain share options by employees and, after taking into account the effect of dilutive share options, the weighted average number of ordinary shares applicable was 628.6 million in the six months ended June 30, 2000 and 616.5 million in the six months ended June 30, 1999. 34 OPERATING PROFIT BY DIVISION The following table summarizes our operating profit by division.
OPERATING PROFIT AFTER INTERNET OPERATING PROFIT BEFORE INTERNET ENTERPRISES, GOODWILL ENTERPRISES, GOODWILL AMORTIZATION AND AMORTIZATION AND OTHER ITEMS OTHER ITEMS ----------------------------------------- ------------------------------- SIX MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 ----------------------------------------- ------------------------------- 2000 2000 1999 1999 2000 1999 LM % LM % LM LM -------- -------- -------- -------- -------------- -------------- Pearson Education.............. (26) (18) (38) (34) (108) (116) FT Group....................... 109 74 86 77 35 77 The Penguin Group.............. 33 22 31 28 25 31 Pearson Television............. 32 22 33 29 29 33 ---- ---- ---- ---- ---- ---- Continuing Operations.......... 148 100 112 100 (19) 25
PEARSON EDUCATION Pearson Education's sales increased by L93 million, or 17%, to L647 million in the six months ended June 30, 2000, from L554 million in the six months ended June 30, 1999, principally due to increases in the US Schools business. Pearson Education's sales in the six months ended June 30, 2000 comprised 42% of our total sales. Pearson Education realizes approximately two-thirds of its sales and all of its profits in the second half of the year when it makes the majority of its sales. Operating loss before internet enterprises, goodwill amortization and other items decreased by L12 million, or 32%, to L26 million in the six months ended June 30, 2000, from L38 million in the six months ended June 30, 1999. This decrease in operating loss was primarily due to decreases in the operating loss realized in the US Schools business. The US Schools business increased sales by L35 million, or 19%, to L222 million in the six months ended June 30, 2000, from L187 million in the six months ended June 30, 1999. This increase in sales was primarily due to gains in market share for our reading, literature and electronic programs as well as the continued success of our math program. The US Higher Education and Professional Publishing business increased sales by L37 million, or 21%, to L215 million in the six months ended June 30, 2000, from L178 million in the six months ended June 30, 1999. This increase in sales was primarily due to an increase in sales in the US College publishing business. Sales in the International business increased by L28 million, or 17%, to L197 million in the six months ended June 30, 2000, from L169 million in the six months ended June 30, 1999. This increase in sales was primarily due to an increase in sales in our Latin American and Asian markets. FT Knowledge increased sales by L3 million, or 38%, to L11 million in the six months ended June 30, 2000, from L8 million in the six months ended June 30, 1999. This increase in sales was primarily due to increases in both the individual and corporate businesses. FT GROUP Sales in the FT Group increased by L78 million, or 24%, to L408 million in the six months ended June 30, 2000, from L330 million in the six months ended June 30, 1999. This increase in sales was primarily due to increases in advertising at the FINANCIAL TIMES and LES ECHOS newspapers, increases at FT Interactive Data due to the acquisition of the Thompson Financial Securities business in July 1999 and the acquisition of a controlling interest in Data Broadcasting 35 Corporation in February 2000 and increases in internet enterprises. Operating profit before internet enterprises, goodwill amortization and other items, increased by L23 million, or 27%, to L109 million in the six months ended June 30, 2000, from L86 million in the six months ended June 30, 1999. Operating profit before internet enterprises, goodwill amortization and other items at the FINANCIAL TIMES newspaper increased by L16 million, or 47%, to L50 million in the six months ended June 30, 2000, from L34 million in the six months ended June 30, 1999. This increase in operating profit was primarily due to increases in advertising. Operating profit before internet enterprises, goodwill amortization and other items at FT Interactive Data increased by L11 million, or 73%, to L26 million in the six months ended June 30, 2000, from L15 million in the six months ended June 30, 1999. This increase in operating profit was primarily due to the acquisition of the Thompson Financial Securities business in July 1999 and the acquisition of a controlling interest in Data Broadcasting Corporation in February 2000. Operating profit before internet enterprises, goodwill amortization and other items at the Les Echos Group increased by L3 million, or 23%, to L16 million in the six months ended June 30, 2000, from L13 million in the six months ended June 30, 1999. This increase in operating profit was primarily due to increases in circulation and advertising. Operating profit before internet enterprises, goodwill amortization and other items at Recoletos increased by L1 million, or 6%, to L19 million in the six months ended June 30, 2000, from L18 million in the six months ended June 30, 1999. Operating profit from joint ventures and associates within the FT Group decreased by L13 million to a loss of L5 million in the six months ended June 30, 2000, from a profit of L8 million in the six months ended June 30, 1999. This decrease in operating profit was primarily due to the start-up costs of FINANCIAL TIMES DEUTSCHLAND. THE PENGUIN GROUP Sales at the Penguin Group increased by L63 million, or 24%, to L326 million in the six months ended June 30, 2000, from L263 million in the six months ended June 30, 1999. This increase in sales was partly attributable to the acquisition of DK in May 2000 which contributed sales of L32 million in the six months ended June 30, 2000 and partly attributable to a number of new and established authors reaching the best-seller lists in both the UK and the US. Operating profit before internet enterprises, goodwill amortization and other items increased by L2 million, or 6%, to L33 million in the six months ended June 30, 2000, from L31 million in the six months ended June 30, 1999. This increase in operating profit was primarily attributable to a number of new and established authors reaching the best-seller lists in both the UK and the US and was partly offset by the acquisition of DK in May 2000, which contributed a loss of L4 million in the six months ended June 30, 2000. PEARSON TELEVISION Sales at Pearson Television increased by L5 million, or 3%, to L164 million in the six months ended June 30, 2000, from L159 million in the six months ended June 30, 1999. Operating profit before internet enterprises, goodwill amortization and other items decreased by L1 million, or 3%, to L32 million in the six months ended June 30, 2000, from L33 million in the six months ended June 30, 1999. On July 25, 2000, we merged Pearson Television into the RTL Group. We will account for our interest in the RTL Group as an associate, rather than a subsidiary. As a result, only our share of its profit before interest, interest and taxation will be reflected in our financial results. For more information on this merger, please refer to "Business--Operating Divisions--Pearson Television". 36 INTERNET ENTERPRISES Sales in our internet enterprises increased by L14 million to L16 million in the six months ended June 30, 2000, from L2 million in the six months ended June 30, 1999. These sales all related to the FT Group. Operating losses increased by L77 million to L84 million in the six months ended June 30, 2000, from L7 million in the six months ended June 30, 1999. Of this loss, L64 million was incurred by the internet enterprises of the FT Group, L19 million was incurred by the internet enterprises of Pearson Education and L1 million was incurred by the internet enterprises of Pearson Television. We expect Pearson Education's internet enterprises to account for a higher percentage of these operating losses in the future as we increase our investment in the internet enterprises of Pearson Education. We expect our internet enterprises to incur significant operating losses in the forseeable future as we continue to invest in them. While we cannot predict the magnitude of these operating losses with any specificity, our continued investment in our internet enterprises will result in a decrease in our consolidated operating profit. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 CONSOLIDATED SALES. Our total sales increased by L937 million, or 39%, to L3,332 million in 1999, from L2,395 million in 1998. Sales from continuing operations increased by L1,081 million, or 48%, to L3,332 million in 1999, from L2,251 million in 1998. We realized this increase almost entirely in Pearson Education, where sales increased by L1,023 million primarily due to the Simon & Schuster acquisition in November 1998. This acquisition resulted in a full year of the businesses acquired from Simon & Schuster being included in our 1999 figures as opposed to just over one month in 1998. Pearson Education continued to be our largest business sector in 1999. Sales at Pearson Education accounted for 52% of our total sales from continuing operations in 1999, compared to 31% in 1998. North America continued to be the most significant source of our sales, accounting for 60% of sales from continuing operations in 1999, compared to 48% in 1998. OPERATING PROFIT. Our total operating profit increased by L68 million, or 27%, to L318 million in 1999, from L250 million in 1998. However, our operating profit before internet enterprises, goodwill amortization and other items increased by L199 million, or 51%, to L588 million in 1999, from L389 million in 1998. The increase in operating profit was primarily due to increased profit realized at Pearson Education, the FT Group and the Penguin Group. - Operating profit before internet enterprises, goodwill amortization and other items attributable to Pearson Education increased by L158 million, or 160%, to L257 million in 1999, from L99 million in 1998, primarily due to the Simon & Schuster acquisition in November 1998. - Operating profit before internet enterprises, goodwill amortization and other items attributable to the FT Group increased by L32 million, or 27%, to L150 million in 1999, from L118 million in 1998, primarily due to increases in circulation and advertising at the FINANCIAL TIMES and LES ECHOS newspapers and increases in subscriptions and volume-related business at FT Interactive Data. - Operating profit before internet enterprises, goodwill amortization and other items attributable to the Penguin Group increased by L17 million, or 35%, to L65 million in 1999, from L48 million in 1998, primarily due to a number of new and established authors reaching the best-seller lists. Our trading margin, which measures the ratio of trading profit, excluding income from investments and associates and losses from internet enterprises, to sales, increased to 15% in 1999, from 13% in 1998, primarily due to our effort to decrease overall costs as a percentage of sales. 37 EXCHANGE RATE FLUCTUATIONS. The weakening of sterling against the US dollar on an average basis had a positive impact on reported sales and profits in 1999 compared to 1998. We estimate that if the 1998 average rates had prevailed in 1999, sales would have been lower by L33 million and operating profit would have been lower by L5 million. COST OF SALES AND NET OPERATING EXPENSES The following table summarizes our cost of sales and net operating expense.
1999 1998 -------------- ------------------------------- TOTAL CONTINUING TOTAL -------------- -------------- -------------- LM LM LM COST OF SALES............................................... (1,424) (1,138) (1,176) Distribution costs.......................................... (289) (168) (169) Administration and other expenses........................... (1,470) (848) (933) Other operating income...................................... 98 79 82 -------------- -------------- -------------- NET OPERATING EXPENSES...................................... (1,661) (937) (1,020) ============== ============== ============== Analyzed as: Net operating expenses--before exceptional items and goodwill amortization..................................... (1,446) (854) (937) Net operating expenses--exceptional items................... (85) (71) (71) Net operating expenses--goodwill amortization............... (130) (12) (12) -------------- -------------- -------------- NET OPERATING EXPENSES...................................... (1,661) (937) (1,020) ============== ============== ==============
COST OF SALES. Our cost of sales from continuing operations increased by L286 million, or 25%, to L1,424 million in 1999, from L1,138 million in 1998, primarily due to the acquisition of Simon & Schuster. Cost of sales from continuing operations decreased to 43% of sales in 1999 from 51% in 1998, primarily due to the cost allocation mix at the businesses acquired from Simon & Schuster, where cost of sales as a percentage of sales was lower than in our other businesses. The allocation of expenses by function between cost of sales, distribution and administration and other may vary between companies depending on the type of business they operate in. Cost of sales as a percentage of sales was lower at the education businesses acquired from Simon & Schuster, and correspondingly distribution costs and administration and other costs as a percentage of sales were higher, than our business information, consumer publishing and television businesses. Additionally, exceptional costs associated with the Simon & Schuster acquisition of L10 million in 1999 and L49 million in 1998 were recorded in cost of sales. Taking these exceptional costs into consideration, cost of sales from continuing operations as a percentage of sales was 42% in 1999 and 48% in 1998. DISTRIBUTION COSTS. Our distribution costs from continuing operations increased by L121 million, or 72%, to L289 million in 1999, from L168 million in 1998. Distribution costs increased to 9% of sales in 1999, from 8% of sales in 1998, primarily due to the cost allocation mix at the businesses acquired from Simon & Schuster, where distribution costs as a percentage of sales were higher than in our other businesses. Distribution costs primarily include shipping costs, postage and packing. ADMINISTRATION AND OTHER EXPENSES. Our administration and other expenses from continuing operations increased by L622 million, or 73%, to L1,470 million in 1999, from L848 million in 1998. Administration and other expenses increased to 44% of sales in 1999, from 38% of sales in 1998, primarily due to the cost allocation mix at the businesses acquired from Simon & Schuster, where administration and other expenses as a percentage of sales were higher than in our other 38 businesses. In 1999, administration and other expenses included an exceptional charge of L85 million due to the costs of the integration of the businesses acquired from Simon & Schuster and goodwill amortization of L130 million, L116 million of which related to the Simon & Schuster acquisition. In 1998, administration and other expenses included an exceptional charge of L71 million in respect of the integration of the businesses acquired from Simon & Schuster and goodwill amortization of L12 million, L10 million of which related to the Simon & Schuster acquisition. Excluding the exceptional charges and goodwill amortization in 1999 and 1998, administration and other expenses would have been 38% of sales in 1999 compared to 34% in 1998, primarily due to the Simon & Schuster acquisition, where administration and other expenses as a percentage of sales were higher in 1999, primarily due to the cost allocation mix at the businesses acquired from Simon & Schuster, where administration and other expenses as a percentage of sales were higher than in our other businesses. OTHER OPERATING INCOME. Other operating income from continuing operations increased to L98 million in 1999 from L79 million in 1998 due to increased rights and royalty income at Pearson Education as a result of the Simon & Schuster acquisition, which was partly offset by reduced investment income. GOODWILL AMORTIZATION AND OTHER ITEMS. Goodwill amortization increased by L119 million to L131 million in 1999, from L12 million in 1998, primarily due to the Simon & Schuster acquisition in November 1998. This acquisition resulted in a full year of goodwill amortization being included in our 1999 figures as opposed to just over one month in 1998. Goodwill is amortized over its estimated useful life, not exceeding 20 years, and as such this charge is expected to continue for the foreseeable futue. Other items decreased by L27 million, or 21%, to L100 million in 1999, from L127 million in 1998. Other items comprises a charge in respect of the integration of the businesses acquired from Simon & Schuster which decreased by L25 million, or 21%, to L95 million in 1999, from L120 million in 1998 and a charge in respect of Year 2000 compliance costs which decreased by L2 million, or 29%, to L5 million in 1999, from L7 million in 1998. NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets, investments, businesses and associates was L308 million in 1999 compared to L407 million in 1998. Taxation on these items was L88 million in 1999 and L103 million in 1998. In 1999, the most significant items were a profit of L348 million on the sale of our interest in BSB Holdings Ltd. and a loss of L19 million on the sale of our Extel research products business. In 1998, the most significant items were a profit of L133 million on the sale of our 6.3% shareholding in Societe Europeene des Satellites, a profit of L61 million on the sale of our Law & Tax publishing business, and a profit of L157 million on the sale of The Tussauds Group, our visitor attractions business. INTEREST. Our total net interest payable increased by L108 million, or 277%, to L147 million in 1999, from L39 million in 1998, primarily due to a L1,726 million increase in average net debt. The increase in net debt in 1999 reflected the impact for a full year, as opposed to just over one month in 1998, of the borrowings incurred to finance the Simon & Schuster acquisition. The subsequent enlargement of Pearson Education following the Simon & Schuster acquisition also increased the debt needed to fund our working capital requirements in the middle part of the year. However, this increase in debt was partially offset by the proceeds received from asset disposals, also in the middle part of the year. Our net interest rate payable averaged approximately 6.4% in 1999. This interest rate was lower than in 1998, when it was 6.8%, mainly due to a change in the ratio of cash to gross debt, even though market interest rates increased during the year. For a more detailed discussion of our interest expenses see "--Quantitative and Qualitative Disclosures about Market Risk". The effect of interest rate increases on us was also mitigated by our existing portfolio of interest rate swaps, which converted over half of our variable rate commercial paper and bank debt to a fixed rate basis. 39 TAXATION. The taxation charge was L180 million in 1999, compared to L188 million in 1998. The taxation charge was 37.5% of profit before taxation in 1999, compared to 29.9% in 1998. The main reason for the increase in the effective rate is the significant increase in the charge for goodwill amortization, which increased to L131 million in 1999, from L12 million in 1998, reflecting the fact that the businesses acquired from Simon & Schuster were included in our financial results for a full year in 1999. No taxation relief is available on this amortization and, as in 1998, only limited taxation relief has been recognized on the Simon & Schuster integration costs. In addition, the overall taxation rate on the sale of fixed assets, investments, businesses and associates increased to 28.6% in 1999, from 25.3% in 1998. The most significant item was a profit of L348 million on the sale of our interest in BSB Holdings Ltd., which yielded a benefit from the indexed taxation base cost being higher than the book value. However, this benefit was offset by some smaller disposals where the opposite was the case. The taxation rate on adjusted earnings, as defined below, fell to 25% in 1999 from 28% in 1998. The difference of 5.25% between the UK statutory taxation rate in 1999, which was 30.25%, and the effective taxation rate on adjusted earnings in 1999, which was 25%, is primarily due to the availability of tax losses in the US. The difference of 3% between the 31% UK statutory taxation rate in 1998 and the effective taxation rate on adjusted earnings in 1998, which was 28%, is lower than in 1999 due to increased profits in the US, in 1999, which were relieved by tax losses. The benefit of the US losses in 1999 was slightly offset by higher taxation rates in countries other than the UK and the US and by the effect of disallowed expenses. PROFIT. Profit for the financial year decreased by L143 million, or 33%, to L294 million in 1999, from L437 million in 1998, primarily due to the decrease in profits on the sale of fixed assets, investments, businesses and associates. EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect earnings divided by the weighted average number of shares in issue, decreased to 48.2 pence in 1999 from 74.1 pence in 1998 based on a weighted average number of shares of 610.2 million in 1999 and 589.8 million in 1998. This decrease was primarily due to the decrease in profits on the sale of fixed assets, investments, businesses and associates. Adjusted earnings per ordinary share increased to 48.5 pence in 1999 from 42.0 pence in 1998. Adjusted earnings exclude the profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs, integration costs in respect of the Simon & Schuster acquisition and goodwill amortization. Adjusted earnings before internet enterprises per ordinary share increased to 53.3 pence in 1999 from 42.0 pence in 1998. Adjusted earnings before internet enterprises excludes the above-mentioned items and also excludes the losses arising on internet enterprises. Diluted earnings per ordinary share decreased to 47.5 pence in 1999 from 73.3 pence in 1998 primarily due to the decrease in profits on the sale of fixed assets, investments, businesses and associates. Earnings dilution included the tax benefit on the conversion of certain share options by employees and, after taking into account the effect of dilutive share options, the weighted average number of ordinary shares applicable was 617.2 million in 1999 and 594.9 million in 1998. 40 OPERATING PROFIT BY DIVISION The following table summarizes our operating profit by division:
OPERATING PROFIT BEFORE INTERNET OPERATING PROFIT AFTER INTERNET ENTERPRISES, GOODWILL AMORTIZATION ENTERPRISES, GOODWILL AMORTIZATION AND OTHER ITEMS AND OTHER ITEMS --------------------------------------------- --------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------------------------- --------------------------------------------- 1999 1998 1999 1998 --------------------- --------------------- --------------------- --------------------- LM % LM % LM % LM % Pearson Education........ 257 48 99 30 36 13 (34) (18) FT Group................. 150 28 118 36 103 38 114 61 The Penguin Group........ 65 12 48 15 64 24 46 24 Pearson Television....... 68 12 61 19 67 25 61 33 ---- ---- ---- ---- ---- ---- ---- ---- Continuing Operations.... 540 100 326 100 270 100 187 100 ==== ==== ==== ==== ==== ==== ==== ====
PEARSON EDUCATION Pearson Education's sales increased by L1,023 million, or 146%, to L1,725 million in 1999 from L702 million in 1998, principally due to the Simon & Schuster acquisition in November 1998, resulting in a full year of its operations being included in 1999 as opposed to just one month in 1998. Pearson Education's 1999 sales comprised 52% of our total sales. Pearson Education realizes approximately two-thirds of its sales and all of its profits in the second half of the year when it makes the majority of its sales. Operating profit before internet enterprises, goodwill amortization and other items increased by L158 million, or 160%, to L257 million in 1999, from L99 million in 1998. This increase in operating profit was primarily due to the Simon & Schuster acquisition in November 1998. Pearson Education was formed in November 1998 through the combination of the businesses acquired from Simon & Schuster and Addison Wesley Longman, our existing education business. As the two businesses have been integrated, it is not possible to separate out the impact of the businesses acquired from Simon & Schuster during 1999. As such, unaudited pro forma sales numbers for the combined business have been compiled for 1998 by Pearson management to assist in a meaningful comparison of the results of operations at Pearson Education. The US Schools business increased sales by L49 million, or 9%, to L586 million in 1999, from pro forma sales of L537 million in 1998. This increase in sales was primarily due to a gain in market share by the math and social studies programs during 1999. The US Higher Education and Professional Publishing business increased sales by L73 million, or 12%, to L666 million in 1999, from pro forma sales of L593 million in 1998. This increase in sales was primarily due to increases in the college publishing operations and the professional and technology publishing group as demand increased in the technology and e-commerce areas. Sales in the International business increased by L23 million, or 5%, to L446 million in 1999, from pro forma sales of L423 million in 1998. This increase in sales was primarily due to the strengthening of the international distribution and marketing networks and the expansion of the English language teaching business. FT Knowledge, a newly formed management education business, had 1999 sales of L19 million. 41 FT GROUP Sales in the FT Group increased by L4 million, or 1%, to L687 million in 1999, from L683 million in 1998. Operating profit before internet enterprises, goodwill amortization and other items increased by L32 million, or 27%, to L150 million in 1999, from L118 million in 1998, primarily due to increased operating profit at the FINANCIAL TIMES, FT Interactive Data and Les Echos Group. Operating profit before internet enterprises, goodwill amortization and other items at the FINANCIAL TIMES newspaper increased by L14 million, or 33%, to L56 million in 1999, from L42 million in 1998. This increase in operating profit was partly attributable to an increase in circulation levels. The average daily circulation in December 1999 was 14% higher than the equivalent period in 1998. This increase was also partly attributable to advertising revenues, which increased by 19% in 1999. Operating profit before internet enterprises, goodwill amortization and other items at FT Interactive Data, excluding the operating profits of the businesses sold during 1999, increased by L9 million, or 41%, to L31 million in 1999, from L22 million in 1998. This increase in operating profit was primarily due to growth in the level of subscriptions and volume-related business. Operating profit before internet enterprises, goodwill amortization and other items at Les Echos Group, excluding the operating profits of its medical division which was sold during 1999, increased by L8 million, or 80%, to L18 million in 1999, from L10 million in 1998. This increase in operating profit was partly attributable to a 7% increase in circulation at the newspaper, and partly attributable to a 41% increase in advertising revenues at the newspaper in 1999. Operating profit at Recoletos increased by L4 million, or 13%, to L34 million in 1999, from L30 million in 1998. This increase in operating profit was primarily due to a 20% increase in advertising revenues at MARCA in 1999. Operating profit from associates within the FT Group decreased by L3 million, or 20%, to L12 million in 1999, from L15 million in 1998. This decrease in operating profit was primarily due to the start-up costs of FINANCIAL TIMES DEUTSCHLAND. THE PENGUIN GROUP Sales at the Penguin Group increased by L42 million, or 8%, to L565 million in 1999, from L523 million in 1998. Operating profit before internet enterprises, goodwill amortization and other items increased by L17 million, or 35%, to L65 million in 1999, from L48 million in 1998. This increase in operating profit was primarily due to a number of new and established authors reaching the best-seller lists in both the UK and the US. As a percentage of sales, operating profit before internet enterprises, goodwill amortization and other items increased to 11.5% in 1999, from 9.2% in 1998, due to cost savings from the steps taken in 1998 to rationalize the US warehousing and distribution systems and the integration of the UK children's division. 42 PEARSON TELEVISION Sales at Pearson Television increased by L12 million, or 3%, to L355 million in 1999, from L343 million in 1998. Operating profit before internet enterprises, goodwill amortization and other items increased by L7 million, or 11%, to L68 million in 1999, from L61 million in 1998. On July 25, 2000, we merged Pearson Television into the RTL Group. We will account for our interest in the combined entity as an associate, rather than a subsidiary as is presently the case, and hence only our share of profit before interest, interest and taxation of the combined entity will be consolidated. For more information on this merger, please refer to "Business--Operating Divisions--Pearson Television". INTERNET ENTERPRISES Sales in our internet enterprises, principally those of the FT Group, were L7 million in 1999. Operating losses were L39 million, of which L36 million was incurred by the internet enterprises of the FT Group and L3 million was incurred by the internet enterprises of Pearson Education. We expect Pearson Education's internet enterprises to account for a higher percentage of these operating losses in the future as we increase our investment in the internet enterprises of Pearson Education. Internet enterprises were not significant prior to 1999 and, as a result, comparisons to the results of prior periods are not meaningful. We expect our internet enterprises to incur significant operating losses in the foreseeable future as we continue to invest in them. While we cannot predict the magnitude of these operating losses with any specificity, our continued investment in our internet enterprises will result in a reduction in our consolidated operating profit. DISCONTINUED OPERATIONS In March 2000, we completed the sale of our interests in the Lazard Houses group of investment banks to Financiere et Industrielle Gaz et Eaux S.A. for L410 million. In addition to this stated purchase price, we received a L26 million dividend. If there is an initial public offering or sale of the Lazard Houses at any time prior to September 30, 2000, we will receive 50% of any net gains realized by Gaz et Eaux within two years of that event. The Lazard Houses provide corporate finance advice and, to a lesser extent, participate in fee-earning business activities, such as fund management and securities trading. In 1999, our interests in the Lazard Houses produced an operating profit of L48 million. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 CONSOLIDATED SALES. Total sales increased by L102 million, or 4%, to L2,395 million in 1998, from L2,293 million in 1997. Sales from continuing operations increased by L240 million, or 12%, to L2,251 million in 1998, from L2,011 million in 1997. This increase in sales from continuing operations was primarily due to increased sales at Pearson Education and Pearson Television. Sales at Pearson Education increased by L139 million, or 25%, to L702 million in 1998, from L563 million in 1997, primarily due to the Simon & Schuster acquisition in November 1998, which contributed L120 million to total sales in 1998. Sales at Pearson Television increased by L96 million, or 39%, to L343 million in 1998, from L247 million in 1997, due primarily to the acquisition of All American Communications in November 1997, which contributed approximately L120 million to total sales in 1998. Sales from discontinued operations amounted to L144 million in 1998 and L282 million in 1997. Pearson Education was the largest business sector by sales in 1998. Sales at Pearson Education accounted for 31% of sales from continuing operations in 1998, compared to 28% in 43 1997. North America was the most significant geographic source of sales, accounting for 48% of sales from continuing operations in 1998, compared to 46% in 1997. OPERATING PROFIT. Total operating profit decreased by L78 million, or 24%, to L250 million in 1998, from L328 million in 1997. However, operating profit before goodwill amortization and other items increased by L61 million, or 19%, to L389 million in 1998, from L328 million in 1997. This increase was largely due to increased profit at Pearson Education and Pearson Television. - Operating profit before goodwill amortization and other items attributable to Pearson Education increased by L39 million, or 65%, due mainly to the November 1998 Simon & Schuster acquisition, which contributed operating profit before goodwill amortization and other items of L22 million in 1998. - Operating profit before goodwill amortization and other items attributable to Pearson Television increased by L35 million, or 135%, to L61 million in 1998, from L26 million in 1997, primarily due to the acquisition of All American Communications in November 1997, which contributed operating profit of L21 million in 1998. EXCHANGE RATE FLUCTUATIONS. The strengthening of sterling against the US dollar on an average basis had a detrimental impact on reported sales and profits in 1998 compared to 1997. We estimate that if the 1997 average rates had prevailed in 1998, then sales would have been higher by L45 million and operating profit higher by L6 million. COST OF SALES AND NET OPERATING EXPENSES The following table summarizes our cost of sales and net operating expenses.
1998 1997 ------------------------------- ------------------------------- CONTINUING TOTAL CONTINUING TOTAL -------------- -------------- -------------- -------------- LM LM LM LM COST OF SALES................................... (1,138) (1,176) (1,003) (1,114) Distribution costs.............................. (168) (169) (123) (126) Administration and other expenses............... (848) (933) (701) (844) Other operating income.......................... 79 82 68 72 -------------- -------------- -------------- -------------- NET OPERATING EXPENSES.......................... (937) (1,020) (756) (898) ============== ============== ============== ============== Analyzed as: Net operating expenses--before exceptional items and goodwill amortization..................... (854) (937) (726) (864) Net operating expenses--exceptional items....... (71) (71) (30) (34) Net operating expenses--goodwill amortization... (12) (12) -- -- -------------- -------------- -------------- -------------- NET OPERATING EXPENSES.......................... (937) (1,020) (756) (898) ============== ============== ============== ==============
COST OF SALES. Cost of sales from continuing operations increased by L135 million, or 13%, to L1,138 million in 1998 from L1,003 million in 1997, primarily due to the acquisition of Simon & Schuster. DISTRIBUTION COSTS. Distribution costs from continuing operations, primarily shipping costs, postage and packing, increased by L45 million, or 37%, to L168 million in 1998, from L123 million in 1997. Distribution costs as a percentage of sales increased to 7.5%, from 6.1%, primarily due to the Simon & Schuster acquisition. 44 ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses from continuing operations increased by L147 million, or 21%, to L848 million in 1998, from L701 million in 1997. As a percentage of sales, administration and other expenses increased to 37.7% in 1998, from 34.9% in 1997. In 1998, administration and other expenses included an exceptional charge of L71 million in respect of the integration of the businesses acquired from Simon & Schuster and goodwill amortization of L12 million, L10 million of which related to the Simon & Schuster acquisition. In 1997, administration and other expenses included an exceptional charge of L30 million attributed to restructuring charges of L14 million at FT Group, L12 million at Pearson Education and L4 million at Pearson Television. Excluding exceptional charges and goodwill amortization, administration and other expenses for 1998 were 34.0% of sales from continuing operations compared to 33.4% in 1997. OTHER OPERATING INCOME. Other operating income from continuing operations increased by L11 million, or 16%, to L79 million in 1998, from L68 million in 1997, due to increases in each of the four operating divisions. CHANGE IN ACCOUNTING STANDARD. In 1998, we implemented UK Accounting Standard FRS10 "Goodwill and Intangible Assets" with effect from January 1, 1998. This Standard required that purchased goodwill be shown as an asset on the balance sheet and amortized over its useful economic life, presumed to be not greater than 20 years, unless shown otherwise. The amortization charge is taken through the profit and loss account and is shown as a deduction from operating profit. Our goodwill amortization has been excluded from adjusted earnings to show results on a comparable basis. Goodwill amortization in 1998 was L12 million, primarily due to the Simon & Schuster acquisition in November 1998. OTHER ITEMS. Other items were L127 million in 1998. There were no other items in 1997. Other items comprises a charge of L120 million in respect of the integration of the businesses acquired from Simon & Schuster and a charge of L7 million in respect of Year 2000 compliance costs. NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets, investments, businesses and associates amounted to L407 million in 1998, compared with a loss before taxation of L156 million in 1997. Taxation on these items was L103 million in 1998 and L5 million in 1997. In 1998, the most significant items were a profit of L133 million on the sale of our 6.3% shareholding in Societe Europeene des Satellites, a profit of L61 million on the sale of our Law & Tax publishing business, and a profit of L157 million on the sale of The Tussauds Group, our visitor attractions business. The primary source of the loss recorded in 1997 was the write-down of L212 million against the goodwill acquired in the acquisition of Mindscape Inc. in 1995. The write-down was taken to reflect its realizable value. INTEREST. Total net interest payable fell to L39 million in 1998, from L42 million in 1997. This decrease was primarily due to the decrease in net debt over the first ten months of 1998 from L707 million to net cash of L418 million at the end of October 1998 and the decrease in floating interest rates in sterling from 7.6% to 6.4% and in US dollars from 5.7% to 5.2% during the last four months of 1998. However, for the year as a whole, floating interest rates were slightly higher in 1998 than in 1997 in sterling and virtually unchanged in US dollars. The acquisition of Simon & Schuster at the end of November increased net debt by L2,868 million to L2,279 million at December 31, 1998 and added approximately L12 million to the 1998 interest charge. TAXATION. The taxation charge was L188 million in 1998, compared to L89 million in 1997, primarily due to tax on the sale of fixed assets, investments, businesses and associates which amounted to L103 million in 1998 and L5 million in 1997. Taxation was 29.9% of profit before taxation in 1998, compared to 68.9% in 1997. Although only limited taxation relief has been recognized on the integration costs of the Simon & Schuster acquisition in 1998, the effect of this 45 limitation was largely offset by the fact that, as in 1997, the tax rate on profits on the disposal of businesses and investments was partially offset by losses brought forward. The 1997 rate was abnormally high as there was no current taxation relief for the charge of L212 million in respect of the write-down of Mindscape Inc. goodwill described above. Excluding this amount, the effective rate in 1997 would have been 26% of profit before taxation. The taxation rate on adjusted earnings fell to 28% in 1998, from 29.4% in 1997. As in 1997, the availability of taxation losses in the US meant that no significant taxation was assessed on our profits arising there. This factor alone accounted for 2.7% of the difference between the UK statutory rate of 31% and the effective rate of 28% in 1998 on adjusted earnings. The 1998 taxation rate on adjusted earnings also benefited from the release of some provisions for earlier year's taxation following settlement of the liability for those years, and this factor effectively offset the effect of disallowed expenses and our exposure to higher taxation rates in countries other than the UK and US. PROFIT. Profit for the financial year increased to L437 million in 1998, from L38 million in 1997, primarily due to the increase in profits on the sale of fixed assets, investments, businesses and associates. EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect earnings divided by the weighted average number of shares in issue, increased to 74.1 pence in 1998, from 6.6 pence in 1997, based on a weighted average number of shares of 589.8 million in 1998 and 572.8 million in 1997. This increase was primarily due to the increase in profits on the sale of fixed assets, investments, businesses and associates. Adjusted earnings per ordinary share increased to 42.0 pence in 1998 from 34.9 pence in 1997. Adjusted earnings exclude profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs, integration costs related to the Simon & Schuster acquisition and goodwill amortization. Diluted earnings per ordinary share increased to 73.3 pence in 1998, from 6.4 pence in 1997, primarily due to the increase in profits on the sale of fixed assets, investments, businesses and associates. Earnings dilution included the tax benefit on the conversion of some share options by employees and, after taking into account the effect of dilutive share options, the diluted weighted average number of ordinary shares was 594.9 million in 1998 and 577.5 million in 1997. OPERATING PROFIT BY DIVISION The following table summarizes our operating profit by division.
OPERATING PROFIT BEFORE OPERATING PROFIT AFTER GOODWILL AMORTIZATION GOODWILL AMORTIZATION AND OTHER ITEMS AND OTHER ITEMS ----------------------------------------- ----------------------------------------- YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ----------------------------------------- ----------------------------------------- 1998 1997 1998 1997 ------------------- ------------------- ------------------- ------------------- LM % LM % LM % LM % Pearson Education.................... 99 30 60 24 (34) (18) 60 24 FT Group............................. 118 36 108 43 114 61 108 43 The Penguin Group.................... 48 15 58 23 46 24 58 23 Pearson Television................... 61 19 26 10 61 33 26 10 ---- ---- ---- ---- ---- ---- ---- ---- Continuing Operations................ 326 100 252 100 187 100 252 100 ==== ==== ==== ==== ==== ==== ==== ====
46 PEARSON EDUCATION Pearson Education's sales increased by L139 million, or 25%, to L702 million in 1998, from L563 million in 1997. This increase was primarily due to the Simon & Schuster acquisition in November 1998, which contributed sales of L120 million in 1998. Excluding the impact of the Simon & Schuster acquisition, 1998 sales increased by L19 million, or 3%, compared to 1997. Operating profit before goodwill amortization and other items increased by L39 million, or 65%, to L99 million in 1998 from L60 million in 1997, with the businesses acquired from Simon & Schuster contributing L22 million of the increase. Excluding the impact of the Simon & Schuster acquisition, 1998 operating profit increased by L17 million, or 28%, compared to 1997, attributable to a worldwide restructuring program and cost control measures. Operating profit in 1997 was reduced by restructuring costs of L12 million due to our new management team's initiative to restructure the worldwide financial, managerial and sales organization. Sales at the US Schools division increased by L32 million, or 17%, to L218 million in 1998, from L186 million in 1997, primarily as a result of the adoption by many southern states of Addison Wesley Longman's new math program. 1998 was the first year of major new math adoptions from kindergarten up to eighth grade in a number of the southern states of the US. In addition, the US Schools business gained market shares in new biology and foreign language programs. Sales in the US Higher Education and Professional Publishing division remained the same at L153 million in both 1998 and 1997. Sales in the International division declined by L4 million, or 2%, to L209 million in 1998, from L213 million in 1997. The most significant cause of the decline in sales was the impact of general economic uncertainties in Asia and Latin America, which particularly affected the English language training business in Asia. FT GROUP Sales in the FT Group increased by L7 million, or 1%, to L683 million in 1998, from L676 million in 1997. Operating profit before internet enterprises and other items increased by L10 million, or 9%, to L118 million in 1998, from L108 million in 1997, primarily due to increased operating profit at the FINANCIAL TIMES newspaper. Operating profit before goodwill amortization and other items at the FINANCIAL TIMES newspaper increased by L7 million, or 20%, to L42 million in 1998, from L35 million in 1997, partly due to an increase in circulation levels. The average daily circulation in December 1998 was 12.6% higher than in December 1997. The increase in operating profit was also partly attributable to a 17% increase in advertising revenues in 1998. In 1998, the strategy of investing in new print sites continued with sites opening in Milan and Chicago. This investment strategy, which started in 1996, is designed to increase circulation and advertising revenues in markets outside the United Kingdom through timely delivery of editions tailored to the particular geographic region or country. Operating profit before goodwill amortization and other items at FT Interactive Data and FT Business remained at L19 million for both 1997 and 1998. However, during 1998 we sold a number of businesses, including the Law & Tax publishing business and the Register group. Excluding the operating losses of the businesses which were sold, operating profit increased by L5 million, or 26%, to L24 million in 1998, from L19 million in 1997. Operating profit before goodwill amortization and other items at Les Echos Group increased by L3 million, or 33%, to L12 million in 1998, from L9 million in 1997, primarily due an increase in sales at the newspaper. In 1998, average annual circulation increased by 4% and advertising revenues increased by 20%. 47 Operating profit at Recoletos, however, was L30 million for both years due to significant investments made in 1998 in new products and services and in improving the sports newspaper, MARCA. MARCA'S annual average circulation fell by 9% in 1998, due to increasing competition from other daily sports newspapers. EXPANSION, the financial and business publication, increased its average daily circulation by 22%. EXPANSION'S advertising revenues increased by 25% in 1998. Operating profit before goodwill amortization and other items from associates within the FT Group remained at L15 million in both 1997 and 1998 with The Economist Group contributing almost all of the reported operating profit. THE PENGUIN GROUP Sales at the Penguin Group declined by L2 million, or 0.4%, to L523 million in 1998, from L525 million in 1997. Operating profit before goodwill amortization and other items decreased by L10 million, or 17.2%, to L48 million in 1998, from L58 million in 1997. Operating profit was reduced in 1998 by restructuring costs incurred as a result of the integration of Ladybird Books into the children's book group and the loss of income from Troll, the children's book publisher, which was sold in mid-1997. Excluding the above factors and portfolio and exchange rate changes, operating profit before goodwill amortization and other items increased by L3 million, or 6%, to L52 million in 1998, from L49 million in 1997, primarily due to increased frontlist trading in Penguin UK's general division. The growth was also attributable to increased trading in the children's book group, due in part to increased UK government funding for children's publishing. PEARSON TELEVISION Sales at Pearson Television increased by L96 million, or 39%, to L343 million in 1998, from L247 million in 1997, principally due to the acquisition of All American Communications at the end of 1997. Operating profit before goodwill amortization and other items, excluding Pearson's share of Channel 5 losses and excluding income from its investment in BSB Holdings Ltd., increased by L25 million, or 54%, to L71 million in 1998, from L46 million in 1997, principally due to the acquisition of All American Communications at the end of 1997. DISCONTINUED OPERATIONS In 1998, we sold our consumer software business, Mindscape Inc., for L91 million, giving rise to a loss of L11 million. In 1997, Mindscape Inc. contributed sales of L84 million and profits of L2 million. Also in 1998, we sold our visitor attractions business, The Tussauds Group, for L352 million, giving rise to a profit of L157 million, and our consumer magazines business, Pearson New Entertainment, for L125 million, giving rise to a profit of L41 million. In 1997, The Tussauds Group contributed sales of L107 million and profits of L22 million, and Pearson New Entertainment contributed sales of L91 million and profits of L6 million. We treated the sales and operating profits of these businesses as "discontinued" in our consolidated financial statements in 1998. The profit or loss on the sale of these businesses was treated as an exceptional item and has been included in consolidated profit before interest, but excluded from consolidated operating profit. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS AND FINANCING DURING THE SIX MONTHS ENDED JUNE 30, 2000 Net cash outflow from operating activities was L200 million in the six months ended June 30, 2000, compared to L52 million in the six months ended June 30, 1999. The main reason for this increase in cash outflow was an increase in the cash required for operations due to a L137 million 48 increase in inventory levels, including L132 million at Pearson Education where we have taken advantage of early order programs offered at major US printers. We generally made capital expenditures to replace or upgrade existing equipment, but our 2000 capital expenditures also included the costs associated with a warehousing integration program at Pearson Education. Capital expenditures increased by L24 million, or 59%, to L65 million in the six months ended June 30, 2000, compared to L41 million in the six months ended June 30, 1999. Depreciation increased by L3 million, or 7%, to L44 million in the six months ended June 30, 2000, compared to L41 million in the six months ended June 30, 1999. Net cash used in our internet enterprises was L88 million in the six months ended June 30, 2000, compared to L4 million in the six months ended June 30, 1999, and was used for marketing, editorial, technical and other operating expenses. The sale of investments provided cash inflow of L3 million in the six months ended June 30, 2000, compared to L108 million in the six months ended June 30, 1999 which included L80 million from the sale of several of the businesses acquired from Simon & Schuster. The acquisition of businesses accounted for a cash outflow of L482 million in the six months ended June 30, 2000, compared to L17 million in the six months ended June 30, 1999. The principal acquisition was the purchase of DK for L310 million. The sale of associates contributed a cash inflow of L394 million in the six months ended June 30, 2000, compared to L12 million in the six months ended June 30, 1999. The primary source of cash inflow from the sale of associates in the six months ended June 30, 2000, was the L392 million net proceeds from the disposal of the Lazard Houses. Interest paid increased to L105 million in the six months ended June 30, 2000, compared to L98 million in the six months ended June 30, 1999. CASH FLOWS AND FINANCING DURING 1999 Net cash inflow from operating activities increased 8% to L433 million in 1999, from L402 million in 1998. The main reason for this increase was an increase in operating profit of L187 million, before goodwill amortization, which was partly offset by an increase in cash required for operations due to increased inventory levels. Inventory levels increased in 1999 in anticipation of increased sales levels, primarily at Pearson Education. We generally made capital expenditures to replace or upgrade existing equipment, but our 1999 capital expenditures also included the acquisition of a new printing press at Recoletos and the costs associated with warehousing integration programs at Pearson Education and the Penguin Group. Capital expenditures decreased by L23 million, or 18%, to L102 million in 1999, from L125 million in 1998. Depreciation increased by L16 million, or 24%, to L82 million in 1999, from L66 million in 1998. Net cash used in our internet enterprises was L32 million in 1999 and was used for marketing, editorial, technical and other operating expenses. We expect this to increase in future periods as we continue to invest in our internet enterprises. The sale of investments provided cash inflow of L624 million in 1999, compared to L199 million in 1998. Of this cash inflow, we received L438 million from the sale of our interest in BSB Holdings Ltd. and L184 million from the sale of several of the businesses acquired from Simon & Schuster. The acquisition of businesses accounted for a cash outflow of L249 million in 1999, compared to L2,936 million in 1998. The principal acquisitions in 1999 were the purchase of Thomson Financial Securities Management for L93 million and the purchase of 23.2% of Recoletos for L136 million, and the principal acquisition in 1998 was the Simon & Schuster acquisition. The sale of businesses contributed a cash inflow of L44 million in 1999, compared to L718 million in 1998. The primary sources of cash inflow from the sale of businesses in 1999 were disposal of our Extel research products business for L18 million and the disposal of the medical division of Les Echos 49 Group for L19 million. The primary sources of cash from the sale of businesses in 1998 were the L91 million disposal of Mindscape Inc., the L125 million disposal of Pearson New Entertainment and the L352 million disposal of The Tussauds Group. Interest paid increased to L182 million in 1999, from L88 million in 1998, primarily due to the higher level of debt during 1999. CASH FLOWS AND FINANCING DURING 1998 Net cash inflow from operating activities increased 97% to L402 million in 1998, from L204 million in 1997. This increase resulted primarily due to decreased inventory of L39 million, decreased operating receivables of L77 million and increased operating payables of L117 million. Capital expenditures increased by L15 million, or 14%, to L125 million in 1998, from L110 million in 1997. Depreciation increased by L1 million, or 1.5%, to L66 million in 1998, from L65 million in 1997. Capital expenditures were, in general, related to replacements and upgrades to existing equipment, the acquisition of a new printing press at Recoletos and costs associated with a warehousing integration program at the Penguin Group. The sale of investments in 1998 provided an increase of L51 million, or 34%, to cash inflow to L199 million in 1998, from L148 million in 1997. Of this cash inflow, we received L160 million from the sale of our 6.3% shareholding in Societe Europeenne des Satellites and L28 million from the sale of our 2.7% shareholding in Flextech plc in 1998. In 1997, we received L111 million from the sale of our 10% shareholding in Television Broadcasts Limited. The acquisition of businesses accounted for a cash outflow of L2,936 million in 1998 and L269 million in 1997. Our principal acquisition in 1998 was Simon & Schuster's education, business and professional and reference publishing divisions for L2,868 million. In 1997, our principal acquisition was All American Communications for L247 million. The sale of businesses contributed a cash inflow of L718 million in 1998 and L54 million in 1997. The primary sources of cash from the sale of businesses in 1998 were the disposal of Mindscape Inc. for L91 million, Pearson New Entertainment for L125 million and The Tussauds Group for L352 million. In 1997, cash inflow from the sale of businesses resulted from the disposal of Churchill Communications for L57 million. NCS ACQUISITION We have agreed to purchase all of the outstanding capital stock of NCS for approximately $2.5 billion. We intend to finance this acquisition with the proceeds of the rights offering. However, our acquisition of NCS is not conditioned upon the full subscription of the rights offering. To the extent the rights offering is not fully subscribed, we may be required to borrow under our credit facility a portion of the funds required to complete the acquisition. CAPITAL RESOURCES We believe our working capital is sufficient to meet our current requirements. At June 30, 2000, our net debt was L2,544 million compared to net debt of L2,540 million at June 30, 1999. Net debt is defined as all short-term, medium-term and long-term borrowing, less all cash and liquid resources. Liquid resources comprise short-term deposits of less than one year and investments that are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to L2,913 million at June 30, 2000, compared to L2,891 million at June 30, 1999. At June 30, 2000, cash and liquid resources were L369 million, compared to L351 million at June 30, 1999. 50 BORROWINGS Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. In July 2000, we negotiated a $2.5 billion credit facility with a group of international banks. The credit facility refinanced all existing committed bank debt. The credit facility is a term revolving credit facility which matures in July 2005. As of the date of this prospectus approximately $670 million is available under this facility. The credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31: - We must maintain the ratio of our profit before interest and tax to our interest payable at no less than 3:1; and - We must maintain the ratio of our net debt to our EBITDA at no more than 4:1. The covenants provide for the exclusion from the ratio calculations of specified amounts of internet-related expenditures. We are currently in compliance with these covenants. TREASURY POLICY We hold financial instruments for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations and from our sources of financing. We finance our operations by a mixture of cash flows from operations, short term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. We borrow principally in US dollars, sterling and euro at both floating and fixed rates of interest, using derivatives where appropriate to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts. For a more detailed discussion of our borrowing and use of derivatives, see "--Quantitative and Qualitative Disclosures about Market Risk". EUROPEAN MONETARY UNION Our businesses in continental Europe have found that the euro has simplified trading, while presenting little or no operational or competitive difficulty. All UK operations have contingency plans in the event that the UK decides to join the euro-zone. The financial costs of preparations for the euro have not been material to us. ACCOUNTING PRINCIPLES The following summarizes the principal differences between UK GAAP and US GAAP in respect of our financial statements. See Note 34 to our consolidated financial statements appearing elsewhere in this prospectus. Prior to January 1, 1998, under UK GAAP, goodwill was written off to the profit and loss reserve in the year of acquisition. Under US GAAP, as well as UK GAAP from January 1, 1998, goodwill is recognized as an asset, and amortization expense is recorded over useful lives ranging between 5 and 20 years. Intangible assets under UK GAAP are recognized only when they may be disposed of without also disposing of the business to which they relate, and for that reason it is rare that intangible assets are separately identified and recorded apart from goodwill. Under US GAAP, there is no similar requirement with respect to intangible assets, and they should be recognized 51 separately from goodwill when they are separately identifiable and measurable. Under US GAAP, intangible assets such as publishing rights, television production and distribution rights, non-compete agreements, software, databases and advertising relationships have been recognized and are being amortized over a range of useful lives between two and 16 years. The difference in goodwill and intangible assets also creates a difference in the gain or loss recognized on the disposal of a business due to amortization expense taken with respect to the goodwill and intangible assets, as UK GAAP requires that goodwill be removed from the profit and loss reserve upon disposal and factored into the gain or loss on disposal calculation. Under UK GAAP, the liability method is used in recording deferred taxation, and consideration is given to whether or not the liability will be realized within the foreseeable future. This can result in the full potential liability not being recognized. Deferred tax assets are rarely recognized under UK GAAP. Under US GAAP, the full provision method is used, meaning that all deferred tax assets and liabilities are recorded. An assessment is then made with respect to whether the deferred tax assets are realizable, and a determination is made as to whether a valuation allowance is necessary with respect to the deferred tax assets. The principal differences we recognize relate to deferred tax assets in the United States. Acquisition adjustments have arisen with respect to the Pearson Education acquisition of Simon & Schuster during 1998. Under US GAAP, the criteria necessary for recognizing some restructuring costs in acquisition accounting for the Simon & Schuster acquisition have been met, and a provision for these costs has been included in the purchase price allocation. Under UK GAAP, these types of restructuring costs are recorded as period costs when incurred and may not be included in the allocation of the purchase price. Under UK GAAP, there are no specific criteria which must be fulfilled in order to record derivative contracts such as interest rate swaps, currency swaps and forward currency contracts as a hedging instrument. Accordingly, based upon our intention and stated policy with respect to entering into derivative transactions, they have been recorded as hedging instruments for UK GAAP. This means that unrealized gains and losses on these instruments are typically deferred and recognized when realized. Under US GAAP, our derivative contracts do not meet the prescriptive criteria for hedge accounting, and are recorded at market value at each period end, with changes in their fair value being recorded currently in the profit and loss account. Under UK GAAP, the cost of providing pension benefits is expensed over the average expected useful service lives of eligible employees, using long-term actuarial assumptions. Under US GAAP, the annual pension costs comprise the estimated cost of benefits accruing in the period, and actuarial assumptions are adjusted annually to reflect current market and economic conditions. Additionally, under US GAAP, part of the surplus, which is the excess of plan assets over plan liabilities, is recognized on the balance sheet. The remainder of the unrecognized surplus is spread over the employees' remaining service lifetimes. Under UK GAAP, no compensation costs associated with non-qualified stock option plans are recognized if the value of the option at the date of grant is equal to or greater than the market value on that date. Under US GAAP, we have adopted the fair value method of accounting for options. Compensation expense is determined based upon the fair value at the grant date, and has been estimated using the Black Scholes model. Compensation cost is recognized over the service life of the awards, which is normally equal to the vesting period. Compensation expense is also recognized under US GAAP with respect to UK qualified non-compensatory plans, such as the Save as You Earn option plan and the Worldwide Save for Shares plan, as these plans offer employees a discount of greater than 15% from market value. For a further explanation of the differences between UK GAAP and US GAAP, see Note 34 to the consolidated financial statements. 52 YEAR 2000 We did not experience any significant Year 2000 related disruptions. We successfully implemented a comprehensive Year 2000 compliance program that included assessment, testing, remediation, and contingency planning in the areas of critical business computer systems and critical plant floor equipment. We estimate that our total Year 2000 compliance costs were approximately L19 million, which represents the cost of remedial work required to make all of our systems Year 2000 compliant. It does not include the cost of upgrades or hardware replacement, which has been capitalized. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTRODUCTION Our principal market risks are changes in interest rates and currency exchange rates. Following evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks are the responsibility of the group financial director who acts pursuant to policies approved by our board of directors. A treasury committee of the board receives regular reports on our treasury activities, which our outside advisers also review periodically. We have a policy of not undertaking any speculative transactions, and we hold the derivative and other financial instruments for purposes other than trading. We have formulated our policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives without regard to existing or future US GAAP requirements on hedge accounting. We are satisfied that the present policies achieve our objectives, and that the near equivalence between the carrying book value and fair value of our financial liabilities and derivative contracts confirms this. However, our existing derivative contracts do not qualify for hedge accounting under US GAAP. The following discussion and tables address market risk only and do not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk. INTEREST RATES Our financial exposures to interest rates arise primarily from our borrowings, particularly those in US dollars. We manage our exposure by borrowing at fixed and variable rates of interest, and by entering into derivative instruments. Objectives approved by our board concerning the proportion of outstanding fixed rate debt govern our use of these financial instruments. Our objectives are applied to core net debt, which is year-end borrowings net of year-end cash and liquid funds. Those objectives are that for between 50% and 65% of current core debt, the rate of interest should be fixed or capped for the next two years, and that for between 40% and 60%, the rate of interest should be fixed or capped from two years to a date five years from the present. Within these target ranges the proportion that is hedged is triggered by a formula based on historical interest rate frequencies. In 1998, however, our objective was to hedge at least one-third of our core sterling and US dollar net borrowings for five years. We changed our policy in recognition of increased interest rate risk due to the greater level of core net debt following the acquisition of the Simon & Schuster educational business in November 1998. 53 The principal method to hedge interest rate risk is to enter into an agreement to pay a fixed-rate and receive a variable rate, known as a swap. Under interest rate swaps, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of these contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month LIBOR, and the dates on which these rates are set do not exactly match those of the hedged borrowings. We believe that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings. In addition, from time to time we issue bonds or other capital market instruments to refinance existing bank debt. To avoid the rate unduly influencing the interest expense on a single transaction, it is our normal practice to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to that of the debt which it is refinancing. Most often this is a variable interest rate denominated in US dollars. In several cases, the bond issue was denominated in a different currency than the debt being refinanced and we have entered into a related interest rate and currency swap in order to maintain an unchanged borrowing risk profile. 54 The table below lists for each of the years 2000 to 2004 the notional amounts and weighted average interest rates, as of December 31, 1999, for both our borrowings and our currency and interest rate swaps.
MATURITIES ----------------------------------------------------------------------------------------------------------- FAIR FAIR THERE TOTAL VALUE TOTAL VALUE 2000 2001 2002 2003 2004 AFTER 1999 1999 1998 1998 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- LM LM LM LM LM LM LM LM LM LM BORROWINGS AND OTHER FINANCIAL LIABILITIES Fixed rate US $................ - - - - - 153 153 155 148 160 Average rate........ 7.38% 7.38% 7.38% Sterling............ - - 100 - 125 346 571 616 325 388 Average rate........ 10.75% 9.50% 8.01% 8.82% 10.19% Euro................ - - - - 341 - 341 324 - - Average rate........ 4.63% 4.63% ---- ---- ----- ----- ------ ------ ------ ------ ------ ------ Variable rate US $................ 61 155 155 817 - - 1,188 1,188 1,718 1,718 Average rate........ 6.55% 7.18% 7.38% 7.45% 7.36% 5.76% Sterling............ - - - 80 - - 80 80 292 292 Average rate........ 7.41% 7.41% 5.90% Euro................ - - - - - - - - 159 159 Average rate........ 4.09% Other............... 1 - - - - - 1 1 11 11 ==== ==== ===== ===== ====== ====== ====== ====== ====== ====== INTEREST RATE AND CURRENCY SWAPS(3)(4) Pay US $ variable/.... - - 102 - 120 153 375 (13) 117 (33) Receive Sterling fixed................ (100) (125) (150) (375) (125) US $ variable rate(2)........... 6.86% 7.96% 7.33% 7.41% 6.31% GBP fixed rate.... 7.00% 10.41% 7.00% 8.13% 10.41% Pay US $ variable/.... - - - - 97 - 97 8 - - Receive Euros fixed... (93) (93) US $ variable rate(2)........... 7.62% 7.62% EUR fixed rate.... 4.63% 4.63% ==== ==== ===== ===== ====== ====== ====== ====== ====== ====== INTEREST RATE SWAPS(3) US $ Variable to fixed(1)............. 50 90 - 422 252 310 1,124 (32) 1,090 38 Average pay rate...... 5.64% 6.15% - 6.02% 5.98% 6.36% 6.11% 6.11% - Average receive rate(2).............. 6.40% 6.75% - 6.92% 6.96% 7.10% 6.94% 5.32% - Fixed to variable..... - - - - - 155 155 (2) 151 (18) Average pay rate(2)... - - - - - 7.04% 7.04% 5.37% Average receive rate................. - - - - - 7.23% 7.23% 7.23% Sterling Variable to fixed..... 40 30 - - - - 70 - 40 1 Average pay rate...... 7.16% 4.98% - - - - 6.22% 7.16% Average receive rate(2).............. 6.68% 6.68% - - - - 6.68% 5.45% Fixed to variable(1).......... - - 100 100 - 20 220 - 120 (6) Average pay rate(2)... - - 6.88% 6.45% - 6.61% 6.66% 5.40% Average receive rate................. - - 6.60% 7.00% - 7.46% 6.86% 6.74% Euros Fixed to variable..... - - - - 248 - 248 11 - - Average pay rate(2)... - - - - 5.75% - 5.75% - Average receive rate................. - - - - 4.63% - 4.63% - ==== ==== ===== ===== ====== ====== ====== ====== ====== ======
(FOOTNOTES ON FOLLOWING PAGE) 55 - ------------------------------ (1) The nominal value of US $ "variable to fixed" interest rate swaps includes L118 million (L491 million in 1998) of deferred start contracts that do not provide fixed rate cover on the balance sheet date. In addition, L100 million of sterling "fixed to variable" interest rate swaps maturing in 2003 are forward starting once the equivalent nominal value in 2002 matures. (2) All variable rate legs of the interest rate swaps pay or receive every three months on a margin above or below three-month LIBOR. Three-month LIBOR rates at December 31, 1999 for the US dollar, euro and sterling were 6.00%, 3.34% and 6.08%, respectively. The average interest rate payable on net debt at December 31, 1999 was 6.3% and averaged 6.4% during the whole year. (3) The "variable to fixed" interest rate swaps are used wholly for the hedging of our portfolio of variable rate borrowings. The "fixed to variable" interest rate swaps are used wholly for the conversion of capital market transactions to a floating rate basis. (4) The currency swap converts sterling and euro to US dollars at an average of $1.61 and $1.04, respectively. Our interest-bearing financial assets of L328 million, consisting of floating rate cash and deposits, earn interest based on relevant national equivalents to the London Interbank Depository Rate. In 1998, we held L345 million of interest-bearing financial assets. The fair value approximates to the carrying value due to their short maturity periods of less than three months. CURRENCY EXCHANGE RATES Although we are based in the UK, we have significant investments in overseas operations. The most significant currency for us is the US dollar, followed by the euro and sterling. Our policy is to manage the currency composition of our core borrowings in US dollars, euros and sterling in order to approximate the percentages of those currencies as reflected in our forecast operating profit. We use external borrowings and currency swaps to manage this exposure. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. While long-term core borrowing is now limited to US dollars, euros and sterling, we still borrow small amounts in other currencies, typically for seasonal working capital needs. At December 31, 1999, the percentages of aggregate net borrowings in our three core currencies were: US dollar 80%, or L1,641 million, euro 9%, or L188 million, and sterling 11%, or L224 million. Taking into account the Lazard Houses disposal and a [EURO]650 million bond issue in February 2000, on a pro forma basis the respective percentages were: US dollar 76%, euro 15% and sterling 9%. This corresponds to the 1999 forecast of operating profit by currency of US dollar 76%, euro 16% and sterling 8%. We are also exposed to currency exchange rates in our cash transactions and our investments in overseas transactions. Cash transactions--typically for purchases, sales, interest or dividends--require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that we pay or receive. Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, particularly those in sterling, although they do not give rise to any realized gain or loss, nor to any currency cash flows. FORWARD FOREIGN EXCHANGE CONTRACTS We use forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. Our policy is to effect transactional conversions between currencies, for example, to collect receivables or settle payables at the relevant spot exchange rate. 56 Our forward exchange contracts that relate to cash flow conversion are summarized by currency below for 1999. We had no forward foreign exchange contracts in 1998. The receive euros/pay sterling contracts have a weighted average maturity of nine months. These contracts match exactly the forecast cash flows for start-up costs on FINANCIAL TIMES DEUTSCHLAND. All other contracts have a maturity of less than one month. FOREIGN EXCHANGE CONTRACTS FOR CASH FLOW CONVERSION
CONTRACT AMOUNT GAIN/(LOSS) ------------ ------------ LM LM Receive euros / Pay sterling(1)(4).......................... L10 Average contractual exchange rate........................... L0.65 L(0.3) Receive US dollars / Pay sterling(2)(3)(4).................. L279 L1 Average contractual exchange rate........................... $ 1.62
- ------------------------------ (1) The receive euros/pay sterling contracts have a weighted average maturity of nine months. These contracts match exactly the forecast cash flows for start-up costs on FINANCIAL TIMES DEUTSCHLAND. (2) All other contracts have a maturity of less than one month. (3) The L279 million of receive US dollars/pay sterling contracts relates to the announced disposal of Lazard banking houses that closed on March 3, 2000 for L410 million. In addition to the purchase price, we received a L26 million dividend. (4) There were no material outstanding contracts of this nature in 1998. We seek to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, our debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require us to use short-dated swaps between currencies. The table below summarizes our 1999 position by currency pair. We had no outstanding contracts of that type in 1998. FOREIGN EXCHANGE CONTRACTS DUE TO TIMING DIFFERENCES
CONTRACT AMOUNT GAIN/(LOSS) --------- ------------ LM LM Receive US dollars / Pay euros(1)(2)........................ L47 - Average contractual exchange rate........................... 1.$01
- ------------------------------ (1) These contracts, with a maturity of less than one month, transferred US dollar cash balances into euros in order to partially fund the purchase of a further 20% stake in Recoletos. (2) There were no outstanding contracts of this nature in 1998. Although we prepare our consolidated accounts in sterling, we have invested significant sums in overseas assets, particularly in the US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and also between the euro and sterling, are likely to affect shareholders' funds and other accounting values. The introduction of the euro on January 1, 1999 allowed greater revenue and cost offsetting than previously available operating in separate currencies, therefore reducing our market rate. 57 BUSINESS INTRODUCTION Pearson is a global media company with its principal operations in the education, business information, consumer publishing and television markets. We have significant operations in the US and generate more than half our revenues from that market. On July 31, 2000, we announced an agreement to acquire NCS for a purchase price of approximately $2.5 billion. NCS is a leading testing and educational services company in the US. The combination of NCS and Pearson Education will create an integrated education company with strong market positions in curricular content, online learning, assessment, enterprise applications for US schools and professional accreditation. We intend to finance the acquisition of NCS through the rights offering. We believe the rights offering to be the most efficient means for us to raise the necessary funds. PEARSON PLC We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers, television programs and internet services. We use online capabilities in our back office, our supply chains, our base businesses and new businesses we create. The internet is already both an integral part of each of our businesses and a facilitator of new product and distribution opportunities. Although we seek to build businesses that are worth more together than apart because of the synergies they offer each other, our operations break down into four core areas: - PEARSON EDUCATION is a leading international publisher of textbooks, supplementary materials and electronic education programs for elementary and secondary school, higher education and business and professional markets. In the US, our Scott Foresman, Addison Wesley Longman, Prentice Hall and Allyn & Bacon brands have enabled us to capture significant shares in the kindergarten through 12th grade markets. Our higher education business has been pre-eminent in the US for many years. Our international education business is the global leader in the English language teaching materials market and has a major position in the textbook and educational materials market outside the US, including being the largest textbook and school program provider in a number of local markets. In addition, we are a leader in using technology to educate, including online assessment and digital courseware through the Computer Curriculum Corporation, as well as products such as the Waterford Early Reading Program and the KnowZone. Our education offerings also extend to business education, where FT Knowledge provides distance learning for the corporate and post-secondary markets and has entered into several agreements with major business schools and other educational institutions in the US and worldwide. We are currently developing the Learning Network, a vertically integrated, internet-delivered community linking parents, teachers and students with educational opportunities. On June 29, 2000, we announced the purchase of an 87% interest in FamilyEducation Network, Inc., an online network for parents, teachers and students. We are working to form strategic alliances with other internet content providers, to put in place the necessary technological infrastructure and management team for the Learning Network to develop a marketing program. We expect to launch the Learning Network in the Fall of 2000. NCS, which will become a part of Pearson Education upon completion of the acquisition, is the United States' largest commercial processor of student assessment tests for kindergarten through 12th grade. NCS offers a secure internet-based electronic testing delivery and reporting capacity, allowing it to participate in the professional certification market. It also 58 provides software, services, systems applications and internet-based technologies for the collection, management and interpretation of data in education. NCS seeks to use internet-based technologies to increase its market penetration and offer additional innovative products and services to its customers in the education field. - THE FT GROUP consists of our international newspaper, print and online financial information, business magazine and professional publishing interests. Our flagship product is the FINANCIAL TIMES, known internationally for its premium editorial content and international scope. Building upon the success of the FINANCIAL TIMES, we have developed a global information portal (FT.com), an online personal finance resource (FTYourMoney.com), and a European online financial news website (FTMarketWatch.com). We have also developed a pan-European network of leading business newspapers and related online business portals, including FINANCIAL TIMES DEUTSCHLAND, LES ECHOS and EXPANSION, for the German, French and Spanish-speaking markets. We own Recoletos, a Spanish media group which, in addition to EXPANSION, publishes MARCA, the leading Spanish sports newspaper, and we hold a 50% stake in THE ECONOMIST, an international weekly current affairs and business magazine. We also own 60% of Data Broadcasting Corporation, a supplier of electronic database services to US and UK securities professionals. Data Broadcasting Corporation has a 34% ownership interest in MarketWatch.com, whose web properties, CBS.MarketWatch.com and bigcharts.com, are among the most popular destinations for financial and market news on the web. - THE PENGUIN GROUP is one of the premier English language publishers in the world, with brand imprints such as Penguin, Avery, Dutton, Putnam and Viking. We publish an extensive portfolio of fiction and non-fiction, literary and commercial works from authors such as Tom Clancy, Clive Cussler, Dick Francis, Patricia Cornwell and Nick Hornby. We are one of the pre-eminent classics publishers and own or have rights to some of the most highly prized and enduring brands in children's publishing, featuring the books of Roald Dahl and such popular characters as Spot, Peter Rabbit and Madeline. We have a strong frontlist of new books by bestselling authors, and a backlist of more than 25,000 popular titles. In 1999, titles published by Penguin Putnam, as we are known in the US, spent a record 262 weeks on THE NEW YORK TIMES bestseller list. Our recent acquisition of Dorling Kindersley, or DK, a leading international publisher of illustrated reference books, will add breadth to our portfolio. DK offers many products with illustrations and graphics that are particularly well-suited for online delivery, and DK has invested in converting its properties into a digital format. As a result, this acquisition also gives us many more opportunities for online rights exploitation. - PEARSON TELEVISION was recently merged with CLT-Ufa, the television and broadcasting business owned by Germany's Bertelsmann AG, and Belgium's Audiofina, to create the RTL Group. The combined company is an integrated pan-European company with activities in television production, online delivery and broadcasting, including the well-known RTL television stations. The RTL Group is Europe's largest radio and television broadcast company by revenue and its shares are traded on the London Stock Exchange. The terms of the merger, which closed on July 25, 2000, provide us with a 22% interest in the RTL Group, and representation on its board. COMPETITIVE STRENGTHS We have achieved leading positions in our markets by capitalizing on our competitive strengths: - POWERFUL BRANDS--We have made a substantial investment to develop and promote our quality brands. Our brands create customer loyalty and facilitate the use of new distribution channels and our entry into new markets. 59 - RICH CONTENT--Each of our businesses creates and manages informative, educational and entertaining content. The quality, depth and originality of our products reinforce the strength of our brands and attract customers, partners and talented employees. - INTERNATIONAL SCALE--We have operations around the world and publications in English, French, Spanish, German and many other languages. Our large business presence in many local markets enables us to move rapidly to capitalize on international opportunities. - ATTRACTIVE CUSTOMER BASE--Our products appeal to a range of customers -- institutions, businesses and a broad group of consumers of all ages and interests. We have a highly educated customer base with a substantial discretionary spending capacity. - PROVEN MANAGEMENT TEAM--Since 1997, a new management team has transformed the company into a simpler, more integrated media enterprise focused on our core businesses. Since we started this process, we have publicly set clear financial goals and consistently met or exceeded them. OUR STRATEGIES We focus on media businesses in growing markets and categories where we have or we can attain strong, sustainable market positions. We use our content and brands in our existing businesses and to develop new ones. We have integrated the internet into each of our businesses to enhance our customers' experiences, improve our ability to reach customers and increase the value of our content. - PEARSON EDUCATION constantly seeks ways to make products more attractive to teachers, students, parents and professionals. Over 1,200 of our approximately 49,000 college textbooks have interactive companion websites with online study guides to elaborate on text concepts, and chat rooms and bulletin boards to facilitate interaction between students and faculty. We continue to invest in a range of electronic learning tools to support our programs. We are also developing the Learning Network, an interactive online community of parents, students and teachers, to further expand the distribution of our content and generate new revenue streams. In addition, we are seeking to expand our international reach to benefit from our market expertise and build scale. Our acquisition of NCS will transform Pearson Education into an integrated education company.The combined business will be well-placed to create new market opportunities through developing customized learning in which testing and curriculum work together. The combined business will connect schools and homes, enabling parents to play a more active role in the education of their children. - THE FT GROUP aims to be the leading source of strategic information, intelligence, analysis and commentary for senior managers and institutional and individual investors around the world. We are building on the strength of our flagship brand, the FINANCIAL TIMES, to create a pan-European network of national business newspapers and websites, including LES ECHOS in France, EXPANSION in Spain and FINANCIAL TIMES DEUTSCHLAND in Germany. With THE WALL STREET JOURNAL, we have also launched VEDOMOSTI, a Russian language business newspaper. We use the well recognized brand and premium content of the FINANCIAL TIMES to develop new websites with diverse revenue models. We continue to invest in FT.com, our leading global business information portal, to further enhance its content, include more international company and market information and add more sophisticated tools intended to increase the "stickiness" of the site. We have launched FTYourMoney.com to capitalize on the rapidly growing personal finance market in the UK and FTMarketWatch.com to capture the expanding market of European investors who make their investment decisions online or look to the internet for quick, market-oriented news. 60 - THE PENGUIN GROUP continues to strengthen its frontlist, working globally to extend its stable of bestselling authors and identify new talent. We are digitizing our business--all of our new titles and over half of our backlist titles have been converted to an electronic digital format to enable "printing on demand" and "e-book" delivery. We are also building online communities around authors and genres to strengthen our relationship with our readers and to create new revenue streams. We recently acquired DK, a publisher of illustrated products such as travel and children's reference books. We believe that DK's high quality illustrated publications, many of which have been converted to a digital format permitting online delivery, will provide us access to new customers and markets, expand our product offerings and enhance our online marketing efforts. - PEARSON TELEVISION'S recently completed merger to form the RTL Group offers Pearson Television the opportunity to take its quality content into new distribution channels that are offered by our media partners. The RTL Group will continue Pearson Television's development of online versions of television shows, such as THE PRICE IS RIGHT, and the building of online communities around popular serial dramas. We are working to capture the full synergistic potential that exists among our media businesses through the sharing of content and distribution channels. For example, FT Knowledge, our online distance learning business, results from the merger of Pearson Education's higher education textbooks and professional publishing resources with the FT Group's distance learning and management education resources. Longman Penguin Readers are simplified classics for new English speakers, combining Pearson Education's English language training resources and Penguin's classics library. Content from Penguin and the FT Group will be featured on our Learning Network. NCS ACQUISITION NCS is a leading testing and educational services company in the US. For its fiscal year ended January 29, 2000, NCS had revenues of $630 million, compared to $505 million for the prior fiscal year, and income from operations of $70 million, compared to $55 million for the prior fiscal year. At January 29, 2000, NCS had total assets of $465 million, total long-term debt of $16 million, total cash and cash equivalent of $22 million and total stockholders' equity of $294 million. We have agreed to acquire all of the outstanding shares of NCS for approximately $2.5 billion, or $73 per share. Our merger agreement requires us to launch a cash tender offer for all of the issued and outstanding shares of NCS's common stock on or before August 7, 2000. The tender offer will remain open for 23 business days, unless extended in accordance with the merger agreement, and will be conditioned on the tender of a sufficient number of shares to give us ownership of at least a majority of the fully diluted outstanding shares of NCS. After the completion of the tender offer, NCS will merge with us, and the remaining shareholders of NCS other than us will receive the same cash consideration per share as offered in the tender offer. We intend to finance the NCS acquisition with the proceeds of the rights offering. We believe the acquisition of NCS is an important step in the development of Pearson Education, providing the following opportunities: - INTEGRATING EDUCATIONAL PROGRAMS. The combination of curricular content, testing, and educational applications creates opportunities to provide schools, universities, colleges and professional and training organizations a comprehensive range of education solutions, encompassing curricular and training programs, assessment and testing and educational services, including student curriculum, instructional and financial management software. - CUSTOMIZING LEARNING. Combining NCS's assessment tools with our curricular content will enable us to create customized learning programs individually tailored for each student. 61 - EXTENDING CUSTOMER REACH. Our salesforce will market NCS's instruction management software, assessment tools and school administrative software to kindergarten through 12th grade school districts to supplement NCS's own direct salesforce. - ACCELERATING THE DEVELOPMENT OF NEW ONLINE PRODUCTS. NCS's online business will complement our business enabling us to offer electronic end-to-end learning solutions. - DEVELOPING A NEW MARKET, WITH PARENTS AS CUSTOMERS. NCS's products will enable us to reach parents with new educational content, creating new revenue opportunities for our educational publishing business. It will also extend the scale and reach of our Learning Network, enabling it to reach directly a much bigger audience of parents and students. - MOVING INTO NEW PROFESSIONAL MARKETS. Our professional publishing and corporate training business will enable NCS to market its testing and assessment skills to meet the growing demand for accreditation in a wide range of professions and disciplines. - WIDENING INTERNATIONAL SPREAD. With major educational publishing operations around the world, Pearson Education will enhance NCS's international presence. OPERATING DIVISIONS PEARSON EDUCATION Pearson Education is one of the world's largest publishers of textbooks and paper and online teaching materials based on published sales figures and independent estimates of sales. Pearson Education serves the growing demands of teachers, students, parents and professionals throughout the world for stimulating effective education programs. In 1999, Pearson Education had sales of L1,725 million, or 52% of Pearson's total sales. An integral part of Pearson Education's strategy is the creation of interactive education communities through the development of an online education network. On June 29, 2000, we announced the purchase, for $129 million, of an 87% interest in FamilyEducation Network, Inc., or FEN, an online network for parents, teachers and students. America Online, Inc. will continue to be a minority shareholder in FEN, along with FEN's founders. In addition, we also announced a three-year agreement with AOL under which our Learning Network will be an anchor tenant on the main screen of AOL's Research and Learn Channel, providing educational content for all stages of a person's life, from pre-school to adult learning, including ongoing education and professional training. We expect to launch the Learning Network in the Fall of 2000. We are currently working to identify internet content providers with whom we may form alliances in connection with the Learning Network. We are also working on the Learning Network's technological infrastructure and on assembling its management team within Pearson. The final step in connection with the Learning Network's launch will be the development of a marketing program. We expect the Learning Network will require significant further investment in the future before becoming profitable. Upon completion of the NCS acquisition, its operations will become part of Pearson Education. NCS is the US's largest commercial processor of student assessment tests for kindergarten through 12th grade. It is the largest single provider of student curriculum, instructional and financial management software to schools. NCS provides schools with suites of integrated software modules, along with professional services designed to meet the reporting needs of administrators and the curriculum needs of teachers. NCS also provides large scale performance measurement projects, including program design, item development, program management, software development, printing packaging, distribution, collection, processing, scoring and reporting. Among its other services, NCS provides large scale project management for student financial aid applications and other post-secondary applications. In a world shaped by an increasingly knowledge-based economy, there is a large appetite for education in both the developed and developing worlds. Governments, corporations and individuals 62 see education as a necessary component for success and are willing to invest in it. Favorable demographics, the spread of public education in the developing world and increasing demand to learn English are all factors driving this growth. The international market for educational programs includes not only local language textbooks, but also English language teaching materials and professional publications. PEARSON EDUCATION'S WELL KNOWN BRANDS PRENTICE HALL............................. a secondary school publisher of engineering, math, science and humanities titles and a higher education publisher in every discipline SCOTT FORESMAN............................ a publisher of reading, math and science titles for elementary school ADDISON WESLEY LONGMAN.................... a higher education publisher of science, math and business titles ALLYN & BACON............................. a publisher of education, social science and humanities titles for the higher education market MACMILLAN USA AND PEARSON PROFESSIONAL TECHNICAL REFERENCE..................... publishers of computer books SILVER BURDETT GINN....................... a publisher of math and music titles for the elementary school market
The internet provides an ideal medium for our quality education programs, which we create and sell for use with our textbooks and as stand-alone products. Our internet initiatives also include the creation of the Learning Network, an internet-delivered network of education services. Both our base products and the development of the Learning Network have been facilitated by minority investments in internet companies, including: - Copernicus, which provides customized, local education portals, marketed as EdGate, for teachers, parents and students, - Blackboard, an internet infrastructure company whose learning software backs up online teaching environments in over 1,800 American colleges and universities, and - Score! Learning, a local education service provider that provides online coaching, testing and support and is developing, with Pearson, an internet version. Pearson Education has three principal divisions--US schools, higher education and professional publishing and international. Each division contributes approximately one-third of Pearson Education's revenues. US SCHOOLS Pearson Education is a leading US school publisher for kindergarten through 12th grade, with a comprehensive range of textbooks, supplementary materials and electronic education programs. We believe that our market share in this segment is approximately 25%. Pearson Education's premier elementary school imprint, Scott Foresman, and premier secondary school imprint, Prentice Hall School, publish high quality programs covering subjects such as reading, literature, math, science and social studies. In addition, these groups publish online assessment and digital courseware through the Computer Curriculum Corporation, as well as programs such as the Waterford Early Reading Program and the KnowZone. We also publish supplementary teaching aids for both elementary and secondary schools and teacher-written activity books. 63 With over 90% of education spending in this segment in the US financed at the state or local level, the US Schools division's major customers are state education boards and local school districts. In the US, 20 states, which account for over 50% of the total kindergarten through 12th grade US school population of some 52 million students, buy educational programs by means of periodic statewide "adoptions". These adoptions cover programs in the core subject areas. Typically, a state committee selects a short-list of education programs from which the school districts then make individual choices. We actively seek to keep as many of our offerings as possible on the approved list in each state and we market directly to the school districts. In the 30 states without adoptions, or "open territories", local school districts choose education programs from the extensive range available. We actively market to school districts in open territories as well. Our revenues are split evenly between adoption states and open territory states. HIGHER EDUCATION AND PROFESSIONAL PUBLISHING Pearson Education is America's largest publisher of educational textbooks and related materials for colleges and universities. We publish across all of the main fields of study with imprints such as Prentice Hall, Addison Wesley Longman and Allyn & Bacon. We market primarily to college professors who choose the texts to be purchased by their students. Over 1,200 of Pearson Education's approximately 49,000 college textbooks have an interactive companion website with online study guides to reinforce text concepts, and chat rooms and bulletin boards to facilitate interaction between students and faculty. An increasing number of our programs are delivered through online course management systems that provide a powerful set of easy-to-use tools that allow professors to create sophisticated web-based courses. We also publish textbooks and reference books for industry professionals, with a particular strength in computers and information technology where we are the world's largest publisher. Our imprints in this area include Macmillan USA, Pearson Professional Technical Reference, Prentice Hall, Addison Wesley Longman and Adobe Press. Many of these publications are also available both on the internet and via CD-ROM. Online sales have grown rapidly. We work closely with many independent online retailers and operate our own portal for IT professionals, InformIT. INTERNATIONAL Pearson Education has sales, distribution and publishing operations in 35 countries throughout the world. We produce textbooks, English language teaching materials (in which we are a global leader) and professional publications. Our international division also represents translations and imprints of our US higher education and professional publications. Our publications are primarily in English and are marketed to the English speaking markets. In addition to English, we also publish in the local language in a number of countries, including Germany, France, Spain, Italy, Mexico, Colombia, Brazil, Hong Kong, Japan and South Korea. In a number of English speaking countries, we are the largest publisher of school materials. FT KNOWLEDGE At the end of 1998, we combined our distance learning management education operations into one business, FT Knowledge. These operations include online MBA and online business skills courses. FT Knowledge is a leading provider of business education and management development programs. We specialize in providing education that is highly relevant to the needs of businesses and their employees. Linking up with some of the most respected academic institutions, we operate around the world to create virtual universities and online business schools for a variety of courses. On July 28, 2000 we acquired The Forum Corporation, one of America's top corporate training companies, for $90 million. 64 THE FT GROUP The FT Group is an integrated print and online operation comprising newspapers, print and online financial information, business magazines and professional publishing interests. The FT Group aims to be the leading source of strategic information, intelligence, commentary and analysis for senior managers and institutional and individual investors around the world. The FINANCIAL TIMES, the group's flagship publication, is generally recognized as the world's leading international business newspaper. In 1999, the FT Group had sales of L687 million, or 21% of Pearson's total sales. Business is now global, and the demand for strategic business information--the combination of news, data, comment, analysis and context in which the FT Group excels--is growing fast. In addition to professional and business consumers, individuals around the world are demanding such strategic business information. The FT Group is very well positioned to supply information and benefit from these trends. Since 1997, we have: - Expanded the circulation and geographic reach of the FINANCIAL TIMES in all forms through active promotion of its brand and rich content, - Extended the FT brand to the internet through FT.com, a global business information portal, - Invested in more editorial talent, and created an integrated newsroom serving both the newspaper and FT.com, and - Continued to develop a pan-European network of national business newspapers and related online services. PRIMARILY PRINT SERVICES FINANCIAL TIMES........................ Regarded as the leading international business newspaper (FT.com) LES ECHOS GROUP........................ Publishes France's leading business and financial newspaper and leading business website (lesechos.fr) RECOLETOS.............................. Publishes EXPANSION, Spain's leading business and financial newspaper and MARCA, the leading Spanish sports newspaper; has a 30% interest in EL MUNDO, a leading daily newspaper, and operates one of Spain's leading business and financial websites (expansiondirecto.com) FINANCIAL TIMES DEUTSCHLAND............ A new German language business newspaper with an integrated online business news and data service (ftd.de) (50% interest) BDFM................................... Publishes South Africa's leading daily and weekly financial newspapers and website (bdfm.co.za) (50% interest) THE ECONOMIST GROUP.................... Publishes one of the world's leading weekly business and current affairs magazines (economist.com) (50% interest) FINANCIAL TIMES BUSINESS............... Publishes INVESTORS CHRONICLE, THE BANKER, MONEY MANAGEMENT and FINANCIAL ADVISOR
65 PRIMARILY ONLINE SERVICES FT.COM................................. One of the leading portals on the web for global business information (FT.com) FTYOURMONEY.COM........................ A leading source for independent personal finance information in the UK (FTYourMoney.com) FT INTERACTIVE DATA.................... One of the world's leading sources of securities pricing and specialist financial information (intdata.com and dbc.com) (60% interest) ESIGNAL................................ An online real-time streaming quotation service for brokers and active traders (esignal.com) (60% interest) MARKETWATCH.COM........................ Popular destination on the web for financial and market news (CBS.MarketWatch.com and bigcharts.com) (34% interest) FTMARKETWATCH.COM...................... Real-time financial and market news for the European market (FTMarketWatch.com) (under development) FT ENERGY.............................. An online and print service providing expert analysis, database information systems and consulting services for the energy industry OTHER FINANCIAL TIMES CONFERENCES............ Organizes high-level strategic events for the international business community FTSE INTERNATIONAL..................... A joint venture with the London Stock Exchange providing the investment community with the top UK indices and, together with the Amsterdam Stock Exchange, publishes the Eurotop family of indices (FTSE.com)
THE FINANCIAL TIMES NEWSPAPER The FINANCIAL TIMES is a leading international daily business newspaper. Its average audited daily circulation of 440,000 copies in December 1999, which was 14% greater than the prior year, gives the FINANCIAL TIMES the second largest circulation of any English language business daily in the world. The FINANCIAL TIMES derived approximately three-quarters of its revenue in 1999 from advertising and approximately one-quarter from circulation. The geographic distribution of the FINANCIAL TIMES' average daily circulation was: EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
UK AND REPUBLIC OF IRELAND 44% Continental Europe, Middle Ease and Africa 29% Americas 23% Asia 4%
The FINANCIAL TIMES draws upon an extensive network of international correspondents and its editorial skills to produce unique, informative and timely business information. We believe that we 66 have the largest number of correspondents of any English language daily newspaper in the world. For production and distribution, the FINANCIAL TIMES uses computer-driven communications and printing technology for timely delivery of the various editions of the newspaper to the appropriate geographic markets. In 1998, we established printing sites in Milan, Chicago, Boston and San Francisco, improved our distribution network in the US and began a sustained marketing effort centered in the US and Europe. Increased corporate finance, merger and acquisition activity and European economic integration have fuelled the appetite for increased business coverage in Europe. To add to our pan-European pre-eminence with the FINANCIAL TIMES, the FT Group, in partnership with Gruner + Jahr, a subsidiary of Bertelsmann AG, the German media group, recently inaugurated FINANCIAL TIMES DEUTSCHLAND and its related online business news and data service. FINANCIAL TIMES DEUTSCHLAND provides German-language coverage of business issues that is complementary to the FINANCIAL TIMES' international coverage. In 1999, the FINANCIAL TIMES, THE WALL STREET JOURNAL and Independent Media (publisher of THE MOSCOW TIMES) jointly launched VEDOMOSTI, a daily Russian language business newspaper. Drawing content from a staff of 20 Russian reporters, as well as translated pieces from both the FINANCIAL TIMES and THE WALL STREET JOURNAL, VEDOMOSTI plans to expand from its present circulation in Moscow and St. Petersburg into a national daily newspaper. FINANCIAL TIMES INTERNET BUSINESSES Under the FT brand, we distribute business and personal finance information to a global audience via the internet. We maintain and continue to extend a network of leading European and US business and financial news, private investor and personal finance web services. To date, our internet investment has been primarily focused on the development of FT.com. Our websites include: - FT.COM, a leading global business information portal that combines agenda-setting editorial content with comment and analysis, relevant financial data, discussion groups, unique dossiers on key business people and innovative tools to search the web, manage a working day and seek out leisure opportunities, - FTYOURMONEY.COM, an online source of independent personal finance information and guidance aimed at consumers who seek to manage their own finances better. FTYourMoney.com seeks to capitalize on the rapidly growing personal finance market in the UK and then to roll-out similar websites in other countries, and - FTMARKETWATCH.COM, a joint venture between the FT Group and MarketWatch.com that launched in June 2000, provides free, real-time financial and market news to Europe's community of private investors. The new website is modelled on CBS.MarketWatch.com. Through our ownership of Data Broadcasting Corporation, we also own 34% of MarketWatch.com. The following operating statistics show that, similar to the FINANCIAL TIMES, FT.com has quickly shown an ability to attract a large number of users:
JANUARY FEBRUARY MARCH -------- --------- -------- (IN MILLIONS) Users.......................................... 1.0 1.1 1.2 Page views..................................... 18.0 22.0 24.0
67 FT INTERACTIVE DATA FT Interactive Data supplies market data to US and UK securities professionals, including trading houses, custodians and fund managers. Its most significant activity in sales is the supply of database services, which are primarily delivered electronically, covering a wide range of pricing, dividend, corporate action and descriptive information. FT Interactive Data has a database of 3.5 million securities, including hard-to-value, fixed income instruments. This information allows institutional investors efficiently to value their portfolios. FT Interactive Data operates under the trade name Interactive Data Corporation in the US and EXSHARE in the UK. FT Interactive Data also operates FTSE International, a joint venture with the London Stock Exchange, that provides the professional investment community with the FTSE 100 and European economic and market indices. In 1999, we acquired the Thomson Financial Securities business, a unit of the Thomson Corporation. These assets include Muller Data Corporation and Muniview, municipal bond valuation businesses based in the US, and Valorinform, an international valuation business based in the UK. In February 2000, FT Interactive Data merged with Data Broadcasting Corporation, a Nasdaq-listed company that is one in the leading providers of real-time financial market data to traders and individual investors. We own a 60% stake in the combined business. FINANCIAL TIMES BUSINESS Financial Times Business provides magazines and web services for professionals in the finance and energy sectors. It publishes the UK personal finance magazine INVESTORS CHRONICLE, as well as THE BANKER, MONEY MANAGEMENT and FINANCIAL ADVISER. Its energy business, based in the US, operates under the brands Research Data International and E-Source and produces management studies, consultancy work and newsletters. LES ECHOS GROUP The Les Echos Group publishes newspapers and magazines for the French speaking market. The French language financial newspaper, LES ECHOS, has the highest daily circulation of any business newspaper in France. LesEchos.com, the newspaper's website, is the leading business website in France. The Les Echos Group also publishes a business magazine called ENJEUX-LES ECHOS. 68 RECOLETOS We have a 99.6% stake in Recoletos, a Spanish media group that we built with its Spanish promoters over several years. Recoletos' publishing businesses in Spain and Portugal include MARCA, a leading sports newspaper for the region with an average annual circulation of 397,000 in 1999, EXPANSION, a daily business newspaper, ACTUALIDAD ECONOMICA, a weekly business magazine, and TELVA, a monthly women's magazine. It is also developing its internet activities as it seeks to extend the reach of its print-based products. The group is has announced plans for a public offering of a minority stake. INVESTMENTS AND ASSOCIATES In addition to interests outlined elsewhere, we hold non-controlling interests in several other media companies, including a 50% stake in The Economist Group, which owns THE ECONOMIST, an international weekly current affairs and business magazine. We also own a 50% stake in BUSINESS DAY and FINANCIAL MAIL, the leading daily and leading weekly financial publications in South Africa, respectively. THE PENGUIN GROUP Penguin is one of the premier English language publishers in the world. We publish an extensive range of titles, including the very best new fiction and non-fiction, literary prize winners and commercial blockbusters. Our titles range from history and science to essential reference. We are also one of the pre-eminent classics publishers and own some of the most highly prized and enduring brands in children's publishing, featuring popular characters such as Spot, Peter Rabbit and Madeline, as well as the books of Roald Dahl. We rank in the top three in all major English speaking markets--the US, UK, Australia, New Zealand, Canada, India and South Africa. The Penguin Group combines a frontlist of new books by best-selling authors with a backlist of more than 25,000 popular titles. In 1999, Penguin Group titles spent a record 262 weeks on THE NEW YORK TIMES bestseller lists and, in the UK, the Penguin Group nearly doubled its share of THE GUARDIAN'S Top 100 Bestsellers. In 1999, the Penguin Group had sales of L565 million, representing 17% of Pearson's total sales. Revenues are split approximately evenly between frontlist and backlist titles, minimizing Penguin's exposure to volatility in either market. The Penguin Group earns over 90% of its revenues from the sale of hard cover and paperback books. The balance comes from audio books and from the sale and licensing of intellectual property rights, such as the Beatrix Potter series of fictional characters. We also sell a range of titles on CD-ROM and cassette and act as a book distributor for a number of smaller publishing houses. We sell directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel which best serves the specific requirements of an order. In the last few years, we have also seen a significant growth in online purchasing directly by consumers, which currently accounts for approximately 5% of US sales and a growing percentage of UK sales. 69 We publish under the following imprints and have many well known authors.
PENGUIN GROUP IMPRINTS PENGUIN'S REPRESENTATIVE - ------------------------------------------------------------ ----------------------------- ADULT CHILDREN AUTHORS - ----------------------------- ----------------------------- ----------------------------- Penguin Dial Tom Clancy Putnam Dutton Patricia Cornwell Avery Viking Clive Cussler Berkley Books Ladybird Dick Francis Dutton Penguin Alex Garland Hamish Hamilton Puffin Sue Grafton Michael Joseph Frederick Warne Nick Hornby Plume Beatrix Potter Signet Sue Townsend Viking
The Penguin Group's gateway internet site, Penguin.com, provides access to its focused websites in the US, Canada, UK and Australia. Websites have also been developed to target certain niche audiences. For example, Penguinclassics.com has an entire online world for the classics--with anthologies, original essays, interviews and discussions and links to other classics sites. It is the favored classics site on Amazon UK. In addition, we have developed the award-winning PeterRabbit.com and we are extending rapidly our range of author websites, live webcasts and subject-specific sites, such as one for readers of romance novels. The Penguin Group aims to use the internet to increase the commercial efficiency of its existing publishing operations and to exploit its popular brands and unique content, and to continue to convert its library into digital formats suitable for e-book delivery, printing on demand and other forms of distribution. On May 12, 2000, we completed our acquisition of Dorling Kindersley Holdings plc, or DK, an international publisher of illustrated reference books, for L310 million. We believe that the combination of DK, the Penguin Group and Pearson's educational and other businesses will provide us with strategic benefits, including: - COMPLEMENTARY PRODUCT LINES. DK's illustrated reference books are distinct from Penguin's existing product lines, providing access to new and sophisticated customers in both English-speaking and foreign markets. - MARKET COVERAGE. Many of DK's illustrated products will reinforce our ages 4-18 market coverage and take the Penguin Group into large segments of the consumer market where we are not currently present. DK also takes the Penguin Group into non-English language markets and provides the basis for establishing local publishing operations outside the English speaking world founded on illustrated books with international appeal. - DIGITAL ILLUSTRATION LIBRARY AND NEW MEDIA OPPORTUNITIES. This acquisition provides the Penguin Group and other Pearson operating companies with a digitized, primarily wholly-owned library of high quality text and picture-based intellectual property. We can develop and use this library as a digital platform for e-books, online education products and other new formats in the future. - ENHANCED RETURN DUE TO SYNERGIES. The combination with the Penguin Group will allow DK to realize substantial economies of scale and integration savings. - BUSINESS EXTENSIONS. DK provides a large and immediate opportunity for two of our operating companies, the Penguin Group and Pearson Education, to integrate DK's brand and database content into their markets in appropriate formats. Its reference books, for instance, will enhance the research service of the education network as well as provide supplemental products to be sold by Pearson Education's large sales force. 70 PEARSON TELEVISION On July 25, 2000, Pearson Television was merged with CLT-Ufa, the television and broadcasting business owned by Germany's Bertelsmann AG, and Belgium's Audiofina, to create the RTL Group. The combined company is an integrated pan-European company with activities in television production, online delivery and broadcasting, including the well-known RTL television stations. The RTL Group is Europe's largest radio and television broadcast company by revenue and is listed on the London Stock Exchange. The terms of the merger, which closed on July 25, 2000, provide that we will own a 22% interest in the RTL Group. We currently own 20.5% of the group, which will increase to 22% upon the transfer of certain remaining assets of Pearson Television. This transfer remains subject to government approvals. Marjorie Scardino, our chief executive officer, and John Makinson, our finance director, are directors. Pearson Television's former chief executive, Richard Eyre, will be the RTL Group's executive director responsible for content and strategy. In 1999, Pearson Television had sales of L355 million, or 10% of Pearson's total sales. COMPETITION All of Pearson's businesses operate in highly competitive environments. Pearson Education competes with other publishers and creators of educational materials. These companies include large international companies, such as McGraw-Hill, Houghton Mifflin and Thomson. Competition is based on the ability to deliver quality products that appeal to the school boards, educators and government officials making purchasing decisions, at competitive prices. NCS competes with numerous commercial processors of student assessment tests including in-house systems, national and regional providers, data processing service bureaus and test publishers. FT Group competes with other companies engaged in the publishing of business news, such as THE WALL STREET JOURNAL. The FT Group competes with other newspapers and information sources for readership by offering timely and expert journalism, and competes for advertisers with other forms of media based on the ability to offer an effective means for advertisers to reach their target audience. The Penguin Group competes with other publishers of fiction and non-fiction books. As such, principal competitors include Random House and Harper Collins. Publishers compete by developing a portfolio of books that are in demand by continually seeking out and promoting talented writers and by offering their works at competitive prices. INTELLECTUAL PROPERTY Our principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly Financial Times and Penguin and the various imprints of Pearson Education, and copyrights in our content. We believe we have taken all appropriate available legal steps to protect our intellectual property in all relevant jurisdictions. RAW MATERIALS Paper is one of the principal raw materials used by each of Pearson Education, the FT Group and the Penguin Group. We purchase most of our paper through our central purchasing department located in the US. We have not experienced and do not anticipate difficulty in obtaining adequate supplies of paper for their operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we have not experienced extensive volatility in fulfilling paper requirements. 71 GOVERNMENT REGULATION The manufacture of certain of our products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Our operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conduct these operations maintain controls on the repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to Pearson as a whole. Accordingly, these controls have not significantly affected our international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe, however, that we have taken and continue to take measures to comply with all applicable laws and governmental regulations in the jurisdictions where we operate so that the risk of these sanctions does not represent a material threat to us. We have minority investments in a number of broadcasting entities that hold licenses granted by various governmental authorities. These licenses generally are subject to renewal at prescribed periods and are subject to forfeiture for failure to comply with the rules and regulations of these authorities. We hold investments in entities that are dependent upon these licenses, but we are not dependent upon any particular licenses. ORGANIZATIONAL STRUCTURE We have interests in subsidiaries and other entities throughout the world. Below is a list of our significant subsidiaries, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.
COUNTRY OF INCORPORATION/ PERCENTAGE INTEREST/ NAME RESIDENCE VOTING POWER - ---- ------------------------- -------------------- Pearson Inc.................... United States 100 Pearson AG..................... Switzerland 100 Whitehall Electric Investments Limited...................... England and Wales 100 Whitehall Trust................ England and Wales 100 Rycade Capital Corporation Inc.......................... United States 100 Financial Times Limited........ England and Wales 100 FT Group Limited............... England and Wales 100 Prentice Hall Inc.............. United States 100 Pearson Business Services Inc.......................... United States 100 Data Broadcasting Corporation.................. United States 60
HISTORY AND DEVELOPMENT During the past three years, we have concentrated on developing our four media business divisions: education, business information, consumer publishing and television. In 1997, we acquired All American Communications, a US television producer, for L247 million. We also obtained a 24% stakeholding in Channel 5, the fifth UK terrestrial television channel, and made a financial commitment of L47 million. This later increased to 29%. Our largest acquisition was in 1998, when we acquired the educational, business & professional and reference publishing businesses of Simon & Schuster from Viacom International Inc. for L2,868 million. We combined these publishing units with Addison Wesley Longman to form the world's largest educational publisher--Pearson Education. In 1999, we acquired the Thomson Financial Securities Management business, a unit of The Thomson Corporation, for L93 million. In February 2000, we merged our FT Interactive Data business, which was then called FT Asset Management, with Data Broadcasting Corporation, one of America's leading providers of real-time financial market data to traders and individual investors. The FT Group has retained a 60% stake in the combined business. 72 On June 29, 2000, we announced the purchase, for $129 million, of an 87% Interest in FamilyEducation Network, Inc., or FEN, an online network for parents, teachers and students. On May 12, 2000, we completed the acquisition of DK, an international illustrated reference publisher, for L310 million. We will combine DK with the Penguin Group. On July 25, 2000, Pearson Television merged with CLT-Ufa to form the RTL Group, a pan-European integrated broadcast and content company in which we will retain a 22% interest. On July 31, 2000, we announced our agreement to acquire NCS for approximately $2.5 billion. To focus on our four principal businesses, we have disposed of several ancillary businesses over the last three years. In 1997, we sold Churchill Livingstone, a medical publishing business, for L57 million. In 1998, we sold our Law & Tax publishing business for L66 million and Pearson New Entertainment, which included Future Publishing, a consumer magazine business, for L125 million. Also in 1998, we sold Mindscape Inc., a developer and publisher of consumer software, for L91 million and The Tussauds Group, our visitor attractions business, for L352 million. In September 1999, we sold our investment in BSB Holdings Ltd. to Vivendi for L408 million. During 1999, we also sold six of Simon & Schuster's business & professional and reference publishing businesses, which did not fit with the rest of Pearson Education's operations, for an aggregate of L209 million. The businesses sold included the following: - Macmillan Library Reference USA Inc., a publisher of materials for high school, college and public libraries, for L52 million, - Macmillan General Reference USA Inc., a full range reference book publisher, for L50 million, - Jossey-Bass Inc. Publishers, a diversified publisher of business management books and journals, for L49 million, and - Appleton & Lange Inc., a medical textbook company for L28 million. On March 3, 2000, we completed the sale of our interests in the Lazard Houses for L410 million paid at closing, together with dividend payments totalling L26 million. PROPERTY, PLANT AND EQUIPMENT Our headquarters is located at leasehold premises in London, England. We own or lease approximately 280 properties in 24 countries worldwide, the majority of which are located in the UK and the US. All of the properties owned and leased by us are suitable for their respective purposes and are in good operating condition. We own the following principal properties:
GENERAL USE OF PROPERTY LOCATION AREA IN SQUARE FEET - ----------------------- ---------------------------------- -------------------- Warehouse......................... Pittstown, Pennsylvania, US 510,000 Warehouse......................... West Nyack, New York, US 501,912 Warehouse......................... Kirkwood, New York, US 409,000 Offices/Warehouse................. Ringwood, Victoria, Australia 274,159 Offices........................... Old Tappan, New Jersey, US 212,041 Warehouse......................... Harlow, UK 164,853 Offices........................... Reading, Massachusetts, US 158,527 Offices........................... Stoneham, Massachusetts, US 48,769
73 We lease the following principal properties:
GENERAL USE OF PROPERTY LOCATION AREA IN SQUARE FEET - ----------------------- ---------------------------------- -------------------- Offices........................... Upper Saddle River, New Jersey, US 474,801 Offices........................... Hudson, New York, US 271,952 Warehouse/Offices................. Harmondsworth, UK 250,658 Warehouse......................... Bittleswell, UK 210,000 Offices........................... London, UK 152,986 Offices........................... Harlow, UK 98,000 Offices........................... Madrid, Spain 72,839 Offices........................... Bedford, Massachusetts, US 64,349
EMPLOYEES The average number of persons employed by us during each of our last three fiscal years were as follows: - 18,306 in fiscal 1997, - 18,400 in fiscal 1998, and - 23,872 in fiscal 1999. The significant increase in the number of our employees in 1999 resulted from the Simon & Schuster acquisition in November 1998. We, through our subsidiaries, have entered into collective bargaining agreements with employees in various locations. Our management has no reason to believe that we would not be able to renegotiate any such agreements on satisfactory terms. We encourage employees to contribute actively to the business in the context of their particular job roles and believe that the relations with our employees are generally good. We do not employ a significant number of temporary employees. The table set forth below shows for 1999 the average number of persons employed in each of our operating divisions in the UK, the US, other locations and in total.
BUSINESS UNIT UK US OTHER TOTAL - ------------- -------- -------- -------- -------- Pearson Education........................................... 1,761 9,970 2,394 14,125 FT Group.................................................... 2,158 1,034 1,790 4,982 The Penguin Group........................................... 749 1,866 614 3,229 Pearson Television.......................................... 617 105 550 1,272 Other....................................................... 171 93 - 264 ----- ------ ----- ------ Continuing Operations....................................... 5,456 13,068 5,348 23,872
LEGAL PROCEEDINGS We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries. 74 MANAGEMENT DIRECTORS AND SENIOR MANAGEMENT We are managed by our board of directors and, under the direction of the board, by the Pearson management committee. We refer to the executive director members of the board of directors, the chairman of the board of directors and the chief executives of each of the four operating divisions as our "senior management". The following table sets forth information concerning each of our directors and members of senior management, as of June 30, 2000.
NAME AGE POSITION - ---- -------- -------- Lord Stevenson............................ 55 Chairman Marjorie Scardino......................... 53 Chief Executive, Director David Bell................................ 53 Director for People John Makinson............................. 45 Finance Director Lord Burns................................ 56 Non-executive Director Gillian Lewis............................. 56 Non-executive Director Reuben Mark............................... 61 Non-executive Director Vernon Sankey............................. 51 Non-executive Director Rana Talwar............................... 52 Non-executive Director Peter Jovanovich.......................... 51 Chief Executive of Pearson Education Stephen Hill.............................. 40 Chief Executive of the FT Group David Wan................................. 46 Chief Executive of the Penguin Group Richard Eyre.............................. 46 Chief Executive of Pearson Television
LORD STEVENSON has been a non-executive director since 1986 and became executive chairman in 1997. He is a member of our treasury committee. He is also chairman of Halifax plc and AerFi Group plc, and a non-executive director of Manpower Inc. MARJORIE SCARDINO joined the board and became chief executive in January 1997. She trained and practiced as a lawyer for nine years from 1976 to 1985, and published a weekly newspaper in the US for seven years from 1978 to 1985. In 1985, she joined The Economist Group as president of its North American operations and was its chief executive from 1993 until joining us. She is also a non-executive director of America Online Inc. and of ConAgra Inc. DAVID BELL became a director in March 1996 and became chairman of the FT Group in 1996. He was chief executive of the FINANCIAL TIMES from 1993 to 1998. In July 1998, he was appointed our director for people with responsibility for the recruitment, motivation, development and reward of employees. He is also a non-executive director of VITEC Group plc and chairman of the Millennium Bridge Trust. JOHN MAKINSON became finance director in March 1996. From 1994 to 1996 he was managing director of the FINANCIAL TIMES, and prior to that he founded and managed the investor relations firm Makinson Cowell. He is also a non-executive director of George Weston Limited in Canada. He is a member of our treasury committee. 75 LORD BURNS became a non-executive director in 1999 and currently serves on our audit and personnel committees. He was the UK government's chief economic advisor from 1980 until 1991 and Permanent Secretary of HM Treasury from 1991 until 1998. He is a non-executive director of Legal & General Group plc and of Queens Park Rangers Football Club. GILLIAN LEWIS became a non-executive director in 1992 and currently serves as the chair of our personnel committee. She has been managing partner of Heidrick & Struggles in the UK, the Republic of Ireland, Middle East and the Republic of South Africa since 1998. Prior to becoming managing partner of UK operations at Heidrick & Struggles, she was the practice managing partner for the consumer practice of Heidrick & Struggles. REUBEN MARK became a non-executive director in 1988 and currently serves on our audit and personnel committees. He became chief executive of the Colgate Palmolive Company in 1984, and became chairman in 1986. He has held these positions since then. He is also a director of Citigroup Inc. and of Time Warner Inc. VERNON SANKEY became a non-executive director in 1993 and currently serves as the chair of our audit committee and as a member of our treasury committee. He is non-executive chairman of Thomson Travel Group plc and a non-executive director of Allied Zurich plc, Zurich Allied AG and Zurich Financial Services. He is also a board member of the Food Standards Agency and a member of the International Advisory Board for Korn/Ferry International. RANA TALWAR became a non-executive director in March 2000. He has been chief executive of Standard Chartered plc since 1998 and a governor of the London Business School since 1999. He is also currently a governor of the Indian School of Business. He was at Citicorp from 1969 to 1997, where he held a number of senior international management roles. PETER JOVANOVICH became chairman and chief executive of Addison Wesley Longman in 1997. In 1998, following the Simon & Schuster acquisition, he became chief executive of Pearson Education. He also serves on the board of the Association of American Publishers and the board of the Alfred Harcourt Foundation. Prior to that he was president of McGraw-Hill's Educational and Professional Publishing Group from 1995 to 1997, and its chairman in 1997. STEPHEN HILL has been chief executive officer of the FT Group since 1998. From 1996 to 1998, he was the chief executive officer of the FINANCIAL TIMES. Prior to that, from June 1995, he was chief executive of Westminster Press. DAVID WAN became chief executive officer of the Penguin Group in January 2000. From 1998 to January 2000, he was chief financial officer of the Penguin Group. From 1989 to 1998, he was President of Simon & Schuster's US school publishing business, which we acquired in 1998. RICHARD EYRE became chief executive of Pearson Television in January 2000. Prior to January 2000, he was chief executive of Capital Radio from 1991 to 1997 until he became chief executive of ITV Network in 1997. On July 25, 2000, Pearson merged Pearson Television into the RTL Group. Effective on that date, Mr. Eyre ceased being a member of our senior management. COMPENSATION OF SENIOR MANAGEMENT The main components of compensation for our senior management are base salary, annual bonuses, long-term incentives, pension benefits and other market specific benefits. BASE SALARY Base salaries are set at levels that we believe are competitive with pay for directors and executives in similar positions in comparable companies. 76 ANNUAL BONUS Annual bonus awards for senior management and some executives can be up to 100% of their annual base salary. In order to receive the maximum bonus, an employee must meet financial targets set by the personnel committee of the board. In 1999, those targets related to our stated goals of increasing earnings per equity share, revenue growth, margin improvement and cash generation. With respect to members of our management committee who are not directors, 80% of their bonus relates to the performance of the operating division of which they are chief executive, and the remaining 20% relates to our performance overall. The bonus given to Greg Dyke, the former executive director and chief executive officer of Pearson Television, also relates to the performance of Pearson Television. The personnel committee of the board will continue to review our bonus plans and has the authority to revise the bonus limits and targets in the future. The personnel committee also may award individual discretionary bonuses. The personnel committee did not award discretionary bonuses for 1999. Bonuses are not considered pensionable earnings. LONG-TERM INCENTIVE PLANS Long-term incentive plans are intended to align the interests of senior management and other employees with those of shareholders. The personnel committee reviews the operation of long-term incentive plans on a regular basis, taking into account UK legislative and regulatory developments, particularly with regard to performance targets and evolving UK best practice. PEARSON REWARD PLAN In 1999, our shareholders approved adoption of a new long-term incentive plan called the Pearson reward plan. Awards under this plan have been made in 1999 and 2000. The plan has two elements: - premium-priced options linked to the rise in our share price over three to seven years, and - our ordinary shares in the form of equity incentives, for the 1999 award linked to the three-year cumulative growth in our free cash flow. The personnel committee has the option to consider and specify other criteria for making awards. Recipients are not eligible for grants of conventional options under our share option plans in any year they receive an award under the Pearson reward plan. The chairman of the board of directors is not eligible for this plan. ANNUAL BONUS SHARE MATCHING PLAN In 1998, our shareholders approved a share matching plan that permits senior management and other senior executives, excluding the chairman of the board, to take up to 50% of the after-tax value of an annual bonus in the form of our ordinary shares. We will match these shares on a before-tax basis at a rate of one matching share for every two shares held for three consecutive years, with an additional share for every two shares held for a total of five consecutive years. However, we only will match if we employ the potential recipient at the time of the grant and if we experience real average growth in our adjusted earnings per share of at least 3% per year during the relevant period. INCENTIVE SHARE PLAN We introduced our incentive share plan in 1993 to reward senior management and a select group of other senior executives based on our performance over the medium to long-term, as measured by total shareholder return relative to the average of the FTSE 100 total return index. The three-year performance period for the incentive share plan awards we made in 1997 ended on 77 December 31, 1999. Since our total shareholder return outperformed that of the FTSE 100 by 105% over the three-year period and our adjusted earnings per equity share for 1999 were higher than those for 1996, 150% of the shares awarded in 1997 were released to the participants in 1999. There remains one outstanding award, relating to Lord Stevenson, which matures in April 2002. No new awards will be made under this plan. EXECUTIVE SHARE OPTION PLAN In 1998, our shareholders approved an executive share option plan pursuant to which options are awarded to senior management and other executives and managers, based on guidelines approved by our personnel committee. These guidelines govern the total number of options that may be granted and the frequency of awards to individual grantees. Options awarded under this plan are granted at value on the date of grant. The chairman of the board is not eligible to participate in this plan. SPECIAL SHARE OPTION PLAN In 2000, we made a special award of share options to some of our key employees. In particular, we made awards to people working on our internet initiatives. RESTRICTED SHARES In addition to share options and performance shares, awards of restricted shares have been granted in 2000 to certain people working on our internet initiatives. RETIREMENT BENEFITS In 1999, we accrued or set aside L0.6 million for the pension, retirement or similar benefits of senior management. NON-EXECUTIVE DIRECTORS' REMUNERATION The board of directors determines fees for non-executive directors with regard to market practice and within limits contained in our articles of association. The board reviews these fees annually with the assistance of an outside advisor. Non-executive directors receive no pay or benefits other than reimbursement for expenses incurred in connection with their directorships and do not participate in our annual bonus plan, incentive share plan or share option plan. Since January 1995, non-executive directors have received an annual fee of L25,000 each. One overseas-based director is paid a supplement of L7,000 per annum. The non-executive directors who chair the personnel and audit committees of the board each receive an additional fee of L5,000 per annum. Starting in January 2000, non-executive director fees were increased by L10,000 per annum, which may be taken in the form of our ordinary shares. 78 REMUNERATION OF SENIOR MANAGEMENT Excluding contributions to pension funds and related benefits, senior management remuneration for 1999 was as follows:
RELEASE OF AWARDS MADE IN 1997 UNDER THE INCENTIVE SHARE SALARIES/FEES BONUS OTHER(1) PLAN TOTAL ------------- -------- -------- ----------------- -------------- (IN L THOUSANDS) CHAIRMAN Lord Stevenson....................... 268 - - - 268 EXECUTIVE DIRECTORS Marjorie Scardino.................... 465 465 54 1,533 2,517 David Bell........................... 270 270 17 589 1,146 Greg Dyke(2)......................... 215 122 10 - 347 John Makinson........................ 310 310 15 - 635 Senior management as a group (9 persons)(3)..................... 2,433 1,875 110 2,122 6,540
- ------------------------ (1) For Marjorie Scardino, David Bell, Greg Dyke and John Makinson, "other" includes company car and health care benefits. Also included in "other" for Marjorie Scardino is L34,180 in respect of housing costs. (2) Greg Dyke resigned as an executive director and chief executive officer of Pearson Television in 1999. (3) Includes the chief executives of the four operating divisions. We are not required to make public disclosure of individual compensation arrangements of non-directors in the UK and, therefore, do not include individual disclosure of the compensation paid to the chief executives of our four operating divisions in this prospectus. As stated in footnote 2 above, the senior management remuneration table also includes remuneration paid to Greg Dyke, who was a director and the chief executive officer of Pearson Television in 1999. 79 SHARE OPTIONS OF SENIOR MANAGEMENT This table sets forth for each director, and for members of senior management as a group, the number of share options held as of June 30, 2000 as well as the exercise price and the range of expiration dates of these options.
OPTIONS HELD EXERCISE PRICE (IN PENCE) ------------- ------------------------- Lord Stevenson........................... 2,243 769(1) --------- -------- Total.................................... 2,243 ========= Marjorie Scardino........................ 163,300 1,090(1) 2,535 769(1) 33,557 1,537(2) 33,557 1,845(2) 33,557 2,152(2) 33,021 2,579(2) 33,021 3,095(2) 33,021 3,611(2) --------- -------- Total.................................... 365,569 ========= David Bell............................... 26,500 654(1) 18,300 1,090(1) 1,186 436(1) 596 578(1) 581 593(1) 448 769(1) 165 1,022(1) 181 1,599(1) 16,701 1,537(2) 16,701 1,845(2) 16,701 2,152(2) 16,684 2,579(2) 16,684 3,095(2) 16,684 3,611(2) --------- -------- Total.................................... 148,112 ========= John Makinson............................ 50,000 635(1) 18,000 545(1) 32,800 654(1) 66,000 758(1) 27,300 1,090(1) 2,984 578(1) 19,176 1,537(2) 19,176 1,845(2) 19,176 2,152(2) 19,068 2,579(2) 19,068 3,095(2) 19,068 3,611(2) --------- -------- Total.................................... 311,816 ========= Senior management as a group (8 persons)(3)......................... 1,392,437
- ------------------------ (1) Granted under the share option plans and exercisable between 2000 and 2008. (2) Granted under the Pearson reward plan and exercisable between 2001 and 2009. 80 (3) Includes the chief executives of the four operating divisions. We are not required to make public disclosure of individual compensation arrangements of non-directors in the UK and, therefore, do not include individual disclosure of the option information for the chief executives of our four operating divisions in this prospectus. SHARE OWNERSHIP OF SENIOR MANAGEMENT The table below sets forth the number of ordinary shares held by each of our directors, and by members of senior management as a group, as at June 30, 2000. Additional information with respect to the share options held by, and bonus and incentive awards for, these persons is set out above in "Remuneration of Senior Management" and "Share Options of Senior Management". The total number of ordinary shares held by senior management as of June 30, 2000 was 274,312, representing less than 1% of the issued share capital on June 30, 2000.
INCENTIVE SHARE ANNUAL PLAN AND PEARSON BONUS OPTIONS-ORDINARY REWARD PLAN MATCHING ORDINARY SHARES(1) SHARES ORDINARY SHARES(2) SHARES(3) ------------------ ---------------- ------------------ ------------------------ Lord Stevenson................... 70,788 2,243 65,807 - Marjorie Scardino................ 55,770 365,569 104,661 40,139 John Makinson.................... 17,598 311,816 59,989 22,621 David Bell....................... 32,516 148,112 52,318 14,406 Senior management as a group (8 persons)(4)................. 274,312 1,392,437 382,665 120,222
- ------------------------ (1) Amounts include shares acquired by individuals under the annual bonus matching plan. (2) The number of ordinary shares shown represents the maximum number of ordinary shares, plus, in the case of the incentive share plan, accumulated share dividend ordinary shares included in the original award that may be transferred to the employee. (3) These ordinary shares are held in trust and represent the maximum award required to provide our matching contribution of ordinary shares in respect of that part of the bonus taken in ordinary shares by each director. The ordinary shares only vest if the performance and other conditions of the plan are met. (4) Includes the chief executives of the four operating divisions. We are not required to make public disclosure of individual compensation arrangements of non-directors in the UK and, therefore, do not include individual disclosure of the shares and share options held by the chief executives of its four operating divisions in this prospectus. Our executive directors, as possible beneficiaries, are also deemed to be interested in Pearson Employee Share Trust Limited, the trustee of which held 754,318 of our ordinary shares on June 30, 2000. EMPLOYEE SHARE OWNERSHIP PLANS PROFIT SHARING PLAN Since 1998, we have operated a profit sharing plan available to all employees who: - have worked for us for at least six months of the relevant fiscal year, and - we employ at the time we make payment under the plan. All payments made under the plan are determined in the discretion of the board after consideration of our profitability for the year. Payment under the plan may be in the form of cash and/or our ordinary shares. Payment under the plan was 3% of salary plus 15 ordinary shares for fiscal year 1998 and 2% of salary plus 10 ordinary shares for fiscal year 1999. We intend to continue the plan in fiscal year 2000. 81 SAVE-FOR-SHARES PLAN In 1998, we introduced a worldwide save-for-shares plan. Under this plan, our employees worldwide have the option to save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee's participation in the plan. In the US, due to restrictions under US law, stock appreciation rights are used instead of share options. The savings period is two years and the discount to the market price is 15%. This arrangement will be replaced by a stock purchase plan under Section 423 of the Internal Revenue Code of 1986 subsequent to this offering. BOARD PRACTICES Our board of directors currently is comprised of four executive directors, including the chairman, who is a part-time director, and five non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors, or the number nearest to one-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible for re-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing to continue, is deemed to have been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. The board of directors has established the following committees, all of which have written terms of reference setting out their authority and duties: AUDIT COMMITTEE Vernon Sankey chairs this committee and Lord Burns and Reuben Mark are members. The "terms of reference" of the committee require that its members be non-executive directors with financial and accounting experience. The committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee. The committee reports to the full board of directors. PERSONNEL COMMITTEE Gillian Lewis chairs this committee and Lord Burns and Reuben Mark are members. They all are non-executive directors. The committee meets regularly to decide the remuneration and benefits packages of the executive directors and the chief executives of our four operating divisions. The committee also recommends the chairman's remuneration to the board of directors for its decision and reviews our management development and succession plans. TREASURY COMMITTEE The members of this committee are Lord Stevenson, John Makinson and Vernon Sankey. The committee sets the policies for our treasury department and reviews its procedures on a regular basis. 82 PRINCIPAL STOCKHOLDERS To our knowledge, as of June 30, 2000, no person or group was the beneficial owner of 3% or more of our issued and outstanding ordinary share capital, except for Telefonica Media SA which owned 30,527,674 ordinary shares representing 4.89% of our outstanding ordinary shares. On July 24, 2000, 306 recordholders with registered addresses in the US held 63,907,606 ordinary shares, including those held through ADSs, which represented approximately 10% of our outstanding ordinary shares. Because some of our ordinary shares and ADSs are held by nominees, these numbers may not accurately represent the number of beneficial owners in the US. DESCRIPTION OF SHARE CAPITAL SHARE CAPITAL The ordinary shares, par value 25p, represent our only authorized class of share capital. The table below sets forth: - the number of ordinary shares authorized at the end of our 1999 fiscal year and as of June 30, 2000, - the number of ordinary shares issued as of June 30, 2000, and - a reconciliation of the number of ordinary shares issued at the beginning and end of our 1999 fiscal year and the number of ordinary shares issued as of June 30, 2000.
NUMBER LM ----------------------------- ------------ AUTHORIZED At December 31, 1999........................................ 894,000,000 L224 As of June 30, 2000......................................... 916,000,000 229 ----------------------------- ------------ ISSUED At January 1, 1999.......................................... 609,554,547 152 Issued under share option and employee share plans during 1999.................................................... 3,115,620 1 ----------------------------- ------------ At December 31, 1999........................................ 612,670,167 153 ----------------------------- ------------ Issued under January 2000 share placing................... 11,500,000 3 ----------------------------- ------------ Issued under share option and employee share plans during 2000.................................................... 1,052,766 0 ----------------------------- ------------ As of June 30, 2000......................................... 625,222,933 L156 ============================= ============
The Pearson Employee Share Trust, an English trust we established to hold ordinary shares to be distributed under various executive and employee share plans and the two Pearson Employee Share Ownership Trusts established in Jersey, which contain both ordinary shares held under options and restricted shares for senior management and a selected group of other executives, together held 953,057 ordinary shares with a market value of L19 million on December 31, 1999. As of June 30, 2000, these two trusts held 3,410,317 ordinary shares with a market value of L72 million. 83 OUTSTANDING OPTIONS The table below sets forth the outstanding options for our ordinary shares as of December 31, 1999 and as of June 30, 2000:
NUMBER OF NUMBER OPTIONS OF OPTIONS OUTSTANDING OUTSTANDING ORIGINAL (DECEMBER 31, (JUNE 30, SUBSCRIPTION DATE OF 1999) 2000) PRICE EXERCISE GRANT (IN THOUSANDS) (IN THOUSANDS) (IN PENCE) PERIOD -------- -------------- -------------- ------------------ ---------- Worldwide save-for- shares plans 1992 39 -- 242 1997-2000 1994 100 84 509 1999-2002 1995 429 420 436 2000-2003 1996 335 330 578 2001-2004 1997 422 399 593 2000-2005 1998 1,225 1,151 769 2000-2006 1999 1,416 1,333 1,022-1,086 2001-2007 2000 -- 630 1,599-1,658 2003-2008 ------ ------ Total: 3,966 4,370 ====== ====== Executive share option plans 1990 148 -- 307-334 1993-2000 1991 59 46 364-377 1994-2001 1992 100 53 327-379 1995-2002 1993 125 -- 396 1996-2003 1994 265 198 635 1997-2004 1995 438 266 545 1998-2005 1996 999 511 654-682 1999-2006 1997 2,410 2,208 744-757 2000-2007 1998 2,971 2,815 948-1,090 2001-2008 1999 3,479 3,383 1,210-1,285 2002-2009 2000 -- 5,909 2,501 2003-2010 ------ ------ Total: 10,994 15,389 ====== ======
The subscription prices have been rounded down to the nearest whole pence. HISTORY OF SHARE CAPITAL In addition to issues under our scrip dividend plan and share option and employee share plans, we have made two issuances of additional ordinary shares during the last three years. In January 2000, we issued 11.5 million ordinary shares, representing approximately 2% of our then existing issued ordinary share capital. Those shares were subscribed for by institutional investors at a price of L22.00 per share. The proceeds of that placement were to finance further investment to expand existing and to develop new internet-related businesses. We issued 28.9 million ordinary shares in August 1998, representing approximately 5% of our then existing issued ordinary share capital. These shares were subscribed for by institutional investors at a price of L11.35 per share. The proceeds of that placement were used to provide funds for the Simon & Schuster acquisition. In addition, at our annual general meeting held on May 12, 2000, we were authorized, subject to certain conditions, to acquire up to 62 million of our ordinary shares by purchases in the open market. 84 MEMORANDUM AND ARTICLES OF ASSOCIATION We summarize below the material provisions of our memorandum and articles of association, which have been filed as an exhibit to the registration statement of which this prospectus is a part. We have multiple business objectives and purposes and are authorized to do such things as the board may consider to further our interests or incidental or conducive to the attainment of our objectives and purposes. We are registered with the Registrar of Companies and our entry number is 53723. INTERESTED DIRECTORS A director shall not be disqualified from contracting with us by virtue of his or her office or from having any other interest, whether direct or indirect, in any contract or arrangement entered into by or on behalf of us. An interested director must declare the nature of his or her interest in any contract or arrangement entered into by or on behalf of us at the first meeting of directors at which any such contract or arrangement is discussed or the first meeting of directors after the director has obtained an interest in the contract or arrangement. If a director wishes to enter into a contract with us to sell or purchase substantial non-cash property interests (defined as being greater than L2,000 and exceeding the lesser of L100,000 or 10% of our net assets), approval by the shareholders in a general meeting is required. Directors' interests in contracts or arrangements entered into by or on behalf of us must be disclosed in the notes to our audited annual accounts. A director may not vote on any contract or arrangement or any other proposal in which he or she has, together with any interest of any person connected with him or her, an interest which is, to his or her knowledge, a material interest, otherwise than by virtue of his or her interests in shares, debentures or other securities of or otherwise in or through us. If a question arises as to the materiality of a director's interest or his or her entitlement to vote and the director does not voluntarily agree to abstain from voting, that question will be referred to the chairman of the board or, if the chairman also is interested, to a person appointed by the other directors who is not interested. The ruling of the chairman or that other person, as the case may be, will be final and conclusive. A director will not be counted in the quorum at a meeting in relation to any resolution on which he or she is prohibited from voting. A director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters: - the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or her or by any other person at the request of or for the benefit of us or any of our subsidiaries, - the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of ours or any of our subsidiaries for which he or she has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security, - any proposal relating to us or any of our subsidiaries where we are offering securities in which a director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a director is to participate, - any proposal relating to another company, provided that he or she and any persons connected with him or her do not, to his or her knowledge, hold an interest in shares, as defined under UK law, representing 1% or more of either any class of the equity share capital, or the voting rights, in such company, 85 - any proposal relating to an arrangement for the benefit of our employees or any of our subsidiaries that does not award him or her any privilege or benefit not generally awarded to the employees to whom such arrangement relates, and - any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors. Where proposals are under consideration concerning the appointment of two or more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the proviso of the fourth clause above, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment. BORROWING POWERS The board of directors may exercise all powers to borrow money and incur debt. The board may restrict any borrowings in order to ensure that the aggregate amount of undischarged debt will not at any time, without our prior authorizing resolution, exceed a sum equal to twice the aggregate of the adjusted capital and reserves, as calculated in accordance with article 90 of our articles of association. OTHER PROVISIONS RELATING TO DIRECTORS Under the articles of association, directors are paid out of our funds for their services as we may from time to time determine by ordinary resolution. Directors currently are not required to be qualified by owning our shares. While the Companies Act 1985 states that no director may be appointed after he reaches the age of 70, our articles of association provide for the reappointment, after retirement, of directors attaining the age of 70. This is permissible under the Companies Act 1985. ANNUAL GENERAL MEETINGS AND EXTRAORDINARY GENERAL MEETINGS Shareholders' meetings may be either annual general meetings or extraordinary general meetings. However, the following matters can only be transacted at an annual general meeting: - sanctioning or declaring dividends, - consideration of the accounts and balance sheet, - ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet, - as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise, - appointment or reappointment of, and determination of the remuneration of, the auditors, and - the renewal, limitation, extension, variation or grant of any authority of or to the board, pursuant to the Companies Act 1985, to allot securities. Business transacted at an extraordinary general meeting may also be transacted at an annual general meeting. We hold a general meeting as our annual general meeting within fifteen months after the date of the preceding annual general meeting, at a place and time determined by the board. The board may call an extraordinary general meeting at any time and for any reason. The board must convene 86 an extraordinary general meeting if requested to do so by shareholders holding not less than one-tenth of our issued share capital. Three shareholders present in person and entitled to vote will constitute a quorum for any general meeting. If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. ORDINARY SHARES Certificates representing ordinary shares are issued in registered form and, subject to the terms of issue of those shares, are issued following allotment or receipt of the form of transfer bearing the appropriate stamp duty by our registrar, Lloyds Bank Registrars, the Causeway, Worthing, West Sussex BN99 6DA, United Kingdom, telephone number +44-1903-502-541. VOTING RIGHTS Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded. A poll may be demanded by: - the chairman of the meeting, - at least three shareholders present in person or by proxy and entitled to vote, - any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting, or - any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right. DIVIDENDS Holders of ordinary shares are entitled to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us. LIQUIDATION RIGHTS In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any 87 balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them. OTHER PROVISIONS OF THE ARTICLES OF ASSOCIATION Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders of three-fourths of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate meeting of these holders. In the event that a shareholder or other person appearing to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 212 of the Companies Act 1985, we may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with our information request. If the shares described in the default notice represent at least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares: - we will not issue shares or pay dividends, and - we will not register transfers of shares unless the shareholder attaches to that transfer, when presented for registration, a certificate to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association. No provision of our articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Companies Act 1985, any person who acquires, either alone or, in specified circumstances, with others: - a material interest in our voting share capital equal to or in excess of 3%, or - a non-material interest equal to or in excess of 10%, comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a person's notifiable interests fall below the notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases. LIMITATIONS AFFECTING HOLDERS OF ORDINARY SHARES OR ADSS Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals. With respect to the items discussed above, applicable UK law is not materially different from applicable US law. 88 DESCRIPTION OF AMERICAN DEPOSITARY SHARES AMERICAN DEPOSITARY SHARES The Bank of New York will issue the ADSs. The ownership interest in each ordinary share will be represented by one ADS. The ordinary shares or the right to receive ordinary shares will be deposited by us with a custodian, the London office of The Bank of New York. Each ADS will also represent securities, cash or other property deposited with The Bank of New York but not distributed to ADS holders. The Bank of New York's Corporate Trust office is located at 101 Barclay Street, New York, N.Y. 10286. Its principal executive office is located at One Wall Street, New York, N.Y. 10286. You may hold ADSs either directly or indirectly through your broker or another financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should speak to your broker or financial institution for further information about those procedures. The Bank of New York will actually hold the ordinary shares. You must rely on it to exercise the rights of a shareholder. The obligations of The Bank of New York are set out in an agreement among us, The Bank of New York and you, as an ADS holder. That agreement and the ADSs generally are governed by New York law. The following is a summary of the agreement. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire agreement and the ADR. Directions on how to obtain copies of these are provided in the section entitled "Where You Can Find More Information". SHARE DIVIDENDS AND OTHER DISTRIBUTIONS The Bank of New York has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent. CASH. The Bank of New York will convert any cash dividend or other cash distribution we pay on the shares into US dollars, if it can do so on a reasonable basis and can transfer those dollars to the US. If that is not possible or if approval of any government is needed and cannot be obtained, the agreement allows The Bank of New York to distribute sterling to those ADS holders to whom it is possible to do so. The Bank of New York will hold the sterling it cannot convert for the account of the ADS holders who have not been paid. It will not invest the sterling and it will not be liable for the interest. Before making a distribution, any withholding taxes that must be paid under applicable law will be deducted. See "Tax Considerations" for more information. The Bank of New York will distribute only whole US dollars and cents and will round fractional cents to the nearest whole cent. IF THE EXCHANGE RATES FLUCTUATE AT A TIME WHEN THE BANK OF NEW YORK CANNOT CONVERT THE STERLING, YOU MAY LOSE SOME OR ALL OF THE VALUE OF THE DISTRIBUTION. ORDINARY SHARES. The Bank of New York may distribute new ADSs representing any ordinary shares we may distribute as a dividend or free distribution, if we furnish it promptly with satisfactory evidence that it is legal for it to do so. The Bank of New York will only distribute whole ADSs. It will sell ordinary shares which would require it to use a fractional ADS and distribute the net proceeds in the same way it does cash. If The Bank of New York does not distribute additional ADSs, each ADS will also represent the new ordinary shares. 89 RIGHTS TO RECEIVE ADDITIONAL ORDINARY SHARES. If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, The Bank of New York may, after consultation with us, make these rights available to you. We first must instruct The Bank of New York to do so and furnish it with satisfactory evidence that it is legal for it to do so. If we fail to furnish this evidence or to give these instructions, and The Bank of New York decides it is practical to sell the rights, The Bank of New York will sell the rights and distribute the proceeds in the same way it does cash. The Bank of New York may allow rights that are not distributed or sold to lapse. In that case, you would receive no value for them. If The Bank of New York makes rights available to you, upon instruction from you, it will exercise the rights and purchase the shares on your behalf. The Bank of New York will then deposit the ordinary shares and issue ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay. The US securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after the exercise of rights. For example, you may not be able to trade the ADSs freely in the United States. In this case, The Bank of New York may issue the ADSs under a separate restricted deposit agreement which will contain the same provisions as the agreement except for the changes needed to put the restrictions in place. OTHER DISTRIBUTIONS. The Bank of New York will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, The Bank of New York may either sell what we distributed and distribute the net proceeds in the same way it does cash or it may decide to hold what we distributed, in which case the ADSs will also represent the newly distributed property. The Bank of New York is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, ordinary shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to ADS holders. This means that you may not receive the distribution we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. DEPOSIT, WITHDRAWAL AND CANCELLATION The Bank of New York will issue ADSs if you or your broker deposit ordinary shares or evidence of rights to receive ordinary shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, The Bank of New York will register the appropriate number of ADSs in the names you request and will deliver the ADSs at its Corporate Trust office to the persons you request. You may turn in your ADSs at The Bank of New York's Corporate Trust office. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, The Bank of New York will deliver the underlying ordinary shares to an account designated by you and any other deposited securities underlying the ADSs at the office of the custodian. Or, at your request, risk and expense, The Bank of New York will deliver the deposited securities at its Corporate Trust office. VOTING RIGHTS You may instruct The Bank of New York to vote the ordinary shares underlying your ADSs only if we ask The Bank of New York to ask for your instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares. However, you may not know about the meeting long enough in advance to withdraw the ordinary shares. 90 If we ask for your instructions, The Bank of New York will notify you of the upcoming vote and arrange to deliver our voting materials to you. The materials will describe the matters to be voted on and explain how you, on a certain date, may instruct The Bank of New York to vote the ordinary shares or other deposited securities underlying your ADSs as you direct. For instructions to be valid, The Bank of New York must receive them on or before the date specified. The Bank of New York will try, as far as practical, subject to English law and the provisions of our articles of association, to vote or to have its agents vote the ordinary shares or other deposited securities as you instruct. The Bank of New York will only vote or attempt to vote as you instruct. However, if The Bank of New York does not receive your voting instructions, it will give a proxy to vote your ordinary shares to our designated representative. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct The Bank of New York to vote your shares. In addition, The Bank of New York and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your ordinary shares are not voted as you requested. FEES AND EXPENSES
ADS HOLDERS MUST PAY: FOR: - --------------------- --------------------------------------------- $5.00 (or less) per 100 ADSs................. Each issue of an ADS, including as a result of a distribution of ordinary shares or rights or other property Each cancellation of an ADS, including if the agreement terminates $.02 (or less) per ADS....................... Any cash payment, except for distributions of cash dividends Registration or Transfer Fees................ Transfer and registration of ordinary shares on the share register of the foreign registrar from your name to the name of The Bank of New York or its agent when you deposit or withdraw ordinary shares Expenses of The Bank of New York............. Conversion of sterling to US dollars Cable, telex and facsimile transmission expenses Taxes and other governmental charges The Bank of New York or the custodian have to pay on any ADS or ordinary share underlying an ADS, for example, stock transfer taxes, stamp duty, stamp duty reserve tax or withholding taxes........................................ As necessary
PAYMENT OF TAXES You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities underlying your ADSs. The Bank of New York may refuse to transfer your ADSs or allow you to withdraw the deposited securities underlying your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities 91 underlying your ADSs to pay any taxes owed and you will remain liable for any deficiency. If it sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes. RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS If we change the nominal or par value of our ordinary shares; reclassify, split up or consolidate any of the deposited securities; distribute securities on the ordinary shares that are not distributed to you; or recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action, then: - the cash, ordinary shares or other securities received by The Bank of New York will become deposited securities and each ADS will automatically represent its equal share of the new deposited securities; and - The Bank of New York may, and will if we ask it to, distribute some or all of the cash, ordinary shares or other securities it received and may also issue new ADSs or ask you to surrender your outstanding ADSs in exchange for new ADSs, identifying the new deposited securities. AMENDMENT AND TERMINATION We may agree with The Bank of New York to amend the agreement and the ADSs for any reason without your consent. If the amendment adds or increases fees or charges, except for taxes and other governmental charges or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses, or prejudices an important right of ADS holders, it will only become effective 30 days after The Bank of New York notifies you of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADSs, and the agreement is amended. The Bank of New York will terminate the agreement if we ask it to do so. The Bank of New York may also terminate the agreement if it has informed us that it would like to resign and we have not appointed a new depositary bank within 90 days. In both cases, The Bank of New York must notify you at least 30 days before termination. After termination, The Bank of New York and its agents will be required to do only the following under the agreement: - collect distributions on the deposited securities and deliver ordinary shares and other deposited securities upon cancellation of ADSs. At any time after the expiration of one year from the date of termination, The Bank of New York may sell any remaining deposited securities by public or private sale. After that, The Bank of New York will hold the proceeds of the sale, as well as any other cash it is holding under the agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and will have no liability for interest. The Bank of New York's only obligation will be to account for the proceeds of the sale and other cash. After termination our only obligations will be with respect to indemnification and to pay certain amounts to The Bank of New York. LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADS HOLDERS The agreement expressly limits our obligations and the obligations of The Bank of New York, and it limits our liability and the liability of The Bank of New York. We and The Bank of New York: - are only obligated to take the actions specified in the agreement without negligence or bad faith, 92 - are not liable if either is prevented or delayed by law or circumstances beyond our control from performing our obligations under the agreement, - are not liable if either exercises discretion permitted under the agreement, - have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the agreement on your behalf or on behalf of any other party, and - may rely upon any documents they believe in good faith to be genuine and to have been signed or presented by the proper party. In the agreement, we and The Bank of New York agree to indemnify each other under specified circumstances. REQUIREMENTS FOR DEPOSITARY ACTIONS Before The Bank of New York will issue or register transfer of an ADS, make a distribution on an ADS, or withdrawal of ordinary shares, The Bank of New York may require: - payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities, - production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary, and - compliance with regulations it may establish, from time to time, consistent with the agreement, including presentation of transfer documents. The Bank of New York may refuse to deliver, transfer, or register transfers of ADSs generally when the books of The Bank of New York or we are closed, or at any time if The Bank of New York or we think it advisable to do so. You have the right to cancel your ADSs and withdraw the underlying ordinary shares at any time except: - when temporary delays arise because The Bank of New York or we have closed transfer books or the deposit of shares in connection with voting at a shareholders' meeting, or paying a dividend on the ordinary shares, - when you or other ADS holders seeking to withdraw ordinary shares owe money to pay fees, taxes and similar charges, or - when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities. This right of withdrawal may not be limited by any other provision of the agreement. PRE-RELEASE OF ADSS In specified circumstances, subject to the provisions of the agreement, The Bank of New York may issue ADSs before deposit of the underlying ordinary shares. This is called a pre-release of the ADSs. The Bank of New York also may deliver ordinary shares upon cancellation of pre-released ADSs even if the ADSs are canceled before the pre-release transaction has been closed. A pre-release is closed as soon as the underlying ordinary shares are delivered to The Bank of New 93 York. The Bank of New York may receive ADSs instead of ordinary shares to close a pre-release. The Bank of New York may pre-release ADSs only under the following conditions: - before or at the time of the pre-release, the person to whom the pre-release is being made must represent to The Bank of New York in writing that it or its customer owns the ordinary shares or ADSs to be deposited, - the pre-release must be fully collateralized with cash or other collateral that The Bank of New York considers appropriate, and - The Bank of New York must be able to close out the pre-release on not more than five business days' notice. In addition, The Bank of New York will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although The Bank of New York may disregard the limit from time to time, if, in its judgment, it is appropriate to do so. 94 TAX CONSIDERATIONS The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the US rights offering and from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is: - an individual citizen or resident of the US, - a corporation created or organized in or under the laws of the US or any of its political subdivisions, or - an estate or trust the income of which is subject to US federal income taxation regardless of its source. This discussion deals only with share rights, ADS rights, ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as: - dealers or traders in securities or currencies, - financial institutions or other US holders that treat income in respect of the share rights, ADS rights, ordinary shares or ADSs as financial services income, - insurance companies, - tax-exempt entities, - US holders that hold the share rights, ADS rights, ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position, - US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock, - US holders that have a principal place of business or "tax home" outside the US, or - US holders whose "functional currency" is not the US dollar. For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs. The discussion below is based upon current UK law and the provisions of the US Internal Revenue Code of 1986 and regulations, rulings and judicial decisions as of the date of this prospectus; any such authority may be repealed, revoked or modified, perhaps with retroactive effect, so as to result in tax consequences different from those discussed below. This discussion is also based on the current Income Tax Treaty between the UK and the US. UK and US tax authorities have announced the commencement of discussions to update the Income Tax Treaty. There can be no assurance, however, as to whether these discussions will come to fruition or, if so, as to the impact of any resulting changes in the Income Tax Treaty on the summary tax consequences set forth below. In addition, the following discussion assumes that The Bank of New York will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements. BECAUSE US AND UK TAX CONSEQUENCES MAY DIFFER FROM ONE HOLDER TO THE NEXT, THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE ALL OF THE TAX CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR SITUATION. ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE US FEDERAL, STATE AND LOCAL, UK AND OTHER, INCLUDING FOREIGN, TAX CONSEQUENCES OF THE US RIGHTS OFFERING AND OF INVESTING IN THE ORDINARY SHARES OR ADSS. THE STATEMENTS OF US AND UK TAX LAW SET OUT BELOW ARE BASED ON THE LAWS AND INTERPRETATIONS IN 95 FORCE AS OF THE DATE OF THIS PROSPECTUS, AND ARE SUBJECT TO ANY CHANGES OCCURRING AFTER THAT DATE. THE US RIGHTS OFFERING US TAXATION OF THE US RIGHTS OFFERING DISTRIBUTION OF SHARE RIGHTS OR ADS RIGHTS. A US holder of ordinary shares or ADSs will not be required to include any amount in income for US federal income tax purposes as a result of the distribution of share rights or ADS rights from Pearson. In a tax-free distribution of rights, if the fair market value of the share rights or ADS rights on the date of distribution is less than 15% of the fair market value of the ordinary shares or ADSs with respect to which the share right or ADS right was distributed, then the tax basis of the share right or ADS right will be zero, unless the US holder elects to allocate its tax basis in the underlying ordinary shares or the underlying ADSs, as the case may be, between the ordinary shares or ADSs and the share right or ADS right in proportion to the relative fair market value of each on the date of distribution of the share right or ADS right. Any such election must be made in respect of all share rights or ADS rights distributed to the US holder, must be made in the original US federal income tax return filed by the US holder for the year in which the US holder receives the share rights or ADS rights, and once made, is irrevocable. If, on the date of distribution, the fair market value of the share right or ADS right is 15% or more of the fair market value of the ordinary shares or ADSs with respect to which the share right or ADS right was distributed, then there is no election available and a US holder must allocate tax basis between the share right or ADS right and the underlying ordinary shares or underlying ADSs in proportion to their respective fair market values. As of the record date for the rights offering, the value of the share rights and ADS rights was approximately 13.7% of the ordinary shares or ADSs with respect to which they were distributed. We calculated this amount by dividing the excess of the L20.10 per share market price on the record date over the L10 per share subscription price for three share rights by the market price on that date of eleven ordinary shares. The value on the distribution date cannot be determined until that date. In a tax-free distribution of rights, the holding period of a share right or an ADS right in the hands of a US holder will include the holding period of the underlying ordinary shares or the underlying ADSs, as the case may be, with respect to which the share right or ADS right was distributed. SALE OR EXCHANGE OF SHARE RIGHTS OR ADS RIGHTS. On the sale or exchange of a share right or an ADS right, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized upon the sale or exchange and the tax basis, if any, of the share right or the ADS right. Any gain or loss from the sale or exchange will be a capital gain or loss, and will be a long-term capital gain or loss if the combined holding period for the share right or ADS right and the ordinary share or ADS with respect to which the share right or ADS right was distributed is more than one year. Any US holder receiving cash with respect to an unexercised share right or ADS right will be treated either as if it sold the share right or ADS right for the cash received or as if it exercised the share right or ADS right and then sold the ordinary share or ADS for the cash received plus the issue price of the ordinary share or ADS. EXPIRATION OF SHARE RIGHTS OR ADS RIGHTS. If the share rights or ADS rights lapse, then no basis will be allocated to the rights and no loss will be recognized on their lapse. Any US holder that receives cash with respect to unexercised share rights or ADS rights will not be treated as though its share rights or ADS rights have lapsed for this purpose. 96 EXERCISE OF SHARE RIGHTS OR ADS RIGHTS. A US holder will not recognize gain or loss upon exercise of a share right or an ADS right. TAX BASIS OF ORDINARY SHARES OR ADSS. The tax basis of each ordinary share or ADS acquired upon exercise of a share right or an ADS right will equal the sum of the issue price of the ordinary share or ADS and the tax basis, if any, for the share right or the ADS right exercised. The holding period of any ordinary share or ADS acquired through the exercise of a share right or an ADS right will begin with and include the date of exercise. UK TAXATION OF THE US RIGHTS OFFERING UK CAPITAL GAINS TAX. A US holder who is not resident or, in the case of an individual, ordinarily resident in the United Kingdom will not normally be liable for UK taxation on capital gains realized on the disposal of his share rights or ADS rights unless the US holder carries on a trade in the United Kingdom through a branch or agency and such share rights or ADS rights are or have been used, held or acquired for the purposes of such trade, branch or agency. The distribution of share rights and ADS rights will not be treated as a dividend for purposes of UK taxation. UK ESTATE AND GIFT TAX. The same rules generally apply as set forth below with respect to ordinary shares or ADSs. UK STAMP DUTY AND STAMP DUTY RESERVE TAX. The general rules with respect to ordinary shares and ADSs are set out below. Stamp duty reserve tax at a rate of 1.5% of the actual consideration paid for ordinary shares will be payable on the issue of ordinary shares attributable to the exercise of ADS rights. Each holder of an ADS right must pay this amount to the ADS subscription agent with the ADS subscription price. OWNERSHIP OF ORDINARY SHARES OR ADSS UK INCOME TAXATION OF DISTRIBUTIONS Under the Income Tax Treaty, subject to certain exceptions, a US holder who is a resident of the US (and is not a resident of the UK) for purposes of the Income Tax Treaty is entitled to receive, in addition to any dividend that we pay, a payment from the Inland Revenue in respect of such dividend equal to the tax credit to which an individual resident in the UK for tax purposes would have been entitled had he received the dividend (which is currently equal to one-ninth of the dividend received), reduced by a UK withholding tax equal to an amount not exceeding 15% of the sum of the dividend paid and the UK tax credit payment. At current rates the withholding tax entirely eliminates the tax credit payment but no withholding in excess of the tax credit payment is imposed upon the US holder. Thus, for example, a US holder that receives a $100.00 dividend also will be treated as receiving from the Inland Revenue a tax credit payment of $11.11 (one-ninth of the dividend received), but the entire $11.11 payment will be eliminated by UK withholding tax, resulting in a net $100.00 distribution to the US holder. US INCOME TAXATION OF DISTRIBUTIONS Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed Pearson's current and accumulated earnings and profits. The amount of any distribution will equal the sum of the cash distribution and its associated UK tax credit payment; thus, as described above under "--UK Income Taxation of Distributions", the recipient of a $100.00 cash distribution will be deemed to have received a total distribution of $111.11. Distributions, if any, in excess of our current and accumulated earnings and profits will constitute a nontaxable return of capital to a US holder and 97 will be applied against and reduce the US holder's tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its ordinary shares or ADSs, the excess generally will be treated as capital gain. Dividends that we pay will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code. In computing its US federal income tax liability, a US holder generally may elect for each taxable year to claim a deduction or, subject to the limitations on foreign tax credits generally, a US foreign tax credit for foreign income taxes withheld from any distributions paid on the ordinary shares or ADSs. The Internal Revenue Service has confirmed in a recent revenue procedure that, in the case of US holders and subject to certain limitations, a foreign tax credit may be claimed for the amount of UK withholding taxes deemed to be imposed under the Income Tax Treaty. As discussed above (see "--UK Income Taxation of Distributions"), the amount of UK withholding tax deemed to be imposed is equal to one-ninth of the associated cash distribution, or $11.11 on a $100.00 cash distribution. To qualify for this credit, a US holder must make an election on Form 8833 (Treaty-Based Return Position Disclosure), which must be filed with its tax return for the relevant taxable year, in addition to any other filings that may be required. For US foreign tax credit purposes, dividends that we pay generally will be treated as foreign-source income and as passive income, subject to the separate foreign tax credit limitation for passive income. The availability of foreign tax credits depends on your particular circumstances. In the case of distributions in sterling, the amount of the distributions generally will equal the US dollar value of the sterling distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of sterling received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year. UK TAXATION OF CAPITAL GAINS Under the Income Tax Treaty, each country generally may tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a US holder that is not a resident, and, in the case of an individual, not ordinarily resident, in the UK for UK tax purposes and who does not carry on a trade, profession or vocation in the UK through a branch or agency to which ordinary shares or ADSs are attributable will not be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal (including redemption) of these ordinary shares or ADSs, subject to exceptions applicable to persons who are temporarily non-resident in the UK. US INCOME TAXATION OF CAPITAL GAINS Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder's adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated as US-source gain or loss for US foreign tax credit purposes. 98 ESTATE AND GIFT TAX The current Estate and Gift Tax Convention between the US and the UK generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of ADSs where the transferor is domiciled in the US, for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an individual's permanent establishment in the UK or pertain to the fixed base in the UK of a person providing independent personal services. If no relief is given under the Convention, Inheritance Tax may be charged on the amount by which the value of the transferor's estate is reduced as a result of any transfer made by way of gift or other gratuitous transfer by an individual, in general within seven years of death, or on the death of an individual. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the UK to be credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Convention. STAMP DUTY No stamp duty or stamp duty reserve tax (SDRT) will be payable in the UK on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the UK and that the instrument or written agreement of transfer is not executed in the UK. Stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares, where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person. A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration. A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes is subject to stamp duty at the fixed rate of L5.00 per instrument of transfer. CLOSE COMPANY STATUS We believe that the close company provisions of the UK Income and Corporation Taxes Act 1988 do not apply to us. 99 PLAN OF DISTRIBUTION We and the underwriters named in the table below have entered into a standby underwriting agreement, as amended by a supplemental agreement, with respect to the rights offering both outside and inside the US. Pursuant to the terms of this underwriting agreement, if you do not exercise your share rights or ADS rights by the end of the subscription period, the underwriters have agreed to endeavor to procure subscribers for the new ordinary shares underlying the unsubscribed rights at a price in excess of the subscription price and expenses of sale. In the event the underwriters are unable to procure subscribers for the unsubscribed ordinary shares on those terms, they have severally agreed, subject to certain conditions, to subscribe for up to 150 million of the unsubscribed ordinary shares at the L10 per share subscription price. With respect to this purchase, the underwriters will subscribe for the percentage of those underwritten ordinary shares indicated in the following table.
PERCENTAGE OF UNSUBSCRIBED UNDERWRITER SHARES - ----------- ------------- WITH RESPECT TO THE FIRST 82,000,000 UNDERWRITTEN ORDINARY SHARES Goldman Sachs International................................. 72.222% Cazenove & Co. ............................................. 27.778% WITH RESPECT TO THE REMAINING UNDERWRITTEN ORDINARY SHARES Goldman Sachs International................................. 50% Cazenove & Co. ............................................. 50%
The underwriters' obligations to subscribe for any unsubscribed ordinary shares will be reduced by the number of ordinary shares that are taken up during the subscription period or sold after the subscription period ends as a result of the underwriters' efforts to procure subscribers for those ordinary shares. In the event that the underwriters, acting solely as our agent, procure subscribers on your behalf, the underwriters or their agents, including other broker-dealers, are entitled to receive and retain any commissions or other fees paid in connection with the resulting sales. Any proceeds in excess of these expenses and the subscription price, which will be paid to us, will be paid pro rata to the unexercising holders. We have agreed to pay the underwriters a commission of L7.5 million, which represents 0.5% of the aggregate subscription price of the underwritten ordinary shares, which is L1.5 billion. We will also pay the underwriters an additional commission of 0.1%, or L1.5 million, per seven-day period, or any part of that period, after August 30, 2000 until the date that is the earliest of: - the date on which the sub-underwriters learn the number of shares that they will sub-underwrite, - the third business day in London after the end of the subscription period, or - the date on which the underwriters' obligations under the underwriting agreement cease. The underwriters will pay, by reallocating a portion of their own commission, any sub-underwriters 0.4% of the aggregate subscription price of ordinary shares that each sub-underwriter sub-underwrites. The underwriters will also pay, by reallocating a portion of their 100 own commission, to the sub-underwriters an additional commission of 0.1%, per seven-day period, or any part of that period, after August 30, 2000 until the date that is the earliest of: - the date on which the sub-underwriters learn the number of shares that they will sub-underwrite, - the third business day in London after the end of the subscription period, or - the date on which the underwriters' obligations under the underwriting agreement cease. In the event that the underwriters or sub-underwriters are required to pay us the subscription price and take up the unsubscribed ordinary shares, any resale of the unsubscribed ordinary shares by the underwriters or sub-underwriters will be for their own account and not on behalf of the unexercising holders. The proceeds from any resale will belong to them. These proceeds could be deemed underwriting compensation. The underwriters may distribute the ordinary shares in the US in one or more of the following types of transactions: - transactions, which may include block transactions, on the New York Stock Exchange, - exchange distributions and/or secondary distributions in accordance with the rules of the New York Stock Exchange, - over-the-counter market transactions, - negotiated transactions, or - a combination of any of these transactions. These transactions may be effected by selling the ordinary shares to or through the US selling agents of the underwriters or other dealers, at: - fixed prices, which may be changed, - prevailing market prices at the time of the sale, - prices related to prevailing market prices, or - negotiated prices. Dealers that engage in these transactions may receive compensation in the form of discounts, concessions or commissions from the underwriters, sub-underwriters or subsequent purchasers of the ordinary shares. Other terms relating to the distribution of the share rights and ADS rights, as well as the distribution of new ordinary shares and new ADSs, are described under "The US Rights Offering" above. We have been advised by the underwriters that they expect to make offers and sales of the unsubscribed ordinary shares outside of the US and inside the US through their respective selling agents. This prospectus may be used in connection with the offers and sales, or resales, to persons located in the US. The underwriters may distribute the unsubscribed shares in the form of ordinary shares or ADSs. A deposit of ordinary shares will be necessary to distribute ADSs, which will cause the imposition of a 1.5% UK tax on the issue price of the ordinary shares. In connection with the offering, the underwriters may purchase and sell ordinary shares, ADSs, share rights or ADS rights in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of any of these securities than they could be 101 required to purchase in the offering. Stabilizing transactions consist of various bids for or purchases of any of these securities made by the underwriters in the open market prior to the completion of the offering. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of the ordinary shares, ADSs, share rights or ADS rights and may maintain or otherwise affect the market price of those securities. As a result, the price of those securities may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise. We will apply to list the ADRs representing the ADSs on the New York Stock Exchange under the symbol "PSO". We do not intend to list the ADS rights, but you may trade them in the over-the-counter market. Our ordinary shares are listed on the London Stock Exchange under the symbol "PSON". The share rights will trade on the London Stock Exchange. The underwriters, their US selling agents and their respective affiliates may perform investment banking services for us from time to time. Affiliates of the underwriters have advised us in connection with the NCS acquisition. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of ordinary shares that may be offered. We estimate that our share of the total expenses, excluding the commissions paid to the underwriters or sub-underwriters, in connection with the offering will be approximately L6 million or $9 million. We have agreed to indemnify the underwriters and their US selling agents against liabilities under the Securities Act. 102 SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES We are a public company with limited liability incorporated under the laws of England and Wales. Most of our senior management and some of the experts named in this prospectus are not residents of the US. A substantial portion of our assets and all or a substantial portion of the assets of these named persons are or may be located outside the US. As a result, it may not be possible for investors to effect service of process within the US upon us or these persons or to enforce against us or them judgments obtained in US courts. We have been advised by our legal advisors, Freshfields Bruckhaus Deringer, that there is substantial doubt as to the enforcement in England, in original actions or in actions for enforcement of judgments of US courts, of liabilities predicated upon US federal securities laws, including civil liabilities under those laws. We have expressly submitted to the jurisdiction of the US federal and New York state courts sitting in The City of New York for the purpose of any suit, action or proceeding arising out of this offering, and we have appointed Pearson Inc., New York, New York, to accept service of process. WHERE YOU CAN FIND MORE INFORMATION We have filed with the US Securities and Exchange Commission a registration statement on Form F-1 under the Securities Act with respect to the securities offered in this prospectus. This prospectus, which forms a part of the registration statement, does not contain all the information in the registration statement. Portions of the registration statement contain exhibits and schedules which have been omitted from this prospectus as permitted by the rules and regulations of the SEC. For further information about us and our ordinary shares offered in this prospectus, we refer you to the registration statement and to its exhibits and schedules. You may inspect the registration statement, including all its exhibits and schedules, without charge at the principal office of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC in Chicago, Illinois and New York, New York. You may obtain copies of this material from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, we have applied for listing on the New York Stock Exchange. You may inspect reports and other information about us at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Upon completion of this offering, we will be subject to the informational requirements of some US federal securities laws and, therefore, we will be required or have agreed to file periodic reports and other information with the SEC, except as described below. As a foreign private issuer, we will be exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements. Additionally, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, under the Exchange Act, we are not required to publish financial statements as frequently, as promptly or containing the same information as US companies. 103 VALIDITY OF SECURITIES The validity of the ordinary shares represented by the ADSs being registered hereunder will be passed upon by Freshfields Bruckhaus Deringer, our English counsel. The validity of the ADSs will be passed upon for us by Morgan, Lewis & Bockius LLP, and for the underwriters by Sullivan & Cromwell. Morgan, Lewis & Bockius LLP and Sullivan & Cromwell may rely upon Freshfields Bruckhaus Deringer with respect to matters of English law. EXPERTS The financial statements as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers, independent chartered accountants, given on the authority of said firm as experts in auditing and accounting. The Simon & Schuster (Excluding Consumer) carve-out financial statements as of December 31, 1997, 1996 and 1995 and for each of the three years in the period ended December 31, 1997 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers, independent chartered accountants, given on the authority of said firm as experts in auditing and accounting. UK PROSPECTUS A copy of the UK prospectus relating to Pearson in accordance with the listing rules made under Section 142 of the UK Financial Services Act 1986 in connection with the offering of new shares and their admission to the Official List of the UK Listing Authority has been delivered to the Registrar of Companies in England and Wales for registration in accordance with Section 149 of such Act and is available for inspection at our registered office at 3 Burlington Gardens, London W1X 1LE, England. The contents of the referenced UK prospectus do not form part of, nor are they incorporated into, this prospectus. 104 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- PEARSON PLC Report of Independent Accountants........................... F-2 Consolidated Profit and Loss Account........................ F-3 Consolidated Balance Sheet as at December 31, 1999.......... F-5 Consolidated Statement of Cash Flows for the Year Ended December 31, 1999......................................... F-6 Statement of Total Recognized Gains and Losses for the Year Ended December 31, 1999................................... F-7 Note of Historical Cost Profits and Losses for the Year Ended December 31, 1999................................... F-7 Reconciliation of Movements in Equity Shareholders' Funds for the Year Ended December 31, 1999...................... F-7 Notes to the Accounts....................................... F-8 Principal Subsidiaries and Associates as at December 31, 1999...................................................... F-89 PEARSON PLC INTERIM RESULTS FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) F-91 Consolidated Profit and Loss Account........................ F-92 Consolidated Balance Sheet.................................. F-93 Statement of Total Recognized Gains and Losses.............. F-94 Reconciliation of Movements in Equity Shareholders' Funds... F-94 Consolidated Statement of Cash Flows........................ F-95 Notes to the Interim Results................................ F-96 SIMON & SCHUSTER (EXCLUDING CONSUMER) CARVE-OUT FINANCIAL STATEMENTS Report of Independent Accountants........................... F-101 Statements of Operations.................................... F-102 Balance Sheet............................................... F-103 Statements of Cash Flows.................................... F-104 Notes to Financial Statements............................... F-105
F-1 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PEARSON PLC In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in financial position (cash flows) and of changes in capital stock, reserves not available for distribution and unappropriated earnings (shareholders' equity) present fairly in all material respects, the financial position of Pearson plc and its subsidiaries at December 31, 1999 and 1998 and the results of their operations and their changes in financial position (cash flows) for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United Kingdom. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Accounting principles generally accepted in the United Kingdom vary in certain important (or significant) respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of consolidated net income expressed in sterling for each of the three years in the period ended December 31, 1999 and the determination of consolidated stockholders' equity and consolidated financial position also expressed in sterling at December 31, 1999 and 1998 to the extent summarised in Note 34 to the consolidated financial statements. PricewaterhouseCoopers London 6 March 2000, except for the information presented in Notes 31 and 34, for which the date is 12 May 2000 F-2 PEARSON PLC CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 -------------------------------- -------------------------------- -------- OPERATING OTHER OPERATING OTHER RESTATED ACTIVITIES ITEMS TOTAL ACTIVITIES ITEMS TOTAL TOTAL NOTE ---------- -------- -------- ---------- -------- -------- -------- LM LM LM LM LM LM LM SALES Continuing operations.......... 3,304 - 3,304 2,251 - 2,251 2,011 Acquisitions................... 28 - 28 - - - - ------ ------ ------ ------ ------ ------ ------ 3,332 - 3,332 2,251 - 2,251 2,011 Discontinued operations........ - - - 144 - 144 282 ------ ------ ------ ------ ------ ------ ------ TOTAL SALES.................... 2 3,332 - 3,332 2,395 - 2,395 2,293 Cost of sales.................. 3 (1,414) (10) (1,424) (1,127) (49) (1,176) (1,114) ------ ------ ------ ------ ------ ------ ------ GROSS PROFIT................... 1,918 (10) 1,908 1,268 (49) 1,219 1,179 Net operating expenses--before goodwill amortization........ (1,441) (90) (1,531) (930) (78) (1,008) (898) Net operating expenses-- goodwill amortization........ 3 (130) - (130) (12) - (12) - ------ ------ ------ ------ ------ ------ ------ Net operating expenses......... 3 (1,571) (90) (1,661) (942) (78) (1,020) (898) ------ ------ ------ ------ ------ ------ ------ OPERATING PROFIT Continuing operations--Group... 350 (100) 250 303 (127) 176 252 Acquisitions--Group............ (3) - (3) - - - - ------ ------ ------ ------ ------ ------ ------ 347 (100) 247 303 (127) 176 252 Discontinued operations--Group............ - - - 23 - 23 29 ------ ------ ------ ------ ------ ------ ------ TOTAL OPERATING PROFIT--GROUP................ 347 (100) 247 326 (127) 199 281 ------ ------ ------ ------ ------ ------ ------ Share of operating profit of associates: Continuing operations.......... 24 - 24 11 - 11 - Acquisitions--after goodwill amortization of L1m.......... (1) - (1) - - - - ------ ------ ------ ------ ------ ------ ------ 13 23 - 23 11 - 11 - Discontinued operations........ 13 48 - 48 40 - 40 47 ------ ------ ------ ------ ------ ------ ------ TOTAL SHARE OF OPERATING PROFIT OF ASSOCIATES................ 13 71 - 71 51 - 51 47 ====== ====== ====== ====== ====== ====== ====== Total operating profit analyzed between: Operating profit before internet enterprises and goodwill amortization........ 2 588 (100) 488 389 (127) 262 328 Internet enterprises........... 2 (39) - (39) - - - - Goodwill amortization.......... (131) - (131) (12) - (12) - ------ ------ ------ ------ ------ ------ ------ TOTAL OPERATING PROFIT......... 2 418 (100) 318 377 (127) 250 328 ====== ====== ====== ====== ====== ====== ======
F-3 PEARSON PLC CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 -------------------------------- -------------------------------- -------- OPERATING OTHER OPERATING OTHER RESTATED ACTIVITIES ITEMS TOTAL ACTIVITIES ITEMS TOTAL TOTAL NOTE ---------- -------- -------- ---------- -------- -------- -------- LM LM LM LM LM LM LM Continuing operations: Profit on sale of fixed assets and investments.............. 4 352 142 23 (Loss)/profit on sale of businesses and associates.... 5 (44) 50 33 Discontinued operations: Profit/(loss) on sale of businesses and associates.... 5 - 215 (212) ------ ------ ------ ------ ------ ------ ------ 308 407 (156) Continuing operations: Profit/(loss) on sale of businesses and associates by an associate................. 13 1 11 (1) ------ ------ ------ ------ ------ ------ ------ PROFIT BEFORE INTEREST......... 627 668 171 Net interest payable--Group.... 6 (145) (36) (37) Net interest payable--associates.......... 13 (2) (3) (5) ------ ------ ------ ------ ------ ------ ------ TOTAL NET INTEREST PAYABLE..... (147) (39) (42) ------ ------ ------ ------ ------ ------ ------ PROFIT BEFORE TAXATION......... 480 629 129 Taxation....................... 7 (180) (188) (89) ------ ------ ------ ------ ------ ------ ------ PROFIT AFTER TAXATION.......... 300 441 40 Equity minority interests...... (6) (4) (2) ------ ------ ------ ------ ------ ------ ------ PROFIT FOR THE FINANCIAL YEAR......................... 294 437 38 Dividends on equity shares..... 8 (138) (126) (112) ------ ------ ------ ------ ------ ------ ------ PROFIT/(DEFICIT) RETAINED...... 156 311 (74) ====== ====== ====== ====== ====== ====== ====== ADJUSTED EARNINGS PER EQUITY SHARE BEFORE INTERNET ENTERPRISES.................. 9 53.3p 42.0p 34.9p ADJUSTED EARNINGS PER EQUITY SHARE AFTER INTERNET ENTERPRISES.................. 9 48.5p 42.0p 34.9p EARNINGS PER EQUITY SHARE...... 9 48.2p 74.1p 6.6p DILUTED EARNINGS PER EQUITY SHARE........................ 9 47.5p 73.3p 6.4p DIVIDENDS PER EQUITY SHARE..... 8 22.5p 21.0p 19.5p ====== ====== ====== ====== ====== ====== ======
- ------------------------ Note: 1997 has been restated to reflect the adoption of FRS 9 "Associates and Joint Ventures" and FRS 14 "Earnings Per Share". There were no "other items" in 1997. F-4 PEARSON PLC CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1999
1999 1998 NOTE -------- -------- LM LM FIXED ASSETS Intangible assets........................................... 11 2,457 2,330 Tangible assets............................................. 12 405 435 Investments: Associates.................................................. 13 234 145 Other....................................................... 14 99 168 ------ ------ 3,195 3,078 ------ ------ CURRENT ASSETS Stocks...................................................... 15 691 614 Debtors..................................................... 16 1,132 1,127 Investments................................................. 17 4 153 Cash at bank and in hand.................................... 18 328 345 ------ ------ 2,155 2,239 ------ ------ CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR Short-term borrowing........................................ 19 (47) (72) Other creditors............................................. 20 (1,441) (1,282) ------ ------ (1,488) (1,354) ------ ------ NET CURRENT ASSETS.......................................... 667 885 ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,862 3,963 CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium and long term borrowing.............................. 19 (2,276) (2,552) Other creditors............................................. 20 (32) (54) ------ ------ (2,308) (2,606) ------ ------ PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation........................................... 21 (21) (20) Other provisions for liabilities and charges................ 22 (206) (253) ------ ------ NET ASSETS.................................................. 1,327 1,084 ------ ------ CAPITAL AND RESERVES Called up share capital..................................... 23 153 152 Share premium account....................................... 24 517 498 Revaluation reserve......................................... 24 - 1 Other reserves.............................................. 24 - 1 Profit and loss account..................................... 24 651 396 ------ ------ EQUITY SHAREHOLDERS' FUNDS.................................. 1,321 1,048 EQUITY MINORITY INTERESTS................................... 6 36 ------ ------ 1,327 1,084 ====== ======
F-5 PEARSON PLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 NOTE -------- -------- -------- LM LM LM NET CASH INFLOW FROM OPERATING ACTIVITIES................... 27 433 402 204 ------ ------ ---- DIVIDENDS FROM PARTNERSHIPS AND OTHER ASSOCIATES............ 44 53 40 ------ ------ ---- Interest received........................................... 41 52 35 Interest paid............................................... (182) (88) (72) Debt issue costs............................................ (5) (21) - Dividends paid to minority interests........................ (1) (3) (1) ------ ------ ---- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. (147) (60) (38) ------ ------ ---- TAXATION.................................................... (156) (80) (75) ------ ------ ---- Purchase of tangible fixed assets........................... (102) (125) (110) Sale of tangible fixed assets............................... 36 14 22 Purchase of investments..................................... (24) (53) (12) Sale of investments......................................... 14/17 624 199 148 ------ ------ ---- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ 534 35 48 ------ ------ ---- Purchase of subsidiary undertakings......................... (249) (2,936) (269) Net cash acquired with subsidiary undertakings.............. - (2) 3 Purchase of associates...................................... (54) (13) (67) Sale of subsidiary undertakings............................. 44 718 54 Net cash disposed with subsidiary undertakings.............. (3) (17) (1) Sale of associates.......................................... 12 77 46 ------ ------ ---- ACQUISITIONS AND DISPOSALS.................................. 25/26 (250) (2,173) (234) ------ ------ ---- EQUITY DIVIDENDS PAID....................................... (132) (113) (106) ------ ------ ---- NET CASH INFLOW/(OUTFLOW) BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING................................... 326 (1,936) (161) ------ ------ ---- Disposal of asset backed securities......................... - - 89 Liquid resources acquired................................... (9) (1,261) (123) Liquid resources disposed................................... 10 1,306 123 ------ ------ ---- MANAGEMENT OF LIQUID RESOURCES.............................. 27 1 45 89 ------ ------ ---- Issue of equity share capital............................... 18 344 27 Capital element of finance lease rentals.................... (11) (1) (1) Unsecured bank loans repaid................................. - (141) - Loan facility (repaid)/advanced............................. (1,112) 2,115 - 4.625% euro Bonds 2004 advanced............................. 358 - - 7% Sterling Bonds 2014 advanced............................. 250 - - Loan stock repaid........................................... - - (68) Net movement in other borrowings............................ 202 (280) 184 ------ ------ ---- FINANCING................................................... (295) 2,037 142 ------ ------ ---- INCREASE IN CASH IN THE YEAR................................ 27 32 146 70 ====== ====== ====
F-6 PEARSON PLC STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 -------- -------- -------- LM LM LM Profit for the financial year............................... 294 437 38 Other net gains and losses recognized in reserves: Currency translation differences............................ 36 (8) (20) ----- ----- ----- Total recognized gains relating to the year................. 330 429 18 ===== ===== =====
NOTE OF HISTORICAL COST PROFITS AND LOSSES FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 -------- -------- -------- LM LM LM Reported profit before taxation............................. 480 629 129 Realization of property revaluations........................ - 2 2 ----- ----- ----- Historical cost profit on ordinary activities before taxation.................................................. 480 631 131 ----- ----- ----- HISTORICAL COST PROFIT/(LOSS) RETAINED AFTER TAXATION, EQUITY MINORITY INTERESTS AND DIVIDENDS................... 156 313 (72) ===== ===== =====
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997 -------- -------- -------- LM LM LM Profit for the financial year............................... 294 437 38 Dividends on equity shares.................................. (138) (126) (112) ----- ----- ----- 156 311 (74) Other net recognized gains/(losses) relating to the year (see above)............................................... 36 (8) (20) Goodwill arising on prior year acquisitions................. - (16) (402) Goodwill written back....................................... 63 262 233 Shares issued............................................... 18 347 27 ----- ----- ----- Net movement for the year................................... 273 896 (236) Equity shareholders' funds at beginning of the year......... 1,048 152 388 ----- ----- ----- EQUITY SHAREHOLDERS' FUNDS AT END OF THE YEAR............... 1,321 1,048 152 ===== ===== =====
F-7 PEARSON PLC NOTES TO THE ACCOUNTS 1 ACCOUNTING POLICIES Accounting policies have been consistently applied. FRS12 "Provisions, Contingent Liabilities and Contingent Assets" has been adopted. 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 The consolidated accounts include the accounts of Pearson plc (the "Company") and all its subsidiary and associated undertakings (the "Group" or "Pearson") made up to December 31. 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. From January 1, 1998 goodwill, being either the net excess of the cost of shares in subsidiary undertakings, partnerships and other associates over the value attributable to their net assets on acquisition or the cost of other goodwill by purchase, is capitalized and amortized through the profit and loss account over its estimated useful life not exceeding 20 years. Estimated useful life is determined after taking into account such factors as the nature and age of the business and the stability of the industry in which the acquired business operates as well as typical life spans of the acquired products to which the goodwill attaches. Goodwill is subject to an impairment review at the end of the first full year following an acquisition and at any other time if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill arising on acquisitions before January 1, 1998 has been deducted from reserves and is charged or credited to the profit and loss account on disposal or closure of the business to which it relates. The profit of the Group includes the Group's share of the profit of partnerships and other associates, and the consolidated balance sheet includes the Group's interest in partnerships and other associates 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 December 31. C) SALES Sales represent the amount of goods and services, net of value added tax and other sales taxes, and excluding trade discounts and anticipated returns, provided to external customers and associated undertakings. D) FOREIGN CURRENCIES Profit and loss accounts in overseas currencies are translated into sterling at average rates. Balance sheets are translated into sterling at the rates ruling at December 31. 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. F-8 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 1 ACCOUNTING POLICIES (CONTINUED) The principal overseas currency for the Group is the US dollar. The average rate for the year against Sterling was $1.61 (1998: $1.66; 1997: $1.63) and the year end rate was $1.61 (1998: $1.66; 1997: $1.65). 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 recognize this obligation over the expected service lives of the employees concerned. G) CHANNEL 5 The Group's share of certain Channel 5 initial costs is being amortized. These costs will be amortized by the end of the ten year licence period. The Group's share of other profits and losses is being equity accounted. 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 12. I) LEASES Finance lease rentals are capitalized 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 expensed as incurred. J) FIXED ASSETS 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 realizable value. F-9 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 1 ACCOUNTING POLICIES (CONTINUED) L) PRODUCT DEVELOPMENT COSTS Revenue investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. These measures include additional editorial content, distribution and remote printing. The extra costs arising are expensed as incurred: - Pre-publication costs, the direct cost incurred in the development of titles prior to their publication, are included within stocks and are amortized over their estimated economic lives. - Advances to authors are included within debtors net of any provision required for net realizable value and are expensed at contracted rates based on sales of the related titles. - Television program production costs are included within stocks and are amortized over the estimated period in which the related revenue is forecast to be earned. M) 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. N) FINANCIAL INSTRUMENTS The Group uses derivative financial instruments to manage its exposure to interest rate and foreign exchange risks. These include interest rate swaps, currency swaps and forward currency contracts. Amounts payable or receivable in respect of interest rate derivatives are accrued with net interest payable over the period of the contract. Where the derivative instrument is terminated early the gain or loss is spread over the remaining maturity of the original instrument. Foreign currency borrowings and their related derivatives are carried in the balance sheet at the relevant exchange rates at the balance sheet date. Gains or losses in respect of the hedging of overseas subsidiary undertakings are taken to reserves. Gains or losses arising from foreign exchange contracts are taken to the profit and loss account in line with the transactions which they are hedging. The Company participates in offset arrangements with certain banks whereby cash and overdraft amounts are offset against each other. O) LIQUID RESOURCES Liquid resources comprise short-term deposits of less than one year and investments which are readily realizable and held on a short-term basis. P) RETAINED PROFITS OF OVERSEAS SUBSIDIARIES AND ASSOCIATES No provision is made for any additional taxation, less double taxation relief, which would arise on the remittance of profits retained where there is no intention to remit such profits. F-10 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 2 A) ANALYSIS OF SALES AND OPERATING PROFIT
1999 1998 1997 -------------------------------------- -------------------------------------- -------------------- OPERATING OPERATING OPERATING OPERATING PROFIT PROFIT PROFIT PROFIT BEFORE AFTER BEFORE AFTER INTERNET INTERNET INTERNET INTERNET ENTERPRISES, ENTERPRISES, ENTERPRISES, ENTERPRISES, GOODWILL GOODWILL GOODWILL GOODWILL AMORTIZATION AMORTIZATION AMORTIZATION AMORTIZATION RESTATED & OTHER & OTHER & OTHER & OTHER OPERATING SALES ITEMS ITEMS SALES ITEMS ITEMS SALES PROFIT -------- ------------ ------------ -------- ------------ ------------ -------- --------- LM LM LM LM LM LM LM LM BUSINESS SECTORS FT Group................ 687 150 103 683 118 114 676 108 Pearson Education....... 1,725 257 36 702 99 (34) 563 60 The Penguin Group....... 565 65 64 523 48 46 525 58 Pearson Television...... 355 68 67 343 61 61 247 26 ----- --- --- ----- --- --- ----- --- Continuing operations... 3,332 540 270 2,251 326 187 2,011 252 Discontinued operations............ - 48 48 144 63 63 282 76 ----- --- --- ----- --- --- ----- --- 3,332 588 318 2,395 389 250 2,293 328 ----- --- --- ----- --- --- ----- --- GEOGRAPHICAL MARKETS SUPPLIED United Kingdom.......... 544 46 (4) 497 38 35 487 39 Continental Europe...... 518 110 103 461 109 106 382 73 North America........... 1,990 340 134 1,078 157 30 916 110 Asia Pacific............ 200 29 23 161 16 11 179 23 Rest of World........... 80 15 14 54 6 5 47 7 ----- --- --- ----- --- --- ----- --- Continuing operations... 3,332 540 270 2,251 326 187 2,011 252 Discontinued operations............ - 48 48 144 63 63 282 76 ----- --- --- ----- --- --- ----- --- 3,332 588 318 2,395 389 250 2,293 328 ===== === === ===== === === ===== ===
- ------------------------------ Note: "Other items" comprises exceptional items of L95m (1998: L120m) and Year 2000 compliance costs of L5m (1998: L7m). Exceptional items comprise integration costs following the acquisition of Simon & Schuster in 1998. These all relate to the Pearson Education business sector. The results of Simon & Schuster are included within the Pearson Education business sector and are mainly within North America. The results of internet enterprises, the Group's discrete internet operations, are included within FT Group L36m and Pearson Education L3m. Discontinued operations arising in 1999 relate to the withdrawal of the Group from the banking business following its disposal of Lazard on March 3, 2000. Discontinued operations arising in 1998 relate to the withdrawal of the Group from the consumer software business following its disposal of Mindscape Inc. in March 1998, the withdrawal of the Group from the consumer magazine business following its disposal of Pearson New Entertainment in April 1998 and the withdrawal of the Group from the visitor attractions business following its disposal of The Tussauds Group in October 1998. 1997 operating profit is stated after restructuring costs of L34m which were classified as exceptional within operating activities. These related to FT Group, L14m, Pearson Education, L12m, Pearson Television, L4m and discontinued businesses, L4m, and are shown mainly within United Kingdom, L16m, and North America, L17m. Analyses of the profits of associates are shown in note 13. F-11 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 2 A) ANALYSIS OF SALES AND OPERATING PROFIT (CONTINUED)
1999 1998 1997 ------------------------------ ------------------------------ ------------------------------ TOTAL TOTAL TOTAL BY INTER- BY INTER- BY INTER- SOURCE REGIONAL SALES SOURCE REGIONAL SALES SOURCE REGIONAL SALES -------- -------- -------- -------- -------- -------- -------- -------- -------- LM LM LM LM LM LM LM LM LM GEOGRAPHICAL SOURCE OF SALES United Kingdom................. 820 (52) 768 728 (52) 676 703 (46) 657 Continental Europe............. 394 (6) 388 355 (6) 349 302 (7) 295 North America.................. 1,991 (18) 1,973 1,108 (28) 1,080 928 (19) 909 Asia Pacific................... 159 (4) 155 129 (4) 125 144 (7) 137 Rest of World.................. 50 (2) 48 22 (1) 21 13 - 13 ----- --- ----- ----- --- ----- ----- --- ----- Continuing operations.......... 3,414 (82) 3,332 2,342 (91) 2,251 2,090 (79) 2,011 Discontinued operations........ - - - 144 - 144 284 (2) 282 ----- --- ----- ----- --- ----- ----- --- ----- 3,414 (82) 3,332 2,486 (91) 2,395 2,374 (81) 2,293 ===== === ===== ===== === ===== ===== === =====
- ------------------------ Note: The table above analyzes sales by the geographical region from which the products and services originate. Inter-regional sales are those made between the Group companies in different regions. F-12 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 2 B) ANALYSIS OF CAPITAL EMPLOYED
1999 1998 CAPITAL CAPITAL EMPLOYED EMPLOYED ---------- ---------- LM LM BUSINESS SECTORS FT Group.................................................... 408 143 Pearson Education........................................... 2,877 3,200 The Penguin Group........................................... 193 143 Pearson Television.......................................... (78) 39 ------ ------ Continuing operations....................................... 3,400 3,525 Discontinued operations..................................... 149 111 ------ ------ 3,549 3,636 ====== ====== GEOGRAPHICAL LOCATION United Kingdom.............................................. (30) 129 Continental Europe.......................................... 313 217 North America............................................... 3,023 3,041 Asia Pacific................................................ 22 96 Rest of World............................................... 72 42 ------ ------ Continuing operations....................................... 3,400 3,525 Discontinued operations..................................... 149 111 ------ ------ 3,549 3,636 ====== ====== RECONCILIATION OF CAPITAL EMPLOYED TO NET ASSETS Capital employed............................................ 3,549 3,636 Less: deferred taxation..................................... (21) (20) Less: other provisions...................................... (206) (253) Less: net debt.............................................. (1,995) (2,279) ------ ------ NET ASSETS.................................................. 1,327 1,084 ====== ======
F-13 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT
1999 1998 1997 -------- ------------------------------ ------------------------------ CON- DISCON- CON- DISCON- TOTAL TINUING TINUED TOTAL TINUING TINUED TOTAL -------- -------- -------- -------- -------- -------- -------- LM LM LM LM LM LM LM COST OF SALES............................... (1,424) (1,138) (38) (1,176) (1,003) (111) (1,114) ------ ------ --- ------ ------ ---- ------ Distribution costs.......................... (289) (168) (1) (169) (123) (3) (126) Administration and other expenses........... (1,470) (848) (85) (933) (701) (143) (844) Other operating income (see below).......... 98 79 3 82 68 4 72 ------ ------ --- ------ ------ ---- ------ NET OPERATING EXPENSES...................... (1,661) (937) (83) (1,020) (756) (142) (898) ====== ====== === ====== ====== ==== ====== Analyzed as: Net operating expenses-before exceptional items and goodwill amortization........... (1,446) (854) (83) (937) (726) (138) (864) Net operating expenses-exceptional items.... (85) (71) - (71) (30) (4) (34) Net operating expenses-goodwill amortization.............................. (130) (12) - (12) - - - ------ ------ --- ------ ------ ---- ------ NET OPERATING EXPENSES...................... (1,661) (937) (83) (1,020) (756) (142) (898) ====== ====== === ====== ====== ==== ======
- ------------------------------ Note: The following amounts are included in the 1999 totals in respect of acquisitions: cost of sales L14m (1998: L74m; 1997: L15m) and net operating expenses L17m (1998: L95m; 1997: L13m). The exceptional expense of L95m in 1999 (1998: L120m; 1997: L34m) is included within cost of sales L10m (1998: L49m; 1997: Lnil) and administration and other expenses L85m (1998: L71m; 1997: L34m) (see note 2). F-14 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)
1999 1998 1997 -------- -------- -------- LM LM LM OTHER OPERATING INCOME: Income from other investments: Listed...................................................... - - 2 Unlisted.................................................... 3 14 13 BSBH loan stock interest.................................... 1 4 4 Other operating income (mainly royalties, rights and commission income)........................................ 94 64 53 ----- ----- ----- 98 82 72 ===== ===== ===== PROFIT BEFORE TAXATION IS STATED AFTER CHARGING: Depreciation................................................ 82 66 65 Operating lease rentals: Plant and machinery......................................... 22 17 12 Properties.................................................. 61 41 36 Other....................................................... 12 4 5 Year 2000 compliance costs.................................. 5 7 - Auditors' remuneration: Audit....................................................... 2 2 2 Non-audit--UK (Company Lnil; 1998: Lnil, 1997: Lnil)........ 2 2 2 Non-audit--Other............................................ 2 2 - ===== ===== =====
- ------------------------------ Note: In addition to the non-audit fees (UK) of L2m (1998: L2m; 1997: L2m), consultancy fees of L6m (1998: L7m; 1997: L8m) have been incurred in respect of systems development. These fees have been capitalized. Fees of L2m (1998: L2m; 1997 Lnil) were also incurred in the UK in respect of acquisition and disposals. These fees have also been capitalized. Audit fees of the Company amounted to L0.1m (1998: L0.1m; 1997: L0.1m). 4 PROFIT ON SALE OF FIXED ASSETS AND INVESTMENTS
1999 1998 1997 -------- -------- -------- LM LM LM CONTINUING OPERATIONS: Profit on disposal of interest in BSB Holdings Ltd (BSBH) (see note 14)............................................. 348 - - Profit on sale of investments in Societe Europeenne des Satellites................................................ - 133 - Profit on sale in investment in Flextech plc................ - 27 24 Loss on sale of fixed assets relating to the Simon & Schuster acquisition...................................... (3) (6) - Net profit/(loss) on other investments and property interests................................................. 7 (12) (1) ----- ----- ----- 352 142 23 ===== ===== ===== Taxation.................................................... (93) (40) (4) ===== ===== =====
F-15 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 5 (LOSS)/PROFIT ON SALE OF BUSINESSES AND ASSOCIATES
1999 1998 1997 -------- -------- -------- LM LM LM CONTINUING OPERATIONS: Loss on sale of Extel research products business (see note 26)....................................................... (19) - - Profit on sale of Law & Tax publishing business............. - 61 - Profit on sale of 20% of Recoletos.......................... - 34 - Loss on sale of Register group.............................. - (20) - Loss on closure of Simon & Schuster businesses.............. (12) (10) - Profit on sale of Churchill Livingstone..................... - 2 30 Profit on sale of Troll Communications LLC.................. - - 13 Net loss on sale of other businesses and associates......... (13) (17) (10) --- ---- ---- (44) 50 33 === ==== ==== DISCONTINUED OPERATIONS: Profit on sale of The Tussauds Group........................ - 157 - Profit on sale of Pearson New Entertainment................. - 41 - Profit on sale of Port Aventura SA.......................... - 28 - Loss on sale of Mindscape Inc............................... - (11) - Provision against goodwill on the sale of Mindscape Inc..... - - (212) --- ---- ---- - 215 (212) === ==== ==== Taxation.................................................... 5 (63) (1) === ==== ====
6 NET INTEREST PAYABLE--GROUP
1999 1998 1997 -------- -------- -------- LM LM LM INTEREST PAYABLE AND SIMILAR CHARGES: On borrowing repayable wholly within five years not by installments.............................................. (155) (43) (32) On borrowing repayable wholly or partly after five years.... (29) (44) (45) ---- --- --- (184) (87) (77) ==== === === INTEREST RECEIVABLE AND SIMILAR INCOME: On deposits and liquid funds................................ 29 48 37 On discounted proceeds on businesses held for resale (see note 17).................................................. 7 - - Amortization of swap proceeds (see note 20)................. 3 3 3 ---- --- --- NET INTEREST PAYABLE........................................ (145) (36) (37) ==== === ===
F-16 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 7 TAXATION
1999 1998 1997 -------- -------- -------- LM LM LM UK: Corporation tax at 30.2% (1998: 31%; 1997: 31.5%)........... 104 134 37 Deferred taxation........................................... 6 (4) 11 Double taxation relief...................................... (1) (1) (1) Tax on franked investment income............................ 4 - - Associates.................................................. 9 8 5 OVERSEAS: Overseas taxation........................................... 52 45 30 Deferred taxation........................................... - 1 2 Associates.................................................. 6 5 5 ----- ----- ----- 180 188 89 ===== ===== ===== % % % TAX RATE RECONCILIATION UK tax rate................................................. 30.2 31.0 31.5 Effect of utilization of tax losses in the US............... (7.7) (2.7) (4.3) Other items................................................. 2.5 (0.3) 2.2 ----- ----- ----- Tax rate reflected in adjusted earnings..................... 25.0 28.0 29.4 Effect of profits/(losses) excluded from adjusted earnings.................................................. 12.5 1.9 39.5 ----- ----- ----- TAX RATE REFLECTED IN EARNINGS.............................. 37.5 29.9 68.9 ===== ===== =====
- ------------------------------ Note: The Group continues to have substantial tax losses available in the US, which are not recognized in the accounts. Following the acquisition of Simon & Schuster at the end of 1998, US profits are higher in 1999 than in 1998 but are still more than offset by the available losses so reducing the Group tax rate reflected in adjusted earnings. As in 1998, relief has not been taken for the Simon & Schuster integration costs to the extent that they arose in the US, hence increasing the effective tax rate on earnings. The 1997 tax rate has been affected by two significant factors: - - The Group has substantial tax losses in the US which have not been recognized in the accounts and more than offset 1997 profits, so reducing the Group tax rate reflected in adjusted earnings. - - There is no tax payable on the profit arising from the disposal of Television Broadcasts Limited and the tax payable on the disposal of Flextech plc is reduced by capital losses brought forward. The provision against goodwill on the sale of Mindscape Inc. has had no impact on 1997 tax. 8 DIVIDENDS
1999 1998 1997 --------------------- --------------------- --------------------- PENCE PENCE PENCE PER SHARE LM PER SHARE LM PER SHARE LM ---------- -------- ---------- -------- ---------- -------- Interim paid....................... 8.6 53 8.0 47 7.5 43 Final proposed..................... 13.9 85 13.0 79 12.0 69 ----- ----- ----- ----- ----- ----- DIVIDENDS FOR THE YEAR............. 22.5 138 21.0 126 19.5 112 ===== ===== ===== ===== ===== =====
F-17 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 9 EARNINGS PER SHARE In order to show results from operating activities on a comparable basis two adjusted earnings per equity share are presented. First, an adjusted earnings per share is presented which excludes profits or losses on the sale of fixed assets and investments, businesses and associates (see notes 4 and 5), Year 2000 compliance costs and integration costs in respect of the acquisition of Simon & Schuster (see note 2). Goodwill amortization has also been excluded from adjusted earnings calculation following the prospective implementation of FRS10 "Goodwill and Intangible Assets" in 1998. Due to a significant level of expenditure in 1999 on new internet enterprises, a second adjusted earnings per equity share is presented in which the results of these are also excluded from earnings.
1999 1998 1997 -------------------- -------------------- -------------------- EARNINGS EARNINGS EARNINGS PER SHARE PER SHARE PER SHARE LM (P) LM (P) LM (P) -------- --------- -------- --------- -------- --------- Basis earnings........................................ 294 48.2 437 74.1 38 6.6 Less: (Profit) on sale of fixed assets and investments: continuing operations............................... (352) (57.7) (142) (24.1) (23) (4.0) Loss/(profit) on sale of businesses and associates: continuing operations............................... 44 7.2 (50) (8.5) (33) (5.8) (Profit)/loss on sale of businesses and associates: discontinued operations............................. - - (215) (36.4) 212 37.0 (Profit)/loss on sale of businesses and associates by an associate: continuing operations................. (1) (0.2) (11) (1.9) 1 0.2 Add: Internet enterprises.................................. 39 6.4 - - - - Goodwill amortization................................. 131 21.5 12 2.0 - - Simon & Schuster integration costs.................... 95 15.6 120 20.3 - - Year 2000 compliance costs............................ 5 0.8 7 1.2 - - Taxation on above items............................... 70 11.5 90 15.3 5 0.9 ----- ----- ----- ----- ----- ----- Adjusted earnings before internet enterprises......... 325 53.3 248 42.0 200 34.9 ===== ===== ===== ===== ===== ===== Internet enterprises.................................. (39) (6.4) - - - - Taxation on internet enterprises...................... 10 1.6 - - - - ----- ----- ----- ----- ----- ----- Adjusted earnings after internet enterprises.......... 296 48.5 248 42.0 200 34.9 ===== ===== ===== ===== ===== ===== Earnings.............................................. 294 437 38 Taxation on the conversion of ordinary shares......... (1) (1) (1) ----- ----- ----- ----- ----- ----- Diluted earnings...................................... 293 436 37 ===== ===== ===== ===== ===== ===== Weighted average number of equity shares (millions)--for earnings and adjusted earnings...... 610.2 589.8 572.8 Effect of dilutive share options...................... 7.0 5.1 4.7 ----- ----- ----- ----- ----- ----- Weighted average number of equity shares (millions)--for diluted earnings.................... 617.2 594.9 577.5 ===== ===== ===== ===== ===== ===== Adjusted earnings per equity share before internet enterprises......................................... 53.3p 42.0p 34.9p Adjusted earning per equity share after internet enterprises......................................... 48.5p 42.0p 34.9p Earnings per equity shares............................ 48.2p 74.1p 6.6p Diluted earnings per equity share..................... 47.5p 73.3p 6.4p ===== ===== ===== ===== ===== =====
- ------------------------------ Note: 1997 weighted average number of equity shares has been restated in accordance with FRS14 "Earnings Per Share". F-18 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 10 EMPLOYEE INFORMATION
1999 1998 1997 -------- -------- -------- LM LM LM STAFF COSTS Wages and salaries.......................................... 702 476 454 Social security costs....................................... 75 54 46 Post-retirement costs....................................... 26 13 10 --- --- --- 803 543 510 === === ===
UK US OTHER TOTAL -------- -------- -------- -------- AVERAGE NUMBER EMPLOYED 1999 FT Group.................................................... 2,158 1,034 1,790 4,982 Pearson Education........................................... 1,761 9,970 2,394 14,125 The Penguin Group........................................... 749 1,866 614 3,229 Pearson Television.......................................... 617 105 550 1,272 Other....................................................... 171 93 - 264 ----- ------ ----- ------ Continuing operations....................................... 5,456 13,068 5,348 23,872 ===== ====== ===== ====== AVERAGE NUMBER EMPLOYED 1998 FT Group.................................................... 2,780 832 1,858 5,470 Pearson Education........................................... 764 3,171 1,489 5,424 The Penguin Group........................................... 989 1,728 601 3,318 Pearson Television.......................................... 585 113 450 1,148 Other....................................................... 171 48 - 219 ----- ------ ----- ------ Continuing operations....................................... 5,289 5,892 4,398 15,579 Discontinued operations..................................... 2,614 131 76 2,821 ----- ------ ----- ------ 7,903 6,023 4,474 18,400 ===== ====== ===== ====== AVERAGE NUMBER EMPLOYED 1997 FT Group.................................................... 3,093 902 1,834 5,829 Pearson Education........................................... 818 2,498 1,279 4,595 The Penguin Group........................................... 895 1,728 582 3,205 Pearson Television.......................................... 278 40 362 680 Other....................................................... 124 93 - 217 ----- ------ ----- ------ Continuing operations....................................... 5,208 5,261 4,057 14,526 Discontinued operations..................................... 3,187 424 169 3,780 ----- ------ ----- ------ 8,395 5,685 4,226 18,306 ===== ====== ===== ======
F-19 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 10 EMPLOYEE INFORMATION (CONTINUED)
1999 1998 1997 -------- -------- -------- LM LM LM POST-RETIREMENT COSTS Defined benefit pension schemes UK Group plan: regular pension cost......................... 8 8 9 UK Group plan: amortization of surplus...................... (3) (9) (13) --- --- --- Net pension charge/(credit)................................. 5 (1) (4) Other defined benefit pension schemes....................... 11 6 6 Defined contribution pension schemes........................ 6 5 6 Medical benefits............................................ 4 3 2 --- --- --- 26 13 10 === === ===
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. 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 other defined benefit and defined contribution schemes, principally overseas. The results of the most recent actuarial valuation performed as at January 1, 1999, using the projected unit method of valuation, of the principal funded UK scheme, and the principal assumptions are shown in the table below. The net assets of the UK Group plan at December 31, 1999 are included in the pension plan accounts at L1,192m (unaudited).
UK GROUP PLAN -------------- Assets at market value at latest full actuarial valuation on January 1, 1999........................................... L1,038m Real return on investments per annum........................ 3.9% Real increase in earnings per annum......................... 1.9% Real increase in pensions in payment per annum.............. 0.0% Real increase in dividends per annum........................ 1.0% Level of funding*........................................... 105% ==============
- ------------------------ *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. The total market value of the assets of the non-UK defined benefit schemes (mainly in the US), valued this year, was L64m (1998: L63m; 1997: L48m). F-20 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 10 EMPLOYEE INFORMATION (CONTINUED) OTHER POST-RETIREMENT BENEFITS The Group provides certain health care and life assurance benefits principally for retired US employees and their dependants. These plans are unfunded. Retirees are eligible for participation if they meet certain age and service requirements. Plans that are available vary based upon the business division in which the retiree worked. Plan choices and retiree contributions are dependent on retirement date, business unit, option chosen and length of service. The principal assumptions affecting the provision for other post-retirement benefits were: medical inflation rates of between 5.0% and 7.0% and a discount rate of 6.75%. 11 INTANGIBLE ASSETS
GOODWILL GOODWILL TOTAL TOTAL 1999 1998 --------- --------- LM LM COST At December 31.............................................. 2,342 - Exchange differences........................................ 71 (6) Additions (see note 25)..................................... 187 2,348 Disposals (see note 26)..................................... (1) - ----- ----- AT DECEMBER 31.............................................. 2,599 2,342 ===== ===== AMORTIZATION At December 31.............................................. (12) - Provided in the year........................................ (130) (12) ----- ----- AT DECEMBER 31.............................................. (142) (12) ===== ===== NET CARRYING AMOUNT AT DECEMBER 31.............................................. 2,457 2,330 ===== =====
F-21 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 12 TANGIBLE FIXED ASSETS
1999 -------------------------------------------------- FREEHOLD AND ASSETS IN LEASEHOLD PLANT AND COURSE OF PROPERTY EQUIPMENT CONSTRUCTION TOTAL ---------- ----------- ------------ -------- LM LM LM LM COST OR AS VALUED At December 31, 1998.......................... 249 527 18 794 Exchange differences.......................... 2 2 - 4 Reclassifications............................. 3 9 (12) - Owned by subsidiary undertakings acquired..... - (8) - (8) Capital expenditure........................... 18 77 21 116 Disposals..................................... (36) (49) (6) (91) Owned by subsidiary undertakings disposed..... (1) (21) - (22) --- ---- --- ---- AT DECEMBER 31, 1999.......................... 235 537 21 793 === ==== === ==== DEPRECIATION At December 31, 1998.......................... (78) (281) - (359) Exchange differences.......................... (1) (1) - (2) Impairment in value........................... - (11) - (11) Provided in the year.......................... (12) (70) - (82) Subsidiary undertakings acquired.............. - 4 - 4 Disposals..................................... 10 44 - 54 Subsidiary undertakings disposed.............. - 8 - 8 --- ---- --- ---- AT DECEMBER 31, 1999.......................... (81) (307) - (388) === ==== === ==== NET BOOK VALUE At December 31, 1998.......................... 171 246 18 435 --- ---- --- ---- AT DECEMBER 31, 1999.......................... 154 230 21 405 === ==== === ====
F-22 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 12 TANGIBLE FIXED ASSETS (CONTINUED)
1998 -------------------------------------------------- FREEHOLD AND ASSETS IN LEASEHOLD PLANT AND COURSE OF PROPERTY EQUIPMENT CONSTRUCTION TOTAL ---------- ----------- ------------ -------- LM LM LM LM COST OR AS VALUED At December 31, 1997.......................... 319 485 37 841 Exchange differences.......................... - 2 - 2 Reclassifications............................. - 13 (13) - Owned by subsidiary undertakings acquired..... 42 205 1 248 Capital expenditure........................... 15 60 34 109 Disposals..................................... (7) (43) (35) (85) Owned by subsidiary undertakings disposed..... (120) (195) (6) (321) ---- ---- --- ---- AT DECEMBER 31, 1998.......................... 249 527 18 794 ==== ==== === ==== DEPRECIATION At December 31, 1997.......................... (71) (264) - (335) Exchange differences.......................... - - - - Reclassifications............................. 1 (1) - - Impairment in value........................... (6) (5) - (11) Provided in the year.......................... (10) (56) - (66) Subsidiary undertakings acquired.............. (12) (93) - (105) Disposals..................................... 3 37 - 40 Subsidiary undertakings disposed.............. 17 101 - 118 ---- ---- --- ---- AT DECEMBER 31, 1998.......................... (78) (281) - (359) ==== ==== === ==== NET BOOK VALUE At December 31, 1997.......................... 248 221 37 506 ---- ---- --- ---- AT DECEMBER 31, 1998.......................... 171 246 18 435 ==== ==== === ====
FREEHOLD AND LEASEHOLD PROPERTY Net book value includes: freehold of L113m (1998: L133m), short leases of L41m (1998: L38m). DEPRECIATION 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. Land, amounting to L32m (1998: L40m), is not depreciated. CAPITAL COMMITMENTS The Group had capital commitments for fixed assets, including finance leases, already under contract amounting to L20m at December 31, 1999 (1998: L45m). F-23 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 12 TANGIBLE FIXED ASSETS (CONTINUED) OTHER NOTES The net book value of Group tangible fixed assets includes L23m (1998: L20m) in respect of assets held under finance leases. Depreciation on these assets charged in 1999 was L2m (1998: L1m). 13 ASSOCIATES
1999 1998 ------------------------ ------------------------ VALUATIONS BOOK VALUE VALUATIONS BOOK VALUE ---------- ----------- ---------- ----------- LM LM LM LM Partnership interests.................... 410 149 200 111 Unlisted associates...................... 426 18 189 (31) Loans.................................... 67 67 65 65 --- --- --- --- 903 234 454 145 === === === ===
- ------------------------------ Note: Principal associates are listed on page F-90. The valuations of unlisted partnerships and other associates are at directors' valuations as at December 31, 1999. If realized at these values there would be an estimated liability for taxation, at year end rates, of L161m (1998: L68m). The Group had no capital commitments to subscribe for further capital and loan stock.
SHARE TOTAL OF NET EQUITY LOANS RESERVES TOTAL GOODWILL ASSETS -------- -------- --------- -------- --------- -------- LM LM LM LM LM LM SUMMARY OF MOVEMENTS At December 31, 1998....................... 77 65 3 145 - 145 Exchange differences....................... (2) - (1) (3) (2) (5) Additions.................................. 23 2 - 25 29 54 Retained profit for the year............... - - 41 41 - 41 Goodwill amortization...................... - - - - (1) (1) --- --- --- --- --- --- AT DECEMBER 31, 1999....................... 98 67 43 208 26 234 === === === === === ===
F-24 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 13 ASSOCIATES (CONTINUED)
SHARE OF EQUITY LOANS RESERVES TOTAL -------- -------- --------- -------- LM LM LM LM SUMMARY OF MOVEMENTS At December 31, 1997................................... 87 107 4 198 Exchange differences................................... (2) - - (2) Additions.............................................. 2 11 - 13 Goodwill written back.................................. 16 - 1 17 Owned by subsidiary undertakings disposed.............. - (6) - (6) Disposals.............................................. (26) (47) 22 (51) Retained loss for the year............................. - - (24) (24) --- --- --- --- AT DECEMBER 31, 1998................................... 77 65 3 145 === === === ===
- ------------------------------ Note: During 1998 the Group sold its 40.5% share in Port Aventura SA for L56m giving rise to a profit on sale of L28m before tax estimated at L6m. This includes compensation of L18m from Port Aventura SA for the cancellation of the management agreement. During 1998 the Group also sold its 20% share in the Canadian Financial Post for L13m giving rise to a profit on sale of L8m before tax estimated at L4m.
1999 1998 1997 ---------------------- ---------------------- ---------------------- OPERATING TOTAL NET OPERATING TOTAL NET OPERATING TOTAL NET PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS ---------- --------- ---------- --------- ---------- --------- LM LM LM LM LM LM ANALYSIS OF PARTNERSHIPS AND OTHER ASSOCIATES BUSINESS SECTORS FT Group........................ 14 63 15 6 16 (3) Pearson Education............... 6 7 4 5 3 5 The Penguin Group............... - - - - 1 1 Pearson Television.............. 3 15 (8) 23 (20) 49 -- --- -- --- --- --- Continuing operations........... 23 85 11 34 - 52 Discontinued operations......... 48 149 40 111 47 146 -- --- -- --- --- --- 71 234 51 145 47 198 == === == === === === GEOGRAPHICAL MARKETS SUPPLIED AND LOCATION OF NET ASSETS United Kingdom.................. - 2 (3) 18 (16) 40 Continental Europe.............. 10 56 6 7 5 6 North America................... 8 14 5 1 6 (1) Rest of World................... 5 13 3 8 5 7 -- --- -- --- --- --- Continuing operations........... 23 85 11 34 - 52 Discontinued operations......... 48 149 40 111 47 146 -- --- -- --- --- --- 71 234 51 145 47 198 == === == === === ===
F-25 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 13 ASSOCIATES (CONTINUED)
1999 1998 -------- -------- LM LM RECONCILIATION TO RETAINED PROFIT/(LOSS) Operating profit of partnerships and other associates....... 71 51 Net interest payable of other associates.................... (2) (3) Profit on sale of business by an associate.................. 1 11 UK taxation................................................. (9) (8) Overseas taxation........................................... (6) (5) Distributions receivable in respect of the year from partnership interests..................................... (2) (59) Dividends (including tax credits) from unlisted associates................................................ (12) (11) --- ---- RETAINED PROFIT/(LOSS) FOR THE YEAR......................... 41 (24) === ====
The aggregate of Pearson's share in its associates, excluding the interest in Lazard Partners Limited Partnership and the three Lazard Houses, is shown below.
1999 1998 1997 -------- -------- -------- LM LM LM Sales....................................................... 299 239 225 Fixed assets................................................ 98 57 130 Current assets.............................................. 165 126 126 Liabilities due within one year............................. (105) (88) (101) Liabilities due after one year or more...................... (73) (61) (80) ----- ----- ----- NET ASSETS.................................................. 85 34 75 ===== ===== =====
Pearson's interest in Lazard Partners Limited Partnership and the three Lazard Houses for the year ended December 31, 1999 is shown below. On March 3, 2000, Pearson sold its interests in Lazards Partners Limited Partnership and the three Lazard Houses (see note 31).
1999 1998 1997 -------- -------- -------- LM LM LM Profit before tax........................................... 48 53 43 Taxation.................................................... (7) (7) (6) Profit after taxation....................................... 41 46 37 Fixed assets................................................ 26 28 48 Current assets.............................................. 3,399 5,151 3,925 Liabilities due within one year............................. (2,819) (4,829) (3,753) Liabilities due after one year or more...................... (457) (239) (97) ====== ====== ======
- ------------------------------ Note: Pearson's indirect general partnership interest in Lazard Freres et Cie and Maison Lazard et Cie held directly and indirectly through Lazard Partners Limited Partnership was an unlimited liability interest. Pearson held these partnership interests through a subsidiary undertaking registered in England, with no other material assets. The aggregate liabilities of these partnerships included above are L511m (1998: L851m; 1997: L930m). Pearson also held direct interests in Lazard Freres & Co., a New York Limited Liability Company. F-26 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 13 ASSOCIATES (CONTINUED)
COUNTRY OF BENEFICIAL CLASS INCORPORATION INTEREST OF SHARE CAPITAL OR REGISTRATION % SHARE MILLIONS --------------- ---------- ------------- ------------- INTEREST IN THE LAZARD HOUSES Lazard Partners Limited Partnership............ US 50.0 Partnership (which, with direct interest in the US and French partnerships gives the following interest in the Lazard Houses): Lazard Brothers & Co. Ltd...................... England 29.1 Ord L1 25.3 Lazard Brothers & Co. Ltd...................... England 80.0 Def L1 5.0 Lazard Brothers & Co. Ltd...................... England 50.0 SFr 1 0.4 Lazard Freres & Co. "LLC"...................... US 11.5 LLC* Lazard Freres et Cie/Maison Lazard et Cie...... France 9.2 Partnership
- ------------------------------ *Limited Liability Company Note: The beneficial percentages held for the investment banking partnership interest are interests in partnership profits. 14 OTHER FIXED ASSET INVESTMENTS
1999 1998 ----------------------- ----------------------- VALUATION BOOK VALUE VALUATION BOOK VALUE --------- ----------- --------- ----------- LM LM LM LM Listed..................................... 51 16 2 1 Unlisted................................... 83 83 331 167 --- -- --- --- 134 99 333 168 === == === ===
- ------------------------------ Note: During the year the Group sold its interest in BSB Holdings Ltd for L408m which, together with the disposal of an indirect interest in BSkyB for L30m, gave rise to a profit on sale of L348m before tax estimated at L91m. If all investments were realized at valuation there would be an estimated liability for taxation, at year end rates, of L10m (1998: L49m). F-27 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 14 OTHER FIXED ASSET INVESTMENTS (CONTINUED)
BSBH OTHER TOTAL -------- -------- -------- LM LM LM SUMMARY OF MOVEMENTS At December 31, 1998........................................ 90 78 168 Exchange differences........................................ - (8) (8) Additions................................................... - 24 24 Transfers................................................... - 2 2 Disposals................................................... (90) - (90) Release of provisions for permanent diminution in value..... - 3 3 --- --- --- BOOK VALUE AT DECEMBER 31, 1999............................. - 99 99 === === === VALUATION AT DECEMBER 31, 1999.............................. - 134 134 === === ===
- ------------------------ Note: The Pearson Employee Share Trust and Pearson plc Employee Share Ownership Trust hold 953,057 (1998: 386,977) Pearson plc ordinary shares with a market value of L19m at December 31, 1999 (1998: L5m) inclusive of accumulated scrip dividend shares. Amounts included within other fixed asset investments for own shares are L10m. In 1998, L2m was included in debtors.
BSBH OTHER TOTAL -------- -------- -------- LM LM LM SUMMARY OF MOVEMENTS At December 31, 1997........................................ 90 50 140 Exchange differences........................................ - 5 5 Additions................................................... - 53 53 Owned by businesses disposed................................ - (5) (5) Disposals................................................... - (27) (27) Release of provisions for permanent diminution in value..... - 2 2 --- --- --- BOOK VALUE AT DECEMBER 31, 1998............................. 90 78 168 === === === VALUATION AT DECEMBER 31, 1998.............................. 255 78 333 === === ===
15 STOCKS
1999 1998 -------- -------- LM LM Raw materials............................................... 35 32 Work in progress............................................ 159 126 Finished goods.............................................. 497 456 --- --- 691 614 === ===
- ------------------------ Note: The replacement cost of stocks is not materially different from book value. F-28 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 16 DEBTORS
1999 1998 -------- -------- LM LM AMOUNTS FALLING DUE WITHIN ONE YEAR Trade debtors............................................... 807 763 Associates.................................................. 10 39 Other debtors............................................... 219 198 Prepayments and accrued income.............................. 82 105 ----- ----- 1,118 1,105 ===== ===== AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Other debtors............................................... 8 14 Prepayments and accrued income.............................. 6 8 ----- ----- 14 22 ----- ----- 1,132 1,127 ===== =====
17 CURRENT ASSET INVESTMENTS
1999 1998 ----------------------- ----------------------- VALUATION BOOK VALUE VALUATION BOOK VALUE --------- ----------- --------- ----------- LM LM LM LM Unlisted................................... 4 4 5 5 Businesses held for resale................. - - 148 148 --------- --------- --- --- 4 4 153 153 ========= ========= === ===
- ------------------------ Note: Investments are at directors' valuations. If all investments were realized at valuation there would be no liability for taxation.
1999 1998 -------- -------- LM LM SUMMARY OF MOVEMENTS At December 31.............................................. 153 8 Exchange differences........................................ 5 - Owned by businesses acquired (see note 25).................. 27 151 Disposals................................................... (181) (6) ---- --- AT DECEMBER 31.............................................. (4) 153 ==== ===
F-29 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 18 CASH AT BANK AND IN HAND
1999 1998 --------------------- --------------------- GROUP COMPANY GROUP COMPANY -------- ---------- -------- ---------- LM LM LM LM Cash, bank current accounts and overnight deposits.......................................... 288 - 305 - Certificates of deposit and commercial paper........ 22 - 20 - Term bank deposits.................................. 18 7 20 6 --- --------- --- --------- 328 7 345 6 === ========= === =========
19 FINANCIAL INSTRUMENTS TREASURY POLICY The Group holds financial instruments for two principal purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance. The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. The Group borrows principally in US dollars, euros and sterling, at both floating and fixed rates of interest, using derivatives, where appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts. The main risks arising from the Group's financial instruments are interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the Group finance director under policies approved by the board which are summarized below. These policies have remained unchanged, except as disclosed, since the beginning of 1999. A treasury committee of the board receives reports on the Group's treasury activities, policies and procedures, which are reviewed periodically by a Group of external professional advisers. The treasury department is not a profit center, and its activities are subject to audit. INTEREST RATE RISK The Group's exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into interest rate swaps, interest rate caps and forward rate agreements. In September 1998 the Group amended its policy objective to set a target proportion of its forecast borrowings (taken at the year end, net of cash) to be hedged (i.e. fixed or capped) over the next five years of 50% to 65% for the first two years, and 40% to 60% for the next three years. At the end of 1999 that ratio was 58%. On a pro forma basis, taking into account the disposal of the Group's interests in the Lazard houses, that ratio was 74%. In view of this change to the debt portfolio, the Group will manage this position in order to return to within the designated policy. On that pro forma basis, a 1% change in the Group's variable rate US dollar, euro and sterling interest rates would have a L4m effect on its profit before tax. LIQUIDITY AND REFINANCING RISK The Group's objective is to procure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. It has a F-30 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED) policy that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and eight years, and that non-bank sources should provide between 25% and 75% of such core gross borrowings. Between July and November 1999 the Group issued [EURO]550m of bonds due 2004 and L250m of bonds due 2014. As a result, at the end of 1999 the average maturity of gross borrowings was 5.1 years and non-banks provided 46% of them (up from 4.4 years and 18% respectively at the beginning of the year). In addition, in February 2000 the Group issued [EURO]650m of bonds due 2007. Taking these as well as the Lazards disposal into account, on a pro forma basis the average maturity was 5.8 years and the proportion provided by non-banks was 79%. These pro forma adjustments to core gross borrowings result in the Group exceeding its target range for finance provided by non-banks. Again we will manage this position in order to return to within the designated policy. The proceeds of each bond issue were used to repay part of the Group's syndicated bank facility. The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. The Group manages the amount of its net debt and the level of its net interest cover, principally by the use of a target range for net interest cover. All of the Group's credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moody's and BBB+ from Standard & Poor's, and the short-term ratings are P2 and A2 respectively. The Group continues to operate on the basis that the board will take such action as necessary to support and protect its current credit ratings. The Group also maintains undrawn committed borrowing facilities. At the end of 1999 these amounted to L517m and their weighted average maturity was 2.5 years. COUNTERPARTY RISK The Group's risk of loss on deposits or derivative contracts with individual banks is managed in part through the use of counterparty limits. These limits, which take published credit limits (among other things) into account, are approved by the Group finance director. In addition, since the year end, for certain longer dated higher value derivative contracts the Group has entered into mark to market agreements whose effect is to reduce significantly the counterparty risk of the relevant transactions. CURRENCY RISK Although the Group is based in the UK, it has a significant investment in overseas operations. The most significant currency for the Group is the US dollar, followed by the euro and Sterling. The Group's policy during the year on routine transactional conversions between currencies (for example, the collection of receivable, and the settlement of payables or interest) remained that these should be effected at the relevant spot exchange rate. As in previous years, no unremitted profits were hedged with foreign exchange contracts. The Group decided in 1998 to align approximately the currency composition of its core borrowings in US dollars, euros and sterling with the split between those currencies of its forecast operating profit. This policy aims to dampen the impact of changes in foreign exchange rates on F-31 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED) consolidated interest cover and earnings. Long-term core borrowing is now limited to these three major currencies. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. At the year end the split of aggregate net borrowings in its three core currencies was US dollar 80%, euro 9% and Sterling 11%. On a pro forma basis, taking into account the Lazards disposal and the [EURO]650m bond issue, the respective percentages were US dollar 76%, euro 15% and Sterling 9%. Short-term debtors and creditors have been excluded from all the following disclosures, other than currency risk disclosures.
1999 1998 --------------------- --------------------- GROUP COMPANY GROUP COMPANY -------- ---------- -------- ---------- LM LM LM LM MATURITY OF BORROWINGS SHORT-TERM Bank loans, overdrafts and commercial paper......... 47 130 72 172 ----- ----- ----- ----- Total due within one year........................... 47 130 72 172 MEDIUM AND LONG TERM Loans or installments thereof repayable: From one to two years............................... 155 155 151 151 From two to five years.............................. 1,617 906 2,036 1,935 After five years not by installments................ 504 351 365 100 ----- ----- ----- ----- Total due after more than one year.................. 2,276 1,412 2,552 2,186 ----- ----- ----- ----- TOTAL BORROWINGS.................................... 2,323 1,542 2,624 2,358 ===== ===== ===== =====
- ------------------------------ Note: In the absence of enforceable contracts from the relevant lenders to refinance current advances as they fall due, at December 31, 1999 L547m (1998: L755m) of debt currently classified from two to five years would be repayable within one year. The short-term bank loans, overdrafts and commercial paper of the Group are lower than those of the Company because of bank offset arrangements. F-32 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1999 1998 ---------------------------------- ---------------------------------- GROUP GROUP GROUP OTHER GROUP OTHER FINANCE FINANCIAL GROUP FINANCE FINANCIAL GROUP LEASES LIABILITIES TOTAL LEASES LIABILITIES TOTAL -------- ----------- --------- --------- ----------- -------- LM LM LM LM LM LM MATURITY OF OTHER FINANCIAL LIABILITIES Amounts falling due: In one year or less or on demand...... 5 - 5 9 - 9 In more than one year but not more than two years...................... 7 11 18 5 32 37 In more than two years but not more than five years..................... 3 4 7 4 3 7 In more than five years............... - 1 1 1 - 1 --- --- --- --- --- --- 15 16 31 19 35 54 === === === === === ===
1999 1998 --------------------- --------------------- GROUP COMPANY GROUP COMPANY -------- ---------- -------- ---------- LM LM LM LM BORROWING BY INSTRUMENT UNSECURED 10.75% Sterling Bonds 2002.......................... 100 - 100 - 9.5% Sterling Bonds 2004............................ 120 - 117 - 4.625% euro Bonds 2004.............................. 345 345 - - 10.5% Sterling Bonds 2008........................... 100 100 100 100 7% Sterling Bonds 2014.............................. 251 251 - - 7.125% US Dollar Notes 2006......................... 153 - 148 - Bank loans and overdrafts and commercial paper...... 1,254 846 2,159 2,258 ----- ----- ----- ----- TOTAL BORROWINGS.................................... 2,323 1,542 2,624 2,358 ===== ===== ===== =====
1999 1998 -------- -------- LM LM UNDRAWN COMMITTED BORROWING FACILITIES Expiring within one year.................................... - - Expiring between one and two years.......................... 155 3 Expiring in more than two years............................. 362 832 --- --- 517 835 === ===
- ------------------------ Note: All of the above committed borrowing facilities incur commitment fees at market rates. F-33 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1999 ------------------------------------------------------------ WEIGHTED AVERAGE WEIGHTED PERIOD FOR TOTAL TOTAL AVERAGE WHICH RATE VARIABLE FIXED INTEREST IS FIXED- BORROWINGS RATE RATE RATE YEARS ----------- -------- --------- --------- ----------- LM LM LM % CURRENCY AND INTEREST RATE RISK PROFILE OF BORROWINGS US dollar........................ 1,795 790 1,005 6.1 4.6 Sterling......................... 280 130 150 8.5 5.0 euro............................. 248 248 - - - ----- ----- ----- --- --- 2,323 1,168 1,155 ===== ===== ===== === ===
1998 ------------------------------------------------------------ WEIGHTED AVERAGE WEIGHTED PERIOD FOR TOTAL TOTAL AVERAGE WHICH RATE VARIABLE FIXED INTEREST IS FIXED- BORROWINGS RATE RATE RATE YEARS ----------- -------- --------- --------- ----------- LM LM LM % CURRENCY AND INTEREST RATE RISK PROFILE OF BORROWINGS US dollar........................ 1,964 1,365 599 6.0 4.6 Sterling......................... 492 372 120 9.4 6.3 Spanish peseta................... 95 95 - - - French franc..................... 62 62 - - - Other currencies................. 11 11 - - - ----- ----- ----- --- --- 2,624 1,905 719 ===== ===== ===== === ===
- ------------------------ Note: The figures shown in the tables above take into account interest rate and currency swaps entered into by the Group. Variable rate borrowings bear interest at rates based on relevant national LIBOR equivalents. F-34 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1999 -------------------------------------- OTHER TOTAL FINANCIAL TOTAL NO INTEREST LIABILITIES FIXED RATE PAID ----------- ---------- ----------- LM LM LM CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER FINANCIAL LIABILITIES US dollar................................................ 21 14 7 Sterling................................................. 9 - 9 Other currencies......................................... 1 1 - -- -- -- 31 15 16 == == ==
1998 ---------------------------------------------- TOTAL OTHER TOTAL NO FINANCIAL VARIABLE TOTAL INTEREST LIABILITIES RATE FIXED RATE PAID ----------- -------- ---------- -------- LM LM LM LM CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER FINANCIAL LIABILITIES US dollar......................................... 45 - 19 26 Sterling.......................................... 5 - - 5 Spanish peseta.................................... 2 2 - - Other currencies.................................. 2 - - 2 -- --- -- -- 54 2 19 33 == === == ==
- ------------------------ Note: Variable rate financial liabilities bear interest at rates based on relevant national LIBOR equivalents.
1999 ----------------------------------------------------- NET FOREIGN MONETARY ASSETS/(LIABILITIES) US DOLLAR STERLING EURO OTHER TOTAL --------- -------- -------- -------- -------- LM LM LM LM LM CURRENCY EXPOSURES FUNCTIONAL CURRENCY OF ENTITY: US dollar........................................ - (4) 2 9 7 Sterling......................................... 21 - 6 14 41 Other currencies................................. 5 (3) - - 2 --- --- --- --- --- 26 (7) 8 23 50 === === === === ===
F-35 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1998 ---------------------------------------------------------------- NET FOREIGN MONETARY ASSETS/(LIABILITIES) FRENCH SPANISH US DOLLAR STERLING FRANCS PESETA OTHER TOTAL --------- -------- -------- -------- -------- -------- LM LM LM LM LM LM CURRENCY EXPOSURES FUNCTIONAL CURRENCY OF ENTITY: US dollar............................ - (133) 1 - 12 (120) Sterling............................. 42 - 1 2 17 62 Spanish peseta....................... - (1) - - - (1) Other currencies..................... (8) (8) - - - (16) ----- ----- -- -- -- ---- 34 (142) 2 2 29 (75) ===== ===== == == == ====
1999 --------------------------------------------- CASH AT SHORT- OTHER BANK AND TERM FINANCIAL IN HAND DEPOSITS ASSETS TOTAL --------- ---------- --------- -------- LM LM LM LM CURRENCY AND INTEREST RATE RISK PROFILE OF FINANCIAL ASSETS US dollar.......................................... 183 7 1 191 Sterling........................................... 5 17 2 24 euro............................................... 61 14 1 76 Other currencies................................... 39 2 - 41 --- -- --------- --- 288 40 4 332 === == ========= === Floating rate...................................... 221 1 - 222 Fixed rate......................................... 48 35 - 83 No interest paid................................... 19 4 4 27 --- -- --------- --- 288 40 4 332 === == ========= ===
- ------------------------ Note: Floating rate cash and deposits earn interest based on relevant national LIBID equivalents. Fixed rate cash and deposits earn interest at rates between 3% and 8.4%. F-36 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1998 --------------------------------------------- CASH AT SHORT- OTHER BANK AND TERM FINANCIAL IN HAND DEPOSITS ASSETS TOTAL --------- ---------- --------- -------- LM LM LM LM CURRENCY AND INTEREST RATE RISK PROFILE OF FINANCIAL ASSETS US dollar.......................................... 123 10 2 135 Sterling........................................... 32 17 - 49 Spanish peseta..................................... 67 - - 67 French franc....................................... 17 3 1 21 Other currencies................................... 66 10 1 77 --- -- --------- --- 305 40 4 349 === == ========= === Floating rate...................................... 199 4 - 203 Fixed rate......................................... 89 36 - 125 No interest paid................................... 17 - 4 21 --- -- --------- --- 305 40 4 349 === == ========= ===
- ------------------------ Note: Floating rate cash and deposits earn interest based on relevant national LIBID equivalents. Fixed rate cash and deposits earn interest at rates between 3% and 7.5%. F-37 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
1999 1998 ------------------------ ------------------------ BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE ----------- ---------- ----------- ---------- LM LM LM LM PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED TO FINANCE THE GROUP'S OPERATIONS Other financial assets.................... 4 4 4 4 Other financial liabilities............... (31) (31) (54) (54) Cash at bank and in hand.................. 288 288 305 305 Short-term deposits....................... 40 40 40 40 Short-term borrowings..................... (47) (47) (72) (72) Medium and long term borrowings........... (2,276) (2,307) (2,552) (2,635) ------ ------ ------ ------ DERIVATIVE FINANCIAL INSTRUMENTS HELD TO MANAGE THE INTEREST RATE AND CURRENCY PROFILE Interest rate swaps....................... - 23 - (15) Currency swaps............................ - 10 - 24 Foreign exchange swaps.................... - 1 - - ====== ====== ====== ======
- ------------------------ Note: Other financial assets, other financial liabilities, cash at bank and in hand, short-term deposits and short term borrowings: the fair value approximates to the carrying value due to the short maturity periods of these financial instruments. Medium and long term borrowings: the fair value is based on market values or, where these are not available, on the quoted market prices of comparable debt issued by other companies. Interest rate swaps: the fair value of interest rate swaps is based on market values. At December 31, 1999 the notional principal value of these swaps was L1,818m (1998: L368m). Currency swaps: the fair value of these contracts is based on market values. At December 31, 1999 the Group had L473m (1998: L117m) of such contracts outstanding. F-38 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 19 FINANCIAL INSTRUMENTS (CONTINUED)
UNRECOGNIZED ------------------------------- TOTAL NET GAINS/ DEFERRED GAINS LOSSES (LOSSES) GAINS -------- -------- --------- --------- LM LM LM LM GAINS AND LOSSES ON HEDGES AT DECEMBER 31, 1998...... 50 (41) 9 7 Gains and losses arising in previous years that were recognized in 1999................................. (2) - (2) (3) ---- --- --- --------- GAINS AND LOSSES ARISING BEFORE DECEMBER 31, 1998 THAT WERE NOT RECOGNIZED IN 1999................... 48 (41) 7 4 Gains and losses arising in 1999 that were not recognized in 1999................................. 3 24 27 - ---- --- --- --------- UNRECOGNIZED GAINS AND LOSSES ON HEDGES AT DECEMBER 31, 1999........................................... 51 (17) 34 4 ---- --- --- --------- Of which: Gains & losses expected to be recognized in 2000............................................... 2 (1) 1 3 Gains & losses expected to be recognized in 2001 or later.............................................. 49 (16) 33 1 ==== === === =========
F-39 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 20 OTHER CREDITORS
1999 1998 -------- -------- LM LM AMOUNTS FALLING DUE WITHIN ONE YEAR Trade creditors............................................. 473 371 Taxation.................................................... 294 299 Social security and other taxes............................. 28 33 Other creditors............................................. 74 101 Accruals and deferred income................................ 482 388 Obligations under finance leases............................ 5 9 Dividends................................................... 85 81 ----- ----- 1,441 1,282 ===== ===== AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Trade creditors............................................. 2 21 Other creditors............................................. 10 7 Accruals and deferred income................................ 10 16 Obligations under finance leases............................ 10 10 ----- ----- 32 54 ===== =====
- ------------------------ Note: Accruals and deferred income includes L4m (1998: L7m) relating to the unamortized 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 L100m 10.75% Sterling Bonds 2002. The profit is being amortized over the remaining life of the bonds. L1m (1998: L5m) is due after one year. None of the amount falls due after five years. F-40 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 21 DEFERRED TAXATION
1999 1998 -------- -------- LM LM SUMMARY OF MOVEMENTS At December 31.............................................. 20 37 Exchange differences........................................ (3) 1 Subsidiary undertakings acquired/(disposed)................. (2) (14) Net charge/(release) in the year............................ 6 (3) Transfer to current taxation................................ - (1) -- --- AT DECEMBER 31.............................................. 21 20 == ===
1999 1998 -------- -------- LM LM DEFERRED TAXATION DERIVES FROM Capital allowances.......................................... 1 7 Taxation on unremitted overseas earnings.................... 18 15 Other timing differences.................................... 2 (2) -- -- 21 20 == == DEFERRED TAXATION NOT PROVIDED Relating to revalued assets and timing differences.......... 4 (1) Relating to gains subject to roll-over relief............... 1 2 -- -- 5 1 == ==
- ------------------------ Note: The Group has calculated deferred tax not provided on rolled over gains in 1999 taking into account the indexation allowance which would be deductible on a disposal of the asset into which the gain was rolled. 1998 has been restated on this basis. F-41 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 22 OTHER PROVISIONS FOR LIABILITIES AND CHARGES
1999 ---------------------------------- POST- RETIREMENT OTHER TOTAL ------------ -------- -------- LM LM LM At December 31, 1998........................................ 100 153 253 Exchange differences........................................ 2 3 5 Subsidiary undertakings acquired/disposed................... (12) (3) (15) Deferred consideration arising on acquisitions.............. - 4 4 Transfers................................................... - 1 1 Released.................................................... (1) (9) (10) Provided.................................................... 27 24 51 Utilized.................................................... (21) (62) (83) --- --- --- AT DECEMBER 31, 1999........................................ 95 111 206 === === ===
1998 ---------------------------------- POST- RETIREMENT OTHER TOTAL ------------ -------- -------- LM LM LM At December 31, 1997........................................ 34 141 175 Exchange differences........................................ - (1) (1) Subsidiary undertakings acquired/disposed................... 63 31 94 Deferred consideration arising on acquisitions.............. - 1 1 Transfers................................................... - 7 7 Released.................................................... (1) (1) (2) Provided.................................................... 14 47 61 Utilised.................................................... (10) (72) (82) --- --- --- AT DECEMBER 31, 1998........................................ 100 153 253 === === ===
- -------------------------- Note: Post-retirement provisions, based on actuarial assumptions, are in respect of pensions, L35m (1998: L30m) and post-retirement medical benefits, L60m (1998: L70m). Other provisions are mainly in respect of: a. Deferred consideration relating to the purchase of subsidiary and associated undertakings, L29m (1998: L34m). During the year L9m was utilized. Included within the year end balance is L10m which relates to the purchase of All American Communications in 1997, the utilization of which is dependent upon the performance of certain television shows over the next year. b. Litigation, L12m (1998: L12m). During the year L6m has been utilized, L4m released, L3m provided in respect of the Simon & Schuster acquisition, and L6m provided in respect of warranty and legal claims, the amount and timings of the settlement of which is unknown. c. Reorganization and redundancies, L27m (1998: L51m). During the year L3m has been released, L10m provided and L33m utilized mainly in respect of the integration of Simon & Schuster following its acquisition in 1998. The balance is expected to be utilized in the year ended December 31 2000 and is based on current reorganization plans. d. Lease commitments, L27m (1998: L35m). These relate primarily to onerous lease contracts, acquired as part of the purchase of subsidiary undertakings, which have expiry dates up to 2010. The provision is based on current occupancy estimates and it has been assumed that the properties will not be sub-let. During the year L3m has been utilized, L4m charged and L2m removed through disposals. e. Disposals and closures, L3m (1998: L6m). During the year L2m has been utilized in respect of a number of closures which are anticipated to be completed during the year ended December 31, 2000. f. Other, L13m (1998: L15m). During the year the balance was reduced by L6m in respect of Simon & Schuster acquisition and L4m provided. The balance, which relates to a number of small items, is expected to be utilized over varying time periods. F-42 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 23 SHARE CAPITAL
1999 ------------------- NUMBER -------- -------- ('000) LM AUTHORIZED Ordinary shares of 25p each................................. 894,000 212 ------- --- AT DECEMBER 31, 1999........................................ 894,000 212 ======= === CALLED UP, ALLOTTED AND FULLY PAID Ordinary shares of 25p at December 31, 1998................. 609,555 152 Issued under share option and employee share schemes........ 3,115 1 ------- --- AT DECEMBER 31, 1999........................................ 612,670 153 ======= ===
1998 ------------------- NUMBER -------- -------- ('000) LM AUTHORIZED Ordinary shares of 25p each................................. 846,000 212 ------- --- AT DECEMBER 31, 1998........................................ 846,000 212 ======= === CALLED UP, ALLOTTED AND FULLY PAID Ordinary shares of 25p at December 31, 1997................. 576,772 144 Issued under share option and employee share schemes........ 3,611 1 Issued under scrip dividend scheme.......................... 292 - Issued under placing........................................ 28,880 7 ------- --- AT DECEMBER 31, 1998........................................ 609,555 152 ======= ===
- ------------------------ Note: 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 L18m (1998: L347m). 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 for Share" 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 1,814 under the Save for Shares scheme and 15,073 under the executive schemes. Shares issued include Lnil (1998: L3m) under the scrip dividend plan. F-43 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 23 SHARE CAPITAL (CONTINUED)
NUMBER OF ORIGINAL WHEN SHARES SUBSCRIPTION EXERCISE GRANTED ('000) PRICE (P) PERIOD -------- ---------- ------------------ ---------------- OPTIONS OUTSTANDING AT DECEMBER 31, 1999 Worldwide Save for Shares plans................ 1992 39 242 1997-2000 1994 100 509 1999-2002 1995 429 436 2000-2003 1996 335 578 2001-2004 1997 422 593 2000-2005 1998 1,225 769 2000-2006 1999 1,416 1,022-1,086 2001-2007 ------ 3,966 ====== Executive share option plans................... 1990 148 307-334 1993-2000 1991 59 364-377 1994-2001 1992 100 327-379 1995-2002 1993 125 396 1996-2003 1994 265 635 1997-2004 1995 438 545 1998-2005 1996 999 654-682 1999-2006 1997 2,410 744-757 2000-2007 1998 2,971 948-1,090 2001-2008 1999 3,479 1,210-1,285 2002-2009 ------ 10,994 ====== OPTIONS OUTSTANDING AT DECEMBER 31, 1998 Worldwide Save for Shares plans................ 1991 64 299 1996-1999 1992 268 242 1997-2000 1994 478 509 1999-2002 1995 583 436 2000-2003 1996 455 578 2001-2004 1997 601 593 2000-2005 1998 1,674 769 2000-2006 ------ 4,123 ====== Executive share option plans................... 1989 10 376 1992-1999 1990 231 307-334 1993-2000 1991 59 364-377 1994-2001 1992 275 327-379 1995-2002 1993 125 396 1996-2003 1994 460 635 1997-2004 1995 658 545 1998-2005 1996 1,316 654-682 1999-2006 1997 2,605 744-757 2000-2007 1998 3,167 948-1,090 2001-2008 ------ ------ ------------------ ---------------- 8,906 ======
- -------------------------- Note: The subscription prices have been rounded down to the nearest whole penny. F-44 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 24 RESERVES
1999 ----------------------------------------------------------- SHARE PROFIT PREMIUM REVALUATION OTHER AND LOSS ACCOUNT RESERVE RESERVES ACCOUNT TOTAL --------- ------------ --------- --------- -------- LM LM LM LM LM SUMMARY OF MOVEMENTS At December 31, 1998................... 498 1 1 396 896 Exchange differences................... - (1) (1) 38 36 Premium on issue of 3m equity shares... 19 - - (2) 17 Goodwill written back (see note 26).... - - - 63 63 Profit retained for the year........... - - - 156 156 --- -- -- --- ----- AT DECEMBER 31, 1999................... 517 - - 651 1,168 === == == === ===== ANALYZED AS: Partnerships and other associates...... - - - 43 43 Group excluding partnerships and other associates........................... 517 - - 608 1,125 === == == === =====
1998 ------------------------------------------------------------ SHARE PROFIT PREMIUM REVALUATION OTHER AND LOSS ACCOUNT RESERVE RESERVES ACCOUNT TOTAL --------- ------------ --------- ---------- -------- LM LM LM LM LM SUMMARY OF MOVEMENTS At December 31, 1997.................. 158 3 1 (154) 8 Exchange differences.................. - - - (8) (8) Premium on issue of 33m equity shares.............................. 340 - - (1) 339 Goodwill arising...................... - - - (16) (16) Goodwill written back................. - - - 262 262 Realization of revaluation reserve.... - (2) - 2 - Profit retained for the year.......... - - - 311 311 --- -------- -------- ---- --- AT DECEMBER 31, 1998.................. 498 1 1 396 896 === ======== ======== ==== === ANALYZED AS: Partnerships and other associates..... - - 1 2 3 Group excluding partnerships and other associates.......................... 498 1 - 394 893 === ======== ======== ==== ===
- ------------------------ Note: Cumulative goodwill relating to acquisitions made prior to 1998, which was deducted from reserves, amounts to L1,870m (1998: L1,912m). During the year L7m (1998: Lnil) of impaired goodwill was written off through the profit and loss account. During 1999 Pearson plc received L20m (1998: L17m) on the issue of shares in respect of the exercise of options awarded under various share option plans. Employees paid L18m (1998: L16m) to the Group for the issue of these shares and the balance of L2m (1998: L1m) comprised contributions to the qualifying employee share ownership trust (QUEST) from subsidiary undertakings. F-45 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 25 ACQUISITIONS In November 1998 the Group acquired the education, reference and business & professional publishing divisions of Simon & Schuster Inc. All acquisitions have been consolidated applying acquisition accounting principles.
1999 1998 -------- ------------------------------- SIMON & TOTAL SCHUSTER OTHER TOTAL -------- --------- -------- -------- LM LM LM LM ACQUISITION ANALYSIS OF SUBSIDIARIES AND BUSINESSES Tangible fixed assets................................... (4) 126 17 143 Stocks.................................................. (2) 299 - 299 Debtors................................................. 9 306 5 311 Current asset investments............................... 27 151 - 151 Creditors............................................... (20) (236) (22) (258) Provisions.............................................. 10 (86) - (86) Deferred taxation....................................... 1 (1) 2 1 Equity minority interests............................... 32 - 2 2 Net borrowing acquired.................................. - (3) 1 (2) ---- ------ --- ------ Net assets acquired at fair value....................... 53 556 5 561 ---- ------ --- ------ Fair value of consideration: Cash.................................................... (267) (2,865) (53) (2,918) Deferred cash consideration............................. (4) - 1 1 Costs accrued........................................... (2) (3) (1) (4) Net prior year adjustments.............................. 33 - (4) (4) ---- ------ --- ------ Total consideration..................................... (240) (2,868) (57) (2,925) ---- ------ --- ------ GOODWILL ARISING........................................ 187 2,312 52 2,364 ==== ====== === ====== Analyzed as: Goodwill capitalized.................................... 187 2,312 36 2,348 Goodwill written off to reserves........................ - - 16 16 ---- ------ --- ------ 187 2,312 52 2,364 ==== ====== === ======
- ------------------------ Note: Goodwill written off to reserves relates to acquisitions made before January 1, 1998. 1999 includes final fair value adjustments in respect of Simon & Schuster which was acquired in 1998 (see page F-47). F-46 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 25 ACQUISITIONS (CONTINUED)
1999 1998 -------- ------------------------------- SIMON & TOTAL SCHUSTER OTHER TOTAL -------- --------- -------- -------- LM LM LM LM ACQUISITION GOODWILL AND FAIR VALUES Acquisition cost........................................... 240 2,868 57 2,925 --- ----- --- ----- Book value of net assets acquired.......................... 37 569 15 584 Simon & Schuster final fair value adjustments (see below)................................................... 22 - - - Other fair value of adjustments............................ (6) (13) (10) (23) --- ----- --- ----- Fair value to the Group.................................... 53 556 5 561 --- ----- --- ----- GOODWILL ARISING........................................... 187 2,312 52 2,364 === ===== === =====
PROVISIONAL FINAL FAIR VALUE OTHER FAIR VALUE DEC 31, 1998 REVALUATIONS ITEMS DEC 31, 1999 ------------- ------------- -------- ------------- LM LM LM LM SIMON & SCHUSTER Tangible fixed assets................... 126 (5) - 121 Stocks.................................. 299 (12) a 6 293 Debtors................................. 306 (12) b 9 303 Current asset investments............... 151 - 27 178 Creditors............................... (236) 6 c (7) (237) Provisions.............................. (86) 10 d - (76) Deferred tax............................ (1) - - (1) Net borrowing........................... (3) - - (3) ---- ----- -- ---- NET ASSETS ACQUIRED..................... 556 (13) 35 578 ==== ===== == ====
- ------------------------ Note: Simon & Schuster was acquired at the end of 1998 and provisional fair value adjustments were made in the 1998 accounts. Final fair value adjustments have been made in 1999. REVALUATIONS a. In respect of obsolete product L6m of acquired finished goods and work in progress has been written off. Pre-publication expenditure has been reduced by L2m to its net realizable value. b. Debtors have been reduced by L12m to bring them to their net realizable value. This is to increase the reserve for returns in view of actual returns experienced in 1999 in respect of pre-acquisition sales. Further provision has been made for debts acquired which could not be collected. c. Certain excess accruals included in the acquisition balance sheet, no longer required, have been released. F-47 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 25 ACQUISITIONS (CONTINUED) d. Acquired pension and post-retirement medical benefit obligations have been reduced by L22m following actuarial valuations performed during the year. Further contractual pension liabilities of L6m have been accrued. OTHER ITEMS Other items relate to the businesses of Simon & Schuster that Pearson held for resale. These businesses were included in current asset investments at the anticipated net proceeds from sale. During 1999 these businesses, except Prentice Hall Direct, were sold with net proceeds exceeding the original estimate. The net assets of Prentice Hall Direct have been reinstated in the balance sheet. SIMON & SCHUSTER IMPAIRMENT REVIEW An initial impairment review has been carried out in 1999 in respect of Simon & Schuster, following its acquisition in November 1998, which compared the post-acquisition performance of the business with the pre-acquisition forecasts used to support the purchase price. This review indicated that the post-acquisition performance had met the pre-acquisition expectations. As such there has been no impairment of goodwill.
1999 ---------------------------------- NET ASSETS COST ACQUIRED GOODWILL -------- ----------- --------- LM LM LM TOTAL GOODWILL ARISING ON ACQUISITIONS Subsidiaries and businesses (see page F-46)................. 240 53 187 Associates.................................................. 54 25 29 --- -- --- 294 78 216 === == ===
1998 ---------------------------------- NET ASSETS COST ACQUIRED GOODWILL -------- ----------- --------- LM LM LM TOTAL GOODWILL ARISING ON ACQUISITIONS Subsidiaries and businesses (see page F-46)................. 2,925 561 2,364 Associates.................................................. 13 13 - ----- --- ----- 2,938 574 2,364 ===== === =====
F-48 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 25 ACQUISITIONS (CONTINUED)
1999 1998 1997 -------- -------- -------- LM LM LM CASH FLOW FROM ACQUISITIONS Cash-current year acquisitions (see page F-46).............. 267 2,918 252 Deferred payments for prior year acquisitions and other items..................................................... (18) 18 17 --- ----- --- Net cash outflow............................................ 249 2,936 269 === ===== ===
- ------------------------ Note: Contributions to the cash flow from acquisitions in 1999 are as follows: net cash inflow from operating activities L1m (1998: L15m; 1997:L1m), returns on investments and servicing of finance Lnil (1998: L(1)m; 1997: L(1)m), taxation Lnil (1998: L(1)m; 1997: Lnil) and capital expenditure and financial investment Lnil (1998: L(7)m; 1997: Lnil). 26 DISPOSALS
1999 1998 1997 -------- -------- -------- TOTAL TOTAL TOTAL -------- -------- -------- LM LM LM DISPOSAL ANALYSIS OF SUBSIDIARIES AND BUSINESSES Intangible assets........................................... (1) - - Tangible fixed assets....................................... (14) (203) (4) Investments................................................. - (5) - Associates.................................................. - (6) - Stocks...................................................... (4) (16) (12) Debtors..................................................... (20) (66) (14) Creditors and taxation...................................... 22 84 3 Provisions.................................................. 5 (8) (3) Deferred taxation........................................... 1 13 (1) Equity minority interest.................................... - (30) 1 Net cash.................................................... (3) (11) (1) --- ---- --- Net assets disposed of...................................... (14) (248) (31) --- ---- --- Proceeds received........................................... 57 762 62 Deferred consideration...................................... - 2 3 Costs....................................................... (19) (42) (4) Net prior year adjustments.................................. (5) - (1) --- ---- --- Profit on sale.............................................. 19 474 29 --- ---- --- Goodwill written back....................................... (63) (245) (9) --- ---- --- NET (LOSS)/PROFIT ON SALE................................... (44) 229 20 === ==== ===
- ------------------------ Note: During 1999 the Group sold its Extel research products business for L19m giving rise to a loss of L19m. During 1998 the Group sold Mindscape Inc. for L91m giving rise to a profit of L59m, Pearson New Entertainment business for L125m with a profit of L121m and The Tussauds Group for L352m generating a profit of L171m. During 1997 the Group sold Churchill Livingstone for L57m with a profit of L30m. F-49 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 26 DISPOSALS (CONTINUED)
1999 1998 1997 -------- -------- -------- LM LM LM TOTAL GOODWILL WRITTEN BACK ON DISPOSAL On disposal of subsidiaries................................. 63 245 221 On disposal of associates................................... - 16 11 On disposal by associates................................... - 1 1 -- --- --- 63 262 233 == === === CASH FLOW FROM DISPOSALS Cash-current year disposals (see page F-50)................. 57 762 62 Costs paid.................................................. (9) (38) (3) Deferred receipts and payments from prior year disposals and other amounts............................................. (4) (6) (5) -- --- --- NET CASH INFLOW............................................. 44 718 54 == === ===
- ------------------------ Note: Contributions to the cash flow from disposals in 1999 are as follows: net cash inflow from operating activities L4m (1998: L45m; 1997: L1m), returns on investment and servicing of finance Lnil (1998: L(3)m; 1997: L(1)m), taxation Lnil (1998: L(11)m; 1997: Lnil) and capital expenditure and financial investment Lnil (1998: L(14)m; 1997: Lnil). F-50 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS
1999 1998 1997 ------------------------------ ------------------------------ ------------------------------ CON- DISCON- CON- DISCON- CON- DISCON- TINUING TINUED TOTAL TINUING TINUED TOTAL TINUING TINUED TOTAL -------- -------- -------- -------- -------- -------- -------- -------- -------- LM LM LM LM LM LM LM LM LM A) RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Operating profit--total........ 270 48 318 187 63 250 252 76 328 Share of profit of partnerships and other associates......... (23) (48) (71) (11) (40) (51) - (47) (47) Depreciation charges........... 82 - 82 54 12 66 49 16 65 Goodwill amortization.......... 130 - 130 12 - 12 - - - (Increase)/decrease in stocks....................... (57) - (57) 43 1 44 7 (2) 5 (Increase) in debtors.......... (71) - (71) (67) 5 (62) (131) (8) (139) Increase/(decrease) in creditors.................... 127 - 127 113 - 113 (8) 4 (4) (Decrease)/increase in operating provisions......... (33) - (33) 2 - 2 (3) (1) (4) Other and non-cash items....... 8 - 8 28 - 28 (1) 1 - ---- --- ---- ---- --- ---- ---- --- ---- NET CASH INFLOW FROM OPERATING ACTIVITIES*.................. 433 - 433 361 41 402 165 39 204 ==== === ==== ==== === ==== ==== === ==== Purchase of fixed assets and finance leases............... (113) - (113) (113) (13) (126) (93) (18) (111) Sale of operating tangible fixed assets................. 24 - 24 12 1 13 14 - 14 Dividends from partnerships and other associates............. 12 32 44 12 41 53 13 27 40 Other.......................... 8 - 8 25 2 27 10 2 12 ---- --- ---- ---- --- ---- ---- --- ---- OPERATING CASH FLOW............ 364 32 396 297 72 369 109 50 159 ==== === ==== ==== === ==== ==== === ====
- ------------------------ *Net cash inflow from 1999 includes a L54m (1998: L7m; 1997: L9m) outflow relating to exceptional items charged in 1999 and a L36m (1998: L14m; 1997: L11m) outflow relating to exceptional items charged in prior years. F-51 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
DEBT DUE DEBT SHORT- WITHIN DUE TERM ONE AFTER ONE FINANCE CASH OVERDRAFTS SUB-TOTAL DEPOSITS YEAR YEAR LEASES TOTAL -------- ---------- --------- -------- -------- --------- -------- -------- LM LM LM LM LM LM LM LM B) ANALYSIS OF NET DEBT At December 31, 1998...... 305 (67) 238 40 (5) (2,552) (19) (2,298) Exchange differences...... (23) 3 (20) 1 - (30) (1) (50) Disposed with subsidiary*............. - - - - - - 1 1 Debt issue costs.......... - - - - - 5 - 5 Other non-cash items...... - - - - - (5) (7) (12) Net cash flow............. 6 26 32 (1) (4) 306 11 344 --- --- --- --- ---- ------ --- ------ AT DECEMBER 31, 1999...... 288 (38) 250 40 (9) (2,276) (15) (2,010) === === === === ==== ====== === ====== At December 31, 1997...... 144 (23) 121 71 (290) (609) (1) (708) Exchange differences...... (30) 1 (29) 14 - 10 - (5) Acquired with subsidiary*............. - - - - - - (19) (19) Disposed with subsidiary*............. - - - - 5 1 - 6 Debt issue costs.......... - - - - - 21 - 21 Other non-cash items...... - - - - - (1) - (1) Net cash flow............. 191 (45) 146 (45) 280 (1,974) 1 (1,592) --- --- --- --- ---- ------ --- ------ AT DECEMBER 31, 1998...... 305 (67) 238 40 (5) (2,552) (19) (2,298) === === === === ==== ====== === ====== At December 31, 1996...... 139 (69) 70 160 (105) (555) (2) (432) Exchange differences...... (8) (11) (19) - - (3) - (22) Acquired with subsidiary*............. - - - - (54) (66) - (120) Transfers................. - - - - (8) 8 - - Net cash flow............. 13 57 70 (89) (123) 7 1 (134) --- --- --- --- ---- ------ --- ------ AT DECEMBER 31, 1997...... 144 (23) 121 71 (290) (609) (1) (708) === === === === ==== ====== === ======
- ------------------------ *Excluding cash and overdrafts Note: Finance leases are included within other creditors in the balance sheet (see note 20). F-52 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
1999 1998 1997 -------- -------- -------- LM LM LM C) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Decrease in net debt from net cash flow..................... 32 146 70 (Increase) in net debt from management of liquid resources................................................. (1) (45) (89) Decrease/(increase) in net debt from other borrowings....... 302 (1,694) (116) Decrease in finance leases.................................. 11 1 1 Acquired with subsidiary.................................... - (19) (120) Disposed with subsidiary.................................... 1 6 - Debt issue costs............................................ 5 21 - Other non-cash items........................................ (12) (1) - Exchange differences........................................ (50) (5) (22) ------ ------ ---- Movement in net debt in the year............................ 288 (1,590) (276) Net debt at beginning of year............................... (2,298) (708) (432) ------ ------ ---- NET DEBT AT END OF YEAR..................................... (2,010) (2,298) (708) ====== ====== ====
TAX PAID Includes L100m (1998: L3m; 1997: L4m of credits) relating to items excluded from operating profit. 28 COMMITMENTS UNDER LEASES At December 31, 1999, the Group had commitments under leases other than finance leases, to make payments in 2000 as follows:
LAND AND BUILDINGS OTHER --------- -------- LM LM FOR LEASES EXPIRING: In 2000..................................................... 6 3 Between 2001 and 2004....................................... 17 19 Thereafter.................................................. 40 5 -- -- 63 27 == ==
At December 31, 1998, the Group had commitments under leases other than finance leases, to make payments in 1999 as follows:
LAND AND BUILDINGS OTHER --------- -------- LM LM FOR LEASES EXPIRING: In 1999..................................................... 6 2 Between 2000 and 2003....................................... 25 18 Thereafter.................................................. 32 6 -- -- 63 26 == ==
F-53 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 29 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 subsidiaries and associates. In addition there are contingent liabilities of the Group in respect of legal claims and general partnership interests (see note 13). None of these claims is expected to result in a material gain or loss to the Group. 30 RELATED PARTIES ASSOCIATES Loans and equity advanced to associates during the year and at the balance sheet date are shown in note 13. Amounts falling due from partnerships and other associates are set out in note 16. Dividends receivable from partnerships and other associates are set out in note 13. Details of individually significant transactions are shown below. CHANNEL 5 TELEVISION GROUP LTD The Group has a 24% economic interest in the equity of Channel 5 Television Group Ltd. During the year the Group provided L31m (1998: L24m) of programming to Channel 5 Broadcasting Ltd, a wholly owned subsidiary of Channel 5 Television Group Ltd, and undertook transmission to the value of L3m (1998: L2m) for Channel 5 Engineering Services Ltd, a subsidiary of Channel 5 Television Group Ltd. At December 31, 1999 L6m was outstanding (1998: L6m). During the year the Group paid L4m (1998: L6m) for L20m consortium relief (1998: L29m). UK TV The Group has a 20% interest in UK TV. During the year the Group provided programs and services to the value of Lnil (1998: L1m). GRUNDY ASSOCIATES During the year the Group received L3m (1998: L3m) for management fees, format rights and royalties from a number of associates of Grundy Worldwide Ltd, of which L2m (1998: Lnil) was outstanding at the year end. No individual transactions were material to the Group. MAGYAR-RTL The Group has a 20% interest in Magyar-RTL. During the year the Group provided programs and services to the value of L1m (1998: L1m) none of which was outstanding at the year end (1998: Lnil). LAZARD PARTNERSHIP Details of the ownership structure and profit sharing arrangements are set out in Note 13. 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 F-54 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 30 RELATED PARTIES (CONTINUED) Group treasury transactions. The Group also uses the Lazard Houses to provide professional advice. Fees for such services for the year to December 31, 1999 totalled L1m (1998: L5m). EUROPEAN CHANNEL MANAGEMENT LTD During 1998 the Group sold its 45% interest in European Channel Management Ltd. During 1998 the Group paid L1m for L6m of tax losses. There were no transactions during 1999. OTHER There were no transactions with directors and officers of the Company. 31 POST BALANCE SHEET EVENTS On January 26, 2000 Pearson placed 11,500,000 ordinary shares to raise approximately L250m, after expenses, to fund its existing and new internet related businesses and on February 1, 2000 Pearson issued [EURO]650,000,000 Bonds due 2007, the proceeds of which were used to repay existing bank debt. On February 15, 2000 Pearson increased its economic interest in Channel 5 Television Group Ltd, the UK terrestrial broadcaster, from 24% to 29.25% at a cost of L51m. On February 29, 2000 the merger of Pearson's asset valuation business with the Data Broadcasting Corporation, announced in November 1999, was completed. On March 3, 2000 the sale of Pearson's interests in the three Lazard houses, announced in June 1999, was completed with proceeds totalling L436m. On March 31, 2000 Pearson announced that it had made a recommended cash offer of approximately L311m for Dorling Kindersley Holdings plc, the world-wide illustrated reference publisher. This offer went unconditional on May 9, 2000. On April 7, 2000 Pearson announced the merger of Pearson Television with CLT-UFA, Europe's largest broadcaster, whereby following the completion of the transaction Pearson will own 22% of the enlarged company. F-55 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 32 COMPANY BALANCE SHEET AS AT DECEMBER 31, 1999
1999 1998 NOTE -------- -------- LM LM FIXED ASSETS Investments: Subsidiaries................................................ 33 2,401 2,598 Own shares held............................................. 33 8 - ------ ------ 2,409 2,598 ------ ------ CURRENT ASSETS Debtors: Subsidiaries--due within one year........................... 2,233 2,774 Subsidiaries--due after more than one year.................. 1,403 1,268 Other debtors............................................... 6 8 Prepayments and accrued income.............................. 1 10 Cash at bank and in hand.................................... 18 7 6 ------ ------ 3,650 4,066 ------ ------ CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR Short-term borrowing........................................ 19 (130) (172) Subsidiaries................................................ (1,844) (2,082) Taxation.................................................... (20) (5) Other creditors............................................. (4) - Accruals and deferred income................................ 33 (30) (28) Dividends................................................... (85) (79) ------ ------ (2,113) (2,366) ------ ------ NET CURRENT ASSETS.......................................... 1,537 1,700 ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,946 4,298 CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium and long term borrowings............................. 19 (1,412) (2,186) Subsidiaries................................................ (280) (225) Accruals and deferred income................................ 33 (3) (5) PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation........................................... 33 (1) (1) Other provisions for liabilities and charges................ (2) (2) ------ ------ (1,698) (2,419) ------ ------ NET ASSETS.................................................. 2,248 1,879 ====== ====== CAPITAL AND RESERVES Called up share capital..................................... 23 153 152 Share premium account....................................... 33 517 498 Special reserve............................................. 33 397 397 Other reserves.............................................. 33 50 50 Profit and loss account..................................... 33 1,131 782 ------ ------ EQUITY SHAREHOLDERS' FUNDS.................................. 2,248 1,879 ====== ======
F-56 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 33 NOTES TO THE COMPANY BALANCE SHEET
1999 1998 -------- -------- LM LM TANGIBLE FIXED ASSETS (LEASEHOLD PROPERTY) Cost........................................................ 1 1 Depreciation................................................ (1) (1) -- -- NET BOOK VALUE.............................................. - - == ==
- ------------------------ Note: There were no capital commitments for fixed assets at December 31, 1999 or December 31, 1998.
1999 1998 -------- -------- LM LM INVESTMENT IN SUBSIDIARIES At December 31.............................................. 2,598 1,963 Acquisition from subsidiaries............................... - 22 Subscription for additional share capital in subsidiaries... 3 700 Disposals................................................... (195) (89) Revaluations................................................ (5) 2 ----- ----- AT DECEMBER 31.............................................. 2,401 2,598 ===== =====
- ------------------------ Note: Shares are stated at cost less provisions for diminution in value or directors' valuations.
1999 1998 -------- -------- LM LM DEFERRED TAXATION At December 31.............................................. (1) - Charged in the year......................................... - (1) -- -- AT DECEMBER 31.............................................. (1) (1) == ==
- ------------------------ Note: Deferred taxation derives from other timing differences. OWN SHARES HELD Amounts included within own shares relate to Pearson plc ordinary shares held in respect of the Pearson Employee Share Trust and Pearson plc Employee Share Ownership Trust. ACCRUALS AND DEFERRED INCOME Accruals and deferred income includes L4m (1998: L7m) relating to the unamortized 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 L100m 10.75% Sterling Bonds 2002. The profit is being F-57 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 33 NOTES TO THE COMPANY BALANCE SHEET (CONTINUED) amortized over the remaining life of the bonds. L1m (1998: L5m) is due after one year. None of the amount falls due after five years.
SHARE PROFIT PREMIUM SPECIAL OTHER AND LOSS ACCOUNT RESERVE RESERVES ACCOUNT TOTAL --------- --------- --------- --------- -------- LM LM LM LM LM RESERVES SUMMARY OF MOVEMENTS At December 31, 1998...................... 498 397 50 782 1,727 Premium on issue of 3m equity shares...... 19 - - - 19 Profit for the financial year............. - - - 487 487 Dividends................................. - - - (138) (138) --- --- -- ----- ----- AT DECEMBER 31, 1999...................... 517 397 50 1,131 2,095 === === == ===== =====
SHARE PROFIT PREMIUM SPECIAL OTHER AND LOSS ACCOUNT RESERVE RESERVES ACCOUNT TOTAL --------- --------- --------- --------- -------- LM LM LM LM LM RESERVES SUMMARY OF MOVEMENTS At December 31, 1997...................... 158 397 50 688 1,293 Premium on issue of 33m equity shares..... 340 - - - 340 Profit for the financial year............. - - - 220 220 Dividends................................. - - - (126) (126) --- --- -- ---- ----- AT DECEMBER 31, 1998...................... 498 397 50 782 1,727 === === == ==== =====
- ------------------------ Note: 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. F-58 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Kingdom ("UK GAAP"), which differ in certain material respects from generally accepted accounting principles in the United States ("US GAAP"). Such differences involve methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP. The following is a summary of the material adjustments to consolidated profit for the financial year and consolidated shareholders' funds that would have been required in applying the significant differences between UK and US GAAP. RECONCILIATION OF CONSOLIDATED PROFIT FOR THE FINANCIAL YEAR
YEAR ENDED DECEMBER 31 ---------------------- 1999 1998 NOTE -------- -------- PROFIT FOR THE FINANCIAL YEAR UNDER UK GAAP................. 294 437 US GAAP adjustments: Goodwill amortization..................................... (i) (40) (68) Intangible amortization................................... (i) (178) (91) Gain from sale of businesses.............................. (ii) 22 97 Restructuring costs....................................... (iii) (6) (13) Pensions and other post-retirement benefits............... (iv) 8 12 Deferred taxation......................................... (v) 32 25 Options................................................... (vii) (8) (4) Derivatives............................................... (viii) 13 (22) Capitalized costs......................................... (ix) - (3) Acquisition adjustments................................... (x) 16 55 Partnerships and associates............................... (xi) (15) 5 Taxation effect of US GAAP adjustments.................... (v) 60 14 ------ ------ Total US GAAP adjustments................................... (96) 7 ------ ------ PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP................. 198 444 ====== ====== Profit from continuing operations (less charge for applicable taxes 1999: L70m, 1998: L120m)................. 168 122 Profit from discontinued operations (less charge for applicable taxes 1999: L18m, 1998: L28m).................. 30 322 ------ ------ PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP................. 198 444 ====== ======
F-59 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
YEAR ENDED DECEMBER 31 ---------------------- 1999 1998 NOTE -------- -------- PRESENTATION OF EARNINGS PER EQUITY SHARE UNDER US GAAP (P) (P) Earnings per equity share................................... (xv) Basic: Continuing operations....................................... 27.5 20.7 Discontinued operations..................................... 4.9 54.6 ------ ------ Total....................................................... 32.4 75.3 ====== ====== Diluted: Continuing operations....................................... 27.2 20.5 Discontinued operations..................................... 4.9 54.1 ------ ------ Total....................................................... 32.1 74.6 ====== ====== Average shares outstanding (millions)....................... 610.2 589.8 Dilutive effect of stock options (millions)................. 7.0 5.1 ------ ------ Average number of shares outstanding assuming dilution (millions)................................................ 617.2 594.9 ====== ======
F-60 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' FUNDS
YEAR ENDED DECEMBER 31 ---------------------- 1999 1998 NOTE -------- -------- LM LM SHAREHOLDERS' FUNDS UNDER UK GAAP........................... 1,321 1,048 US GAAP adjustments: Goodwill.................................................. (i) 591 753 Intangibles............................................... (i) 1,322 1,194 Goodwill amortization..................................... (i) (362) (343) Intangible amortization................................... (i) (522) (336) Restructuring costs....................................... (iii) 7 9 Pensions and other post-retirement benefits............... (iv) 4 (4) Deferred taxation......................................... (v) 464 364 Leases.................................................... (vi) (4) (4) Derivatives............................................... (viii) 36 23 Capitalized costs......................................... (ix) (3) (3) Acquisition adjustments................................... (x) 3 5 Partnerships and associates............................... (xi) (4) 11 Ordinary dividends........................................ (xii) 85 81 Fixed asset investments................................... (xiii) 19 - Interest in shares of Pearson plc......................... (xiv) (10) (2) Taxation effect of US GAAP adjustments.................... (v) (332) (328) ------ ------ Total US GAAP adjustments................................... 1,294 1,420 ------ ------ SHAREHOLDERS' FUNDS UNDER US GAAP........................... 2,615 2,468 ====== ======
A summary of the principal differences and additional disclosures applicable to the Group are set out below: (I) GOODWILL, INTANGIBLES AND AMORTIZATION Both UK GAAP and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value on the date of acquisition, with the difference between the consideration and the fair value of the identifiable net assets recorded as goodwill. Under UK GAAP for periods ending prior to January 1, 1998, the Group has written off goodwill directly to the profit and loss reserve in the year of acquisition. If a subsidiary or a business is subsequently sold or closed, previously written off goodwill which was the result of the initial acquisition is taken into account in determining the profit or loss on sale or closure. For the purposes of US GAAP, all goodwill written off against reserves under UK GAAP has been reinstated as an asset on the balance sheet and is being amortized using the straight line method over a range of estimated useful lives of between 5 and 20 years. F-61 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Under UK GAAP in order to recognize an intangible asset, the Group must be able to disposed of it without disposing of the business to which it relates. Accordingly under UK GAAP no acquired intangible assets have been recognized. Under US GAAP, acquired assets such as publishing rights, television production and distribution rights, non-compete agreements, software, databases and advertising relationships have been recognized as intangible assets and are being amortized over a range of estimated useful lives of between 2 and 16 years. The identified intangibles were determined based on independent appraisal and management evaluation and analysis. The carrying value of publishing rights was L534m and L642m at December 31, 1999 and 1998 respectively. (II) GAIN FROM SALE OF BUSINESSES In 1999 and 1998, gains or losses were recognized under UK GAAP on the disposal of a number of the Group's businesses. Adjustments made to reconcile US GAAP and UK GAAP have an effect on the net assets of these businesses and, accordingly, a corresponding impact on the gain or loss on disposal. To the extent that goodwill previously written off under UK GAAP was brought to account in the disposal calculation and, under US GAAP, a portion of that goodwill was previously amortized, the carrying value of the goodwill being disposed of will be lower on a US GAAP basis giving rise to either additional profit on disposal or a decrease in the loss on disposal under US GAAP. Additionally, under US GAAP, it is necessary to factor into the disposal calculation any cumulative translation adjustment associated with the business, whereas under UK GAAP this is not required. (III) RESTRUCTURING COSTS Under UK GAAP, prior to the implementation of Financial Reporting Standard 12 (FRS 12) PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS in 1999, the recognition of restructuring provisions was allowable when a decision was taken to restructure part of a company's operations, and no specific criteria had to be fulfilled. US GAAP requires a number of specific criteria to be met before such anticipated costs can be recognized as a liability. Costs which do not meet the specific criteria under US GAAP are recognized as liabilities when an obligation exists to pay cash or otherwise sacrifice assets. Following implementation of FRS 12 criteria similar to that set forth under US GAAP must be met before a provision may be recorded under UK GAAP. Restructuring costs are classified as an operating expense of the business. F-62 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The following table sets out the movements in restructuring provisions under US GAAP during the year:
1999 1998 -------- -------- LM LM At January 1................................................ 42 19 Exchange differences........................................ 1 - Subsidiary undertakings acquired / disposed................. 1 20 Transfers................................................... 1 1 Released.................................................... (3) - Provided.................................................... 14 7 Utilised.................................................... (31) (5) --- -- At December 31.............................................. 25 42 === ==
The majority of the above restructuring provision relates to provisions established in respect of the integration of Simon & Schuster with our existing Education business and was established under US GAAP in purchase accounting. Included within this provision were redundancy costs related to employees in the following business functions: warehousing, administration and finance. The provision includes employee termination costs and other integration costs. (IV) PENSIONS AND OTHER POST-RETIREMENT BENEFITS PENSIONS The Group operates defined benefit pension plans for its employees and former employees throughout the world. The largest defined benefit scheme is a funded scheme operated in the UK. Under UK GAAP the cost of providing pension benefits is expensed over the average expected service lives of eligible employees in accordance with the provisions of Statement of Standard Accounting Practice 24 (SSAP 24) ACCOUNTING FOR PENSION COSTS. SSAP 24 aims to produce an estimate of cost based on long-term actuarial assumptions. Variations from the regular pension cost arising from, for example, experience deficiencies or surpluses, are charged or credited to the profit and loss account over the expected average remaining service lives of current employees in the schemes. Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period as determined in accordance with Statement of Financial Accounting Standards 87 (SFAS 87) EMPLOYERS ACCOUNTING FOR PENSIONS, which requires readjustment of the significant actuarial assumptions annually to reflect current market and economic conditions. Under SFAS 87, part of the surplus (the excess of plan assets over plan liabilities), the majority of which for the Group is attributable to prior acquisitions, has been recognized in the balance sheet. The remainder of the unrecognized surplus is spread over the employees' remaining service lifetimes. In the UK, the majority of the pension benefits for Pearson employees are provided by the Pearson Group Pension Plan. F-63 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) In addition, in the UK, there is a closed defined benefit plan with no active members (the Westminster Press Pension Plan). Although this plan has a large surplus the Group does not believe that it will be able to gain benefit from this surplus in the future. Under UK GAAP this plan and the associated pension credit has not been recognized. US GAAP requires calculations to be carried out for all defined benefit plans regardless of the funded status and likely use of any surplus. Thus the US GAAP numbers in respect of the UK schemes include amounts in respect of the Westminster Press Pension Plan. In the US, the Group sponsors several defined benefit plans to which employees participate. In accordance with SFAS 132, EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS, the components of net periodic pension cost for all Group-sponsored schemes are as follows:
YEAR ENDED DECEMBER 31 ----------------------------------------- UK NON-UK SCHEMES SCHEMES ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- LM LM LM LM Components of pension expense: Service cost................................................ 16 17 12 5 Interest cost............................................... 61 62 4 4 Expected return on plan assets.............................. (78) (89) (4) (4) Amortization of unrecognized transition asset............... (3) (3) - - Amortization of unrecognized prior service cost............. - - - - Amortization of unrecognized net loss....................... 3 - - - --- --- -- -- Net periodic pension cost/(benefit)......................... (1) (13) 12 5 Curtailment................................................. - - - - --- --- -- -- Total benefit cost/(benefit)................................ (1) (13) 12 5 === === == ==
F-64 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The following table sets out the benefit obligation and plan assets of the UK pension plans in accordance with US GAAP:
UK SCHEMES AS AT DECEMBER 31 ------------------------- 1999 1998 ----- ----- LM LM Change in benefit obligation: Benefit at prior measurement date........................... 1,005 912 Service cost................................................ 16 17 Interest cost............................................... 61 62 Plan participants' contribution............................. 5 5 Actuarial (gain)/loss....................................... (61) 54 Special termination benefits................................ - - Benefits paid............................................... (51) (45) ----- ----- Benefit obligation at current measurement date.............. 975 1,005 ===== ===== Change in plan assets: Fair value of plan assets at prior measurement date......... 988 1,014 Actual return on plan assets................................ 170 14 Employer contribution....................................... - - Plan participants' contribution............................. 5 5 Benefits paid............................................... (51) (45) ----- ----- Fair value of plan assets at current measurement date....... 1,112 988 ===== ===== Funded status............................................... 137 (17) Unrecognized actuarial (gain)/loss.......................... (27) 129 Unrecognized transition asset............................... (12) (15) Unrecognized prior service cost............................. - - ----- ----- Net amount recognized....................................... 98 97 ===== =====
As at December 31, 1999 none of the UK plans had an accumulated benefit obligation in excess of the plan assets. As at December 31, 1998 the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the UK pension plan with an accumulated benefit obligation in excess of plan assets were L965m, L948m and L931m respectively. For the two US plans where the accumulated benefit obligations exceeded plan assets, these amounts were L6m, L6m and Lnil, respectively (1998: L6m, L6m and Lnil) For the Westminster Press Pension Plan in the UK, it was assumed that there was a substantive commitment that pension benefits would increase in the future at an annual rate of 4%. For the main UK plan, pension increases are assumed to be in accordance with legal requirements. No pension increases are anticipated for the US pension plans. F-65 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The following table sets out the benefit obligation and plan assets of the non-UK pension plans in accordance with US GAAP:
NON-UK SCHEMES AS AT DECEMBER 31 ----------------------- 1999 1998 -------- -------- LM LM Change in benefit obligation: Benefit at prior measurement date........................... 62 52 Adjustment due to change in measurement date................ (9) - --- --- As restated................................................. 53 52 Service cost................................................ 12 5 Interest cost............................................... 4 4 Plan participants' contribution............................. - - Plan amendments............................................. - (5) Acquisition................................................. - 6 Actuarial (gain)/loss....................................... (3) 4 Foreign exchange impact..................................... 2 - Benefits paid............................................... (9) (4) --- --- Benefit obligation at current measurement date.............. 59 62 === === Change in plan assets: Fair value of plan assets at prior measurement date......... 47 44 Adjustment due to change in measurement date................ (1) - --- --- As restated................................................. 46 44 Actual return on plan assets................................ 6 5 Employer contribution....................................... 1 2 Plan participants' contribution............................. - - Foreign exchange impact..................................... 1 - Benefits paid............................................... (9) (4) --- --- Fair value of plan assets at current measurement date....... 45 47 === === Funded status............................................... (14) (15) Unrecognized actuarial gain................................. (12) - Unrecognized transition asset............................... (1) (1) Unrecognized prior service cost............................. (3) (3) --- --- Net amount recognized....................................... (30) (19) === ===
Plan assets are held in separately administered trusts and consist principally of listed debt and equity securities. F-66 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Assumptions used to determine the pension cost for the defined benefit plans under US GAAP were:
YEAR ENDED DECEMBER 31 ----------------------------------------- 1999 (%) 1998 (%) ------------------- ------------------- UK NON-UK UK NON-UK -------- -------- -------- -------- Discount rate............................................... 6.50 7.25 6.25 6.75 Rate of return on assets.................................... 8.00 9.00 8.00 9.00 Salary growth............................................... 4.25 4.50 4.00 4.50 Pension increases........................................... 2.75 n/a 2.50 n/a
The Group also sponsors defined contribution pension plans covering employees in Australia, India, Mexico and certain employees in Germany. Contributions are recognized as paid and during 1999 amounted to L6m (1998: L5m). OTHER POST-RETIREMENT BENEFITS The Group also provides post-retirement health care plans for certain employees. Additional disclosures required under US GAAP are as follows:
US POST-RETIREMENT MEDICAL PLANS --------------------------- 1999 1998 -------- -------- LM LM Net periodic benefit cost: Service cost................................................ 1 1 Interest cost............................................... 3 2 Expected return on plan assets.............................. - - Amortization of transitional obligation/(asset)............. - - Amortization of prior service cost.......................... - - Recognized net actuarial (gain)/loss........................ - - ---- ---- Net periodic benefit cost................................... 4 3 ==== ==== Change in benefit obligation: Benefit obligation at beginning of year..................... 49 14 Adjustment due to change in measurement date................ 1 - ---- ---- As restated................................................. 50 14 Service cost................................................ 1 1 Interest cost............................................... 3 2 Plan participants' contributions............................ - - Plan amendments............................................. - (1) Acquisition................................................. - 34 Actuarial gain.............................................. (3) - Benefits paid............................................... (3) (1) Foreign exchange impact..................................... 2 - ---- ---- Benefit obligation at current measurement date.............. 50 49 ==== ====
F-67 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
US POST-RETIREMENT MEDICAL PLANS --------------------------- 1999 1998 -------- -------- LM LM Change in plan assets: Fair value at beginning of year............................. - - Actual return on plan assets................................ - - Acquisition................................................. - - Employer contribution....................................... 3 1 Plan participants' contributions............................ - - Foreign exchange impact..................................... - - Benefits paid............................................... (3) (1) ---- ---- Fair value at current measurement date...................... - - ==== ==== Funded status............................................... (50) (49) Unrecognized net actuarial loss............................. 1 3 Unrecognized transition obligation/(asset).................. - - Unrecognized prior service cost............................. (1) (1) Amounts contributed to plan during fourth quarter........... 1 - ---- ---- Prepaid/(accrued) benefit cost.............................. (49) (47) ==== ==== Amount recognized in statement of financial position consist of: Prepaid benefit cost........................................ - - Accrued benefit liability................................... (49) (47) Intangible asset............................................ - - Accumulated other comprehensive income...................... - - ---- ---- Net amount recognized....................................... (49) (47) ==== ==== Assumptions used to determine the post-retirement benefit costs under US GAAP were: Discount rate............................................... 7.25% 6.75%
For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered medical benefits was assumed for 2000. The rate was assumed to decrease 0.5% annually to 5.0% in 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the results:
1999 1998 LM LM ------------------- ------------------- +1% -1% +1% -1% -------- -------- -------- -------- Effect on post retirement benefit obligation at December 31........................................................ 4 (4) 3 (3)
There would be no material effect on service cost and interest cost. F-68 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (V) DEFERRED TAXATION Under UK GAAP, a provision is recorded for deferred taxation under the liability method, at the expected applicable rates, to the extent that such taxation is expected to crystallise within the foreseeable future. This means that the full potential liability is not necessarily provided. Additionally, deferred tax assets are recognized only when they are expected to be recoverable within the foreseeable future. Under US GAAP, deferred taxation is provided for on a full liability basis. Under the full liability method, deferred taxation assets or liabilities are recognized for differences between the financial and taxation basis of assets and liabilities and for tax loss carry forwards at the statutory rate at each reporting date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred taxation assets will not be realized. The reconciling items in 1998 and 1999 reflect the impact of recording the full contingent provision and deferred tax assets, net of valuation allowance. The following table analyzes profit before taxation on a UK GAAP basis:
1999 1998 -------- -------- LM LM United Kingdom.............................................. 339 467 Overseas.................................................... 141 162 --- --- Total profit before taxation................................ 480 629 === ===
Classification of the Group's deferred tax (liabilities and assets) under US GAAP is as follows:
1999 ---------------------------------------------------- CURRENT CURRENT NON-CURRENT NON-CURRENT ASSETS LIABILITIES ASSETS LIABILITIES DEFERRED TAX ANALYSIS -------- ----------- ------------ ------------ LM LM LM LM Fixed asset and investment related.......... - - 28 (55) Receivable related.......................... 106 - - - Inventory related........................... 59 - - - Pension provisions.......................... - - 54 - Other provisions and accruals............... 48 - - - Undistributed earnings...................... - (19) - - Interest.................................... 10 (9) - - Intangibles................................. - - - (151) Goodwill.................................... - - - (11) Tax losses.................................. - - 183 - Other....................................... 10 (10) 9 (57) --- --- --- ---- 233 (38) 274 (274) Valuation allowance......................... (38) - (45) - --- --- --- ---- 195 (38) 229 (274) === === === ====
F-69 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
1998 ---------------------------------------------------- CURRENT CURRENT NON-CURRENT NON-CURRENT ASSETS LIABILITIES ASSETS LIABILITIES DEFERRED TAX ANALYSIS -------- ----------- ------------ ------------ LM LM LM LM Fixed asset and investment related.......... - - 51 (49) Receivable related.......................... 88 - - - Inventory related........................... 46 - - - Pension provisions.......................... - - 34 - Other provisions and accruals............... 52 - - - Undistributed earnings...................... - (15) - - Interest.................................... 26 (5) - - Intangibles................................. - - - (178) Goodwill.................................... - - - (36) Tax losses.................................. - - 162 - Other....................................... 10 (14) 7 (25) --- --- --- ---- 222 (34) 254 (288) Valuation allowance......................... (65) - (72) - --- --- --- ---- 157 (34) 182 (288) === === === ====
The movements in the valuation allowance are set out below:
1999 1998 VALUATION ALLOWANCE -------- -------- LM LM At January 1................................................ (137) (87) Change in estimate.......................................... 63 - Current year loss........................................... (6) (50) Exchange.................................................... (3) - ---- ---- At December 31.............................................. (83) (137) ==== ====
The recognized deferred tax asset is based upon the expected future utilization of tax loss carryforwards and the reversal of other temporary differences. For financial reporting purposes, the Group has recognized a valuation allowance for those benefits for which realization does not meet the more likely than not criteria. The valuation allowance has been recognized in respect of the tax loss carryforwards. The Group continually reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. The reduction in the valuation allowance in 1999 results from planned disposals (principally Lazards) which will create taxable income in 2000 against which previously recognized tax losses may be offset. The majority of the Group's tax losses expire within 20 years. F-70 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Provision has only been made for UK or additional foreign taxes on undistributed earnings of foreign subsidiaries where there is an intention to remit such earnings. No provision has been made in respect of other foreign earnings because they are intended to be permanently reinvested. It is not practicable to estimate the amount of additional tax that might be payable on these other foreign earnings. (VI) LEASES UK GAAP defines a finance (capital) lease as one that transfers substantially all the risks and rewards of ownership of an asset to the lessee. US GAAP sets out certain defined criteria, and if any one of the criteria are met, the lease must be treated as a capital lease. Accordingly, the Group has certain leases for which the classification is operating under UK GAAP and finance under US GAAP. (VII) OPTIONS The Group maintains savings related share option schemes, a bonus matching share option scheme, a profit sharing award scheme and further share option schemes for selected employees. ANNUAL BONUS SHARE MATCHING PLAN The share matching plan permits Senior Management, as well as other senior executives in Pearson, to take up to 50% of any after tax annual bonus in the form of Ordinary Shares. These shares will be matched by Pearson on a before-tax basis at a rate of one matching share for every two shares held for three years, with an additional one share for every two shares held for a total of five years. Matching is conditional upon the recipient remaining employed by Pearson at the time of grant and to real average growth in Pearson's adjusted earnings per share of at least 3% per year during the relevant period. LONG-TERM INCENTIVE PLANS Long-term incentive plans are intended to align the interests of Senior Management, other senior executives, managers and other employees with those of shareholders. The Personnel Committee reviews the operation of long-term incentive plans on a regular basis, taking into account UK legislative and regulatory developments, particularly with regard to performance targets and evolving UK best practice. In 1999, the Company's shareholders approved adoption of a new long-term incentive plan called the Pearson Reward Plan in which Senior Management now participate. The Pearson Reward Plan has two elements: (1) Pearson Premium Options (PPOs) linked to the rise in the Pearson share price over three to seven years and (2) Pearson shares in the form of Pearson Equity Incentives (PEIs) linked to the three-year cumulative growth in Pearson's free cash flow (operating cash flow less tax liabilities on operating activities and interest paid). To date there has been only one award under this plan (made in 1999) which award was based on free cash flow. The Personnel Committee has the option to consider and specify other measures but has not F-71 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) done so. Senior Management are not eligible for grants of conventional options under the Share Option Plan in any year in which they receive an award under the Pearson Reward Plan. INCENTIVE SHARE PLAN The Company's Incentive Share Plan was introduced in 1993 to reward Senior Management based on the performance of the Company over the medium to longer term as measured by total shareholder return relative to the average of the FT-SE 100 total return index. There remains one outstanding award, which matures in April 2002. No new awards have been or will be made under this plan. EXECUTIVE SHARE OPTION PLAN In 1998, the Company's shareholders approved an Executive Share Option Plan pursuant to which options at market value on the date of grant are granted to Senior Management and other senior executives based on guidelines approved by the Personnel Committee. These guidelines govern the total number of options which may be granted and the frequency of awards to individual grantees. EMPLOYEE SHARE OWNERSHIP PLANS PROFIT SHARING PLAN Pearson operates a profit sharing plan available to all employees who (1) have worked for Pearson for at least six months of the relevant fiscal year and (2) who are employed by Pearson at the time payment under the plan is made. All payments made under the plan are determined at the discretion of the Pearson board after consideration of Pearson's profitability for the year. Payment under the plan may be in the form of cash and/or Pearson's Ordinary Shares. SAVE-FOR-SHARES PLAN In 1998, Pearson introduced a Worldwide Save-for-Shares Plan. Under this plan, Pearson's employees worldwide are invited to save a portion of their monthly salary over a period from two to seven years (at the employee's option). At the end of this period, the employee has the option to purchase Ordinary Shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time the employee's participation in the plan commenced. F-72 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Activity with respect to the share option schemes is as follows:
1999 1998 -------------------- -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE EXECUTIVE SHARE OPTIONS PLANS SHARES PRICE SHARES PRICE - ----------------------------- -------- --------- -------- --------- ('000) L ('000) L Outstanding at January 1........................... 8,906 8.02 8,626 6.24 Granted............................................ 3,494 12.15 3,189 10.76 Exercised.......................................... (1,157) 5.94 (2,296) 5.59 Surrendered or expired............................. (249) 9.26 (613) 7.90 ------- ----- ------ ----- Outstanding at December 31......................... 10,994 9.53 8,906 8.02 ======= ===== ====== ===== SAVE FOR SHARE PLANS - -------------------- Outstanding at January 1. 4,123 6.03 4,702 4.42 Granted............................................ 1,472 10.22 1,723 7.69 Exercised.......................................... (958) 4.43 (1,093) 2.91 Surrendered or expired............................. (671) 7.12 (1,209) 4.86 ------- ----- ------ ----- Outstanding at December 31......................... 3,966 7.77 4,123 6.03 ======= ===== ====== =====
Share options outstanding and exercisable at December 31, 1999 are as follows:
SHARE OPTIONS SHARE OPTIONS OUTSTANDING EXERCISABLE ----------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE RANGE OF EXERCISE PRICES (IN L) SHARES LIFE PRICE SHARES PRICE - -------------------------------------- -------- ------------ --------- -------- --------- ('000) L ('000) L 0-3.................................. 39 N/a N/a 39 2.42 3-6.................................. 2,156 1 Year 3.85 906 4.73 6-9.................................. 4,899 4 Years 7.63 1,264 8.50 9-12................................. 4,387 6 Years 10.60 N/a N/a 12-15................................. 3,479 9 Years 12.15 N/a N/a
Under UK GAAP, the Group does not recognise compensation costs under share option schemes that have not been approved by the Inland Revenue unless the exercise price is at a discount to the open market value at date of grant. Under US GAAP, the compensation expense associated with the Pearson Incentive Share Plan, Annual Bonus Matching Plan, the Pearson Reward Plan, the Executive Share Option schemes, the Save as You Earn Scheme and the Worldwide Save for Shares Plan, in consideration for services received, is recognized in accordance with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). F-73 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Under SFAS 123, compensation expense is determined based upon the fair value at the grant date for awards, and has been estimated using the Black Scholes model. Such compensation cost is recognized over the service life of the awards, normally the equivalent to the vesting period of such awards. Generally, option plans which are available to all employees and provide a discount no greater than 15% are considered non-compensatory under SFAS 123. The Save as You Earn Option Scheme and Worldwide Save for Shares Plan are considered compensatory under SFAS 123 since the discount is 20%. The total compensation cost (equal to the 20% discount) is recognized over the period beginning on the grant date. The following weighted-average assumptions were assumed in determining the fair value of options for the Pearson Incentive Share Plan, Annual Bonus Matching Plan, the Pearson Reward Plan, the Executive Share Option schemes, the Save as you Earn scheme and the Worldwide Save for Shares plan: exercise price is equal to the fair value of the stock on the grant date; risk-free interest rate is the gilt rate (ranging from 4.23% to 8.27%) for securities whose maturity equals the expected life of the options on the grant date; expected lives of 2 to 7 years; expected volatility ranging from 21.3% to 31.2% and a dividend yield of between 1.62% and 4.47%. (VIII) DERIVATIVES The additional US GAAP derivative and financial instrument disclosures are presented below. This information should be read in conjunction with Note 19. Under UK GAAP, the Group's derivatives are recorded as hedging instruments. Amounts payable or receivable in respect of interest rate swaps are accrued with net interest payable over the period of the contract. Unrealized gains and losses on currency swaps and forward currency contracts are deferred and recognized when paid. Under US GAAP, derivative contracts, such as interest rate swaps, currency swaps and forward currency contracts are recorded at market value. All gains and losses are included in income. The instruments used to manage the risks' exposure do not meet the prescriptive criteria for hedge accounting under US GAAP, in particular SFAS 52 FOREIGN CURRENCY TRANSLATION and SFAS 80 ACCOUNTING FOR FUTURES CONTRACTS and the related literature providing guidance on these matters. F-74 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The contract/notional principal amounts of derivative instruments that are off-balance-sheet under UK GAAP, by category and by currency, are listed below. The unrealized foreign exchange gain/loss on currency swaps are reflected in the balance sheet under UK GAAP.
INTEREST RATE SWAPS MATURITY 1999 1998 1997 - ------------------- ---------- -------- -------- -------- LM LM LM US DOLLAR Pay variable / receive fixed.............................. 2006 155 151 152 Av fixed rate......................................... 7.23% Av variable rate...................................... 7.04% Pay fixed / receive variable.............................. 2000/2009 1,006 599 267 Av fixed rate......................................... 6.06% Av variable rate...................................... 6.94% Forward start pay fixed / receive variable................ 2003 118 491 76 Av fixed rate......................................... 6.44% Av variable rate...................................... 6.99% STERLING Pay variable / receive fixed.............................. 2002/2008 120 120 120 Av fixed rate......................................... 6.74% Av variable rate...................................... 6.83% Pay fixed / receive variable.............................. 2000/2001 70 40 40 Av fixed rate......................................... 6.22% Av variable rate...................................... 6.68% Forward start pay variable / receive fixed................ 2003 100 - - Av fixed rate......................................... 7.00% Av variable rate...................................... 6.45% EURO Pay variable / receive fixed.............................. 2004 248 - - Av fixed rate......................................... 4.63% Av variable rate...................................... 5.75%
F-75 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
MATURITY 1999 1998 1997 ---------- -------- -------- -------- LM LM LM CURRENCY AND INTEREST RATE SWAPS Pay US dollar variable / receive sterling fixed at $1.61................................................... 2002/2014 At inception of contract.............................. 375 125 125 At balance sheet date................................. 375 117 117 Av fixed rate......................................... 8.13% Av variable rate...................................... 7.41% Pay US dollar variable / receive Euro fixed at $1.04...... 2004 At inception of contract.............................. 93 - - At balance sheet date................................. 97 - - Av fixed rate......................................... 4.63% Av variable rate...................................... 7.62% ------ --- --- FORWARD FOREIGN EXCHANGE CONTRACTS........................ 347 13 50 ====== === ===
The above financial instruments represent trading instruments which do not qualify for hedge accounting under US GAAP. The Group does not meet the designation and correlation tests criteria which are not a requirement to obtain hedge accounting under UK GAAP. In line with Pearson treasury policy, these are however not trading instruments and are transacted solely to match underlying financial exposures. The principal method the Group uses to manage its interest rate risk is to enter into swaps to pay a fixed rate and receive a floating rate. The majority of these contracts are US dollar denominated, and some of them have a deferred start date, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on 3 month LIBOR, and the dates on which these rates are set do not exactly match those of the borrowings that are being hedged. The Group believes that its portfolio of such swaps is an efficient hedge of its portfolio of variable rate borrowings. The Group from time to time issues bonds or other capital market instruments to refinance existing bank debt. In order to avoid undue concentration of interest expense being set by the rate on a single transaction, it is the Group's normal practice on such occasions to enter into a related derivative contract which has the effect of converting the bond transaction to the same interest rate profile as the debt which it is refinancing (i.e most often a floating rate US dollar interest rate basis). In several cases the bond issue has been in a different currency than the debt being refinanced and the Group has entered into a related interest rate and currency swap in order to maintain an unchanged borrowing risk profile. The Group's policy concerning the proportion of fixed rate debt in its debt portfolio is that between 50% and 65% of current core debt (i.e. year end total borrowings net of year end cash and liquid funds) should be hedged for the next two years, and that between 40% and 60% should be hedged from two years to a date five years from the present. Within these target ranges the proportion that is hedged is triggered by a formula based on historical interest rate frequencies. Taking into account the effect of all derivative contracts, the proportion of net borrowings that were F-76 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) hedged at the end of 1999 was L1,155m, representing 58% of the year-end financial liability portfolio, at an average fixed rate of 6.41%. This compares to a proforma hedged proportion of 53% in 1998. Of the L347m of outstanding foreign exchange contracts at December 31,1999, L279m of receive US dollars/pay Sterling contracts relate to the announced disposal of Lazard banking houses which completed on March 3, 2000 for L436m. In addition, a further L47m of receive US dollars/pay Euros contracts, with a maturity of less than one month, transferred surplus US dollar cash balances into Euros to temporarily fund the purchase of a further 20% stake in Recoletos. Credit risk represents the possibility that the Group would suffer a loss if a counterparty was to default on its obligations to the Group. Credit risk exposure arises primarily from the placement of surplus cash funds with financial institutions, as well as from interest rate, currency swap and foreign exchange products. For derivative financial instruments, total credit exposure consists of current and potential exposure. Current credit exposure represents the replacement cost of the transaction. Potential credit exposure is a statistically based estimate of the future replacement cost of the transaction. The Group has established policies and procedures to manage the level and composition of its credit risk on both a transaction and a portfolio basis. In managing the aggregate credit extension to individual counterparties, the Group measures the amount at risk on derivative financial instruments as the total of current and potential credit exposure. Additional financial instruments which potentially subject the Group to concentrations of credit risk consist of accounts receivable. Management believes the concentration of credit risk associated with accounts receivable is minimal due to the dispersion over many customers and different businesses. Financial instruments with off balance sheet credit risk consist of interest rate swaps. The maximum accounting loss the Group would incur if counterparties failed completely to perform according to the contract terms would be L38m (L22m in 1998), L10m of which is accrued interest receivable (1998: L6m). Since the year-end, for certain longer dated higher value derivative contracts the Group has entered into mark to market agreements whose effect is to reduce significantly the counterparty risk of the relevant transactions by the posting of collateral between parties on a quarterly annual basis. In the Group's opinion there is no significant concentration of credit risk with any individual counterparty or groups of counterparties. The greatest accounting loss if a single party failed completely to perform according to the contract terms would be L17m (L15m in 1998), which is to a AA rated financial institution. F-77 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The following table provides a comparison by category of the carrying values under UK GAAP and the fair values of the Group's financial assets and liabilities (both on and off balance sheet).
1999 1999 1998 1998 1997 1997 BOOK FAIR BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE VALUE VALUE PRIMARY FINANCIAL INSTRUMENTS -------- -------- -------- -------- -------- -------- LM LM LM LM LM LM Other financial assets.............................. 4 4 4 4 6 6 Other financial liabilities......................... (31) (31) (54) (54) (33) (33) Cash................................................ 288 288 305 305 144 144 Short term deposits................................. 40 40 40 40 71 71 Short term borrowings............................... (47) (47) (72) (72) (313) (313) Medium and long term borrowings..................... (2,276) (2,307) (2,552) (2,635) (609) (669) ------ ------ ------ ------ ---- ---- (2,022) (2,053) (2,329) (2,412) (734) (794) DERIVATIVE INSTRUMENTS Pay fix interest rate swaps......................... - 32 - (28) - - Pay variable interest rate swaps.................... - (9) - 13 - 16 Currency swaps...................................... - 10 - 24 - 19 Foreign exchange contracts.......................... - 1 - - - - ------ ------ ------ ------ ---- ---- TOTAL............................................... (2,022) (2,019) (2,329) (2,403) (734) (759) ====== ====== ====== ====== ==== ====
For a discussion of the basis for estimating the fair value for each category of financial instruments, refer to Note 19. (IX) CAPITALIZED COSTS The Group has capitalized certain amounts under UK GAAP for computer hardware, software and consulting services. Under US GAAP, certain of these costs cannot be capitalized and must be expensed as incurred. The resulting adjustment takes into consideration the treatment of these costs, as well as any depreciation taken in subsequent periods. (X) ACQUISITION ADJUSTMENTS Acquisition adjustments principally relate to restructuring provisions recognized under US GAAP in purchase accounting for HarperCollins Educational and Simon & Schuster as a reduction of goodwill under Emerging Issues Task Force 95-3 (EITF 95-3) RECOGNITION OF LIABILITIES IN PURCHASE ACCOUNTING. Under UK GAAP these costs were treated as period costs and were recorded as exceptional items in the profit and loss account. (XI) PARTNERSHIPS AND ASSOCIATES There is no difference under UK and US GAAP for the accounting for partnerships and associates. However the accounts of partnerships and associates must be adjusted from UK to US GAAP. which has an impact on the results of the partnerships and associates, as well as the carrying value of the investment in these entities. Principal differences identified with respect to the F-78 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Group's investments in partnerships and associates include: goodwill amortization, pensions, capitalized costs, derivatives, and goodwill impairment charges. (XII) ORDINARY DIVIDENDS Under UK GAAP, ordinary dividends proposed are provided for in the year in respect of which they are recommended by the Board of Directors although approval of the final dividend will not take place until the Annual General Meeting subsequent to the year-end. Under US GAAP, such dividends are provided for in the year in which they are declared and approved by the Board of Directors. (XIII) FIXED ASSET INVESTMENTS Under UK GAAP, fixed asset investments are stated at cost less provisions for diminution in value, or as revalued by the directors. Under US GAAP, SFAS 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, requires debt and equity securities with readily ascertainable market values be adjusted to market value at the end of each period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise securities are classified as "available for sale" and unrealized gains and losses are reported as a separate component of other comprehensive income until realized. At December 31, 1999 and 1998 all securities covered by SFAS 115 were designated by management as available for sale. Proceeds and gross gains from the sale of available for sale securities were L28m and L27m under UK GAAP respectively for the year ended December 31, 1998. There were no sales of available for sale securities in 1999. (XIV) INTEREST IN SHARES OF PEARSON PLC Under UK GAAP, shares in Pearson plc held by the employee share ownership trusts are recorded in the balance sheet within fixed asset investments at December 31, 1999 and debtors at December 31, 1998. These shares are recorded at cost including expenses. Under US GAAP, shares in Pearson plc held by the employee share ownership trusts are recorded as an offset to equity. (XV) PRESENTATION OF EARNINGS PER EQUITY SHARE US GAAP requires presentation of basic and diluted earnings per equity share (EPS) using both income from continuing operations and net income. Therefore, an entity that reports a discontinued operation, an extraordinary item or cumulative effect of an accounting change must present basic and diluted EPS for those line items. Accordingly, the Group has presented EPS for continuing and discontinued operations. F-79 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (XVI) OTHER DISCLOSURES REQUIRED BY US GAAP PRESENTATION IN THE FINANCIAL STATEMENTS Under UK GAAP, operating profit may be shown before specific costs that under US GAAP would be included within operating profit. Additionally, the presentation of earnings per share is not limited to basic and diluted earnings per share on the net profit or loss for the period attributable to ordinary shareholders. Presentation of operating profit before certain costs and additional earnings per share data is allowable when management believe that it provides useful information to an investor and presents a true and fair view of the Company's results. Under US GAAP, costs such as internet operations, goodwill amortization and other items would be included within operating profit. Earnings per share may only be presented on a basic and diluted basis for profit or loss from continuing operations, profit or loss from discontinued operations and net profit or loss for the period. Accordingly, the presentation of "operating profit before internet operations, goodwill amortization and other items" as well as "adjusted earnings per equity share after internet enterprises" and "adjusted earnings per equity share before internet enterprises" is not allowed under US GAAP. COMPREHENSIVE INCOME SFAS 130 REPORTING COMPREHENSIVE INCOME requires prominent presentation of a primary statement showing total recognized gains and losses (total comprehensive income). The total gains and losses recognized in the period attributable to shareholders' comprises net income plus gains and losses recognized directly in equity, such as movements in foreign currency translation differences. The Group has opted to display comprehensive income in accordance with UK GAAP. Total gains and losses are presented in the UK GAAP primary statement under "Statement of total recognized gains and losses". The movements in shareholders' funds between the beginning of the year and the end of the year are presented in the UK GAAP primary statement "Reconciliation of movements in equity shareholders' funds". The components of equity shareholders' funds on a UK GAAP basis are shown in the following disclosure.
1999 1998 1997 -------- -------- -------- LM LM LM Called up share capital..................................... 153 152 144 Share premium account....................................... 517 498 158 Revaluation reserve......................................... - 1 3 Other reserves.............................................. - 1 1 Retained earnings........................................... 600 383 (175) Cumulative currency translation difference.................. 51 13 21 ----- ----- ---- EQUITY SHAREHOLDERS' FUNDS AT END OF THE YEAR............... 1,321 1,048 152 ===== ===== ====
CASH FLOW INFORMATION Under UK GAAP, the Consolidated Cash Flow Statements are presented in accordance with FRS 1, as revised, CASH FLOW STATEMENTS. The statements prepared under FRS 1 present F-80 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) substantially the same information as that required under US GAAP as interpreted by SFAS 95 STATEMENT OF CASH FLOWS. The definition of "cash flow" differs between UK and US GAAP. Cash flow under UK GAAP represents increases or decreases in "cash", which comprises cash in hand and repayable on demand and overdrafts. Under US GAAP, cash flow represents increases or decreases in "cash and cash equivalents", which include short term, highly liquid investments with original maturities of less than 90 days, and exclude overdrafts. Under UK GAAP, cash flows are presented for operating activities; dividends received from partnerships and other associates; returns on investments and servicing of finance; taxation; capital expenditure and financial investment; acquisitions and disposals; equity dividends paid; management of liquid resources and financing. US GAAP requires the classification of cash flows as resulting from operating, investing and financing activities. Cash flows under UK GAAP in respect of interest received, interest paid, investment income and taxation would be included within operating activities under US GAAP. Capital expenditure and financial investment, dividends received from partnerships and associates, and cash flows from acquisitions and disposals would be included within investing activities under US GAAP. Equity dividends paid would be included within financing activities under US GAAP. Management of liquid resources may be included within financing activities or the liquid resources may be considered a cash equivalent under US GAAP, depending on the nature of the liquid resources. A summary of the Group's operating, investing and financing activities, classified in accordance with US GAAP, are as follows:
1999 1998 -------- -------- LM LM Net cash provided by operating activities................... 136 286 Net cash provided by/(used in) investing activities......... 328 (2,085) Net cash (used in) / provided by financing activities....... (460) 1,961 Foreign exchange differences................................ (22) (30) ----- ------ Net increase in cash and cash equivalents................... (18) 132 Cash and cash equivalents under US GAAP at the beginning of the year.................................................. 337 205 ----- ------ Cash and cash equivalents under US GAAP at the end of the year...................................................... 319 337 ===== ======
SEGMENTS Pearson has determined that its reportable segments are those that are based on the Group's method of internal reporting, which disaggregates its business by product category. The Group's segments are strategic business units that offer different products and services. The Group's business units and reportable segments are as follows: - FT Group--publisher of daily business newspapers and provider of online business information F-81 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) - Pearson Education--publisher of educational materials, including textbooks and teaching materials, as well as electronic educational programs - The Penguin Group--publisher of English language fiction and non-fiction books for adults and children - Pearson Television--television production company involved in production of new programs and distribution of proprietary programming The accounting policies of the segments are the same as those described in Note 1. The Group's management evaluates the performance of its segments and allocates resources to them based on underlying sales growth and trading margin improvement. There are no material inter-segment revenues. The Group's segments are the same under UK GAAP and information with respect to the segments is presented in Note 2 to the financial statements. The Group has also separately disclosed information with respect to discontinued operations. DISCONTINUED OPERATIONS In 1999, discontinued operations relate to the withdrawal of the Group from the banking business following its disposal of its investment in Lazard on March 3, 2000. In 1998, discontinued operations have been restated to include the results of Lazard, as well as reflecting the withdrawal of the Group from the consumer software business following its disposal of Mindscape Inc. in March 1998, the withdrawal of the Group from the consumer magazine business following its disposal of Pearson New Entertainment in April 1998 and the withdrawal of the Group from the visitor attractions business following its disposal of The Tussauds Group in October 1998. All disposals were accomplished thruogh the sale of the various operations. At December 31, 1999 and 1998, the carrying value of the investment in Lazard on an UK GAAP basis was L149m and L111m, respectively. At December 31, 1998, due to the disposal dates, there were no assets and liabilities on the balance sheet associated with Mindscape, Pearson New Entertainment and The Tussauds Group. For the year ended December 31, 1999 and 1998, income from operations on an UK GAAP basis for Lazard was L48m and L53m respectively, including a profit in 1998 of L11m on the sale of a business. The gain arising on the disposal of Lazard will be recognized in the 2000 results. The proceeds on its disposal were received in 2000. For the year ended December 31, 1998 on a UK GAAP basis, Mindscape, Pearson New Entertainment and The Tussauds Group had a combined operating profit of L21m prior to disposal, and a total gain on disposal of L215m was recognized. Total proceeds of L568m were received during 1998 upon the sale of Mindscape, Pearson New Entertainment and The Tussauds Group. The Group analyses turnover and operating profit between continuing and discontinued operations. Under US GAAP, the operating profit from discontinued operations would be shown on a separate line in the profit and loss statement below income from continuing operations. F-82 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) SIGNIFICANT ACQUISITIONS During 1998, the Group acquired the Simon & Schuster educational, business & professional and reference businesses (Simon & Schuster). The following unaudited pro-forma information presents the results of operations of the Group as if the acquisition had taken place on January 1, 1998:
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) ------------------------------ Sales (Lm)................................................. 3,368 Profit for the financial year (Lm)......................... 301 Basic earnings per equity share............................ 51.0p Diluted earnings per equity share.......................... 50.4p
The Group's 1999 results consolidate Simon & Schuster for the full year, and accordingly a pro-forma presentation is not necessary. The unaudited pro-forma information has been prepared for comparative purposes only and includes certain adjustments, such as additional amortization expense as a result of goodwill and an increased interest expense on acquisition debt. They do not purport to be indicative of the results of operations that actually would have resulted if the acquisition had been effective at the beginning of 1998. REVENUE RECOGNITION Pearson Education: Revenues are generally recognized when goods are shipped to customers or services rendered, net of a provision for estimated returns. FT Group: Subscription income is recorded as revenue as earned. Deferred subscription revenue, which primarily represents amounts received from customers in advance of newspaper delivery, is included in revenue over the subscription term. Advertising revenue is recognized when the advertisement appears in the newspaper. Penguin: Revenues are generally recognized when goods are shipped to customers or services rendered, net of a provision for estimated returns. Pearson Television: Revenues from all television sources are recognized upon availability of the film for telecast and when certain other conditions are met. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and foreign markets concurrently. The more successful series are later syndicated in domestic markets and in certain foreign markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production. Revenues arising from television license agreements are recognized in the period that the films or television series are available for telecast and when certain other conditions are met. License agreements for the telecast of television product in the broadcast network, syndicated television and cable television markets are routinely entered into in advance of their available date for telecast. Cash received in connection with such contractual rights for which revenue is not yet recognizable is classified as deferred revenue. F-83 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Because deferred revenue generally relates to contracts for the licensing of television product which have already been produced, the recognition of revenue for such completed product is principally only dependent upon the commencement of the availability period for telecast under the terms of the related licensing agreement and when certain other conditions are met. All divisions: Online advertising revenue is recognized ratably during the period in which the advertising is displayed and obligations are satisfied. LEASE COMMITMENTS The following is a summary of future minimum rental payments for all leases with terms greater than one year:
CAPITAL OPERATING 1999 LEASE LEASE - ---- -------- ---------- LM LM Fiscal year ending December 31, 2000........................................................ 7 90 2001........................................................ 5 81 2002........................................................ 2 72 2003........................................................ 1 64 2004........................................................ 1 52 Thereafter.................................................. 1 397 -- --- Total minimum lease payments................................ 17 756 -- --- (Less) Interest element..................................... (2) N/a -- --- Present value of net minimum lease payments................. 15 N/a == ===
CAPITAL OPERATING 1998 LEASE LEASE - ---- -------- ---------- LM LM Fiscal year ending December 31, 1999........................................................ 10 89 2000........................................................ 6 71 2001........................................................ 3 64 2002........................................................ 1 56 2003........................................................ 1 52 Thereafter.................................................. - 364 -- --- Total minimum lease payments................................ 21 696 -- --- (Less) Interest element..................................... (2) N/a -- --- Present value of net minimum lease payments................. 19 N/a == ===
The total operating lease expense for 1999 is L95m (1998: L62m). F-84 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) BORROWINGS The weighted average interest rate on short-term borrowings outstanding was 5.5% and 6.4% as at December 31, 1999 and 1998, respectively. The Group's debt matures as follows
1999 -------- LM Due in: 2000........................................................ 47 2001........................................................ 155 2002........................................................ 590 2003........................................................ 561 2004........................................................ 466 Thereafter.................................................. 504 ----- Total....................................................... 2,323 =====
The Group was in compliance with all debt covenants as at December 31, 1999 and 1998. FIXED ASSETS Fully depreciated assets still being utilised by the Group have the following historical cost values:
1999 1998 -------- -------- LM LM Freehold buildings.......................................... 2 5 Long lease property......................................... 1 1 Short lease property........................................ 4 - Plant & machinery........................................... 52 45 Fixtures & fittings......................................... 34 68 -- --- Total....................................................... 93 119 == ===
In 1998 there was one property which was not being utilised. Its net book value was L15m. There was no such facility in 1999. F-85 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) COMPUTER SOFTWARE COSTS The following table sets forth the amount of computer software costs capitalized in plant & machinery.
1999 1998 -------- -------- LM LM Cost at December 31......................................... 89 58 Depreciation at December 31................................. (38) (31) --- --- Net book value at December 31............................... 51 27 === === Depreciation charged in the year............................ 7 5
CONSOLIDATION The consolidated financial statements include the accounts of the Group and majority-owned and controlled subsidiaries. Under UK GAAP, the investments in companies in which the Group is unable to exercise control but has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method, which is consistent with the equity method under US GAAP. Accordingly, the Group's share of the net earnings of these companies is included in consolidated net income. The investments in other companies are carried at cost or fair value, as appropriate. Inter-company accounts and transactions are eliminated upon consolidation. ALLOWANCE FOR DOUBTFUL RECEIVABLES The Group has recorded an allowance for doubtful receivables as at December 31,1999 of L463m (1998: L401m) of which L456m (1998: L392m) is in respect of receivables due within one year. ADVERTISING COSTS The Group maintains an accounting policy of expensing advertising costs as incurred. The Group recorded advertising costs during the year ended December 31, 1999 and 1998 of L146m and L112m, respectively. STOCKS Stocks are valued at the lower of cost and net realizable value. Cost is calculated on a first in first out basis by reference to the invoiced value of supplies and attributable costs of bringing stocks to their present location and condition. Net realizable value is the estimated market value less selling costs. F-86 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) EXCEPTIONAL ITEMS Exceptional profits or losses on the sale of fixed assets and investments, businesses and associates do not meet the definition of "extraordinary" under US GAAP and, accordingly, are classified as operating items. TOTAL ASSETS AND TOTAL LIABILITIES US GAAP requires that total assets and total liabilities are disclosed. Total assets and total liabilities under UK GAAP are shown below.
1999 1998 -------- -------- LM LM Total assets................................................ 5,350 5,317 Total liabilities........................................... 4,029 4,269
USE OF ESTIMATES Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Accounting estimates have been used in these financial statements to determine reported amounts, including realizability, of useful lives of tangible and intangible assets, income taxes and other items. Actual results could differ from those estimates. COMPANIES ACT 1985 The Consolidated Financial Statements do not constitute "statutory accounts" within the meaning of the Companies Act 1985 of Great Britain for any of the periods presented. Statutory accounts for the years ended December 31, 1999, 1998 and 1997 have been filed with the United Kingdom's Registrar of Companies. The auditors have reported on these accounts. Their reports were unqualified and did not contain statements under Section 237 (2) or (3) of that Act. These Consolidated Financial Statements include all material disclosures required by generally accepted accounting principles in the United Kingdom including those Companies Act 1985 disclosures relating to the profit and loss account and balance sheet items. RECENTLY ISSUED ACCOUNTING STANDARDS FRS 15 TANGIBLE FIXED ASSETS sets out the requirements for accounting for the initial measurement, valuation and depreciation of tangible fixed assets. Valuations remain optional, but if valuations are performed then all assets of the same class should be revalued and revaluation should be kept current. FRS 15 must be adopted for accounting periods ending on or after March 3, 2000, and accordingly will be adopted in Pearson's interim statement as at and for the period ending June 30, 2000. The implementation of FRS 15 is not expected to have a material impact on either the results of operations or the disclosures. FRS 16 CURRENT TAX discusses the recognition and disclosure of current tax, in particular withholding tax and tax credits. The most significant change introduced by FRS 16 is that dividends F-87 PEARSON PLC NOTES TO THE ACCOUNTS (CONTINUED) 34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) received from UK companies should no longer be grossed up for the imputed tax credit, but should instead be recorded at the amount received or receivable. The effect of applying FRS 16 for the first time should be treated as a change in accounting policy. FRS 16 must be adopted for accounting periods ending on or after March 3, 2000, and accordingly will be adopted in Pearson's interim statement as at and for the period ending June 30, 2000. The implementation of FRS 16 is not expected to have a material impact on the results of operations. Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS was issued on December 6, 1999 and provides an interpretation of when the revenue recognition criteria have been met. If a transaction is within the scope of specific authoritative literature that provides revenue recognition guidance, that literature should continue to be applied. However, in the absence of authoritative literature addressing a specific arrangement or a specific industry, SAB 101 is designed to provide additional guidance as to the criteria that will be applied by the SEC. SAB 101 is to be adopted in the second quarter of the financial year beginning after December 15, 1999 (financial year 2000 for Pearson). Pearson has complied with SAB 101 for the period ending December 31, 1999. Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in equity pending recognition in earnings. For US GAAP purposes the Group's derivative instruments did not qualify for hedge accounting in 1999 or 1998. Accordingly, the adoption of SFAS133 should not have a materially different effect than that shown in the US GAAP reconciliation. F-88 PEARSON PLC PRINCIPAL SUBSIDIARIES AND ASSOCIATES AS AT DECEMBER 31, 1999 SUBSIDIARIES The principal operating subsidiaries 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.
COUNTRY OF INCORPORATION OR REGISTRATION ---------------- FT GROUP Financial Times Group Ltd*.................................. England Financial Times Business Ltd................................ England Les Echos SA................................................ France Recoletos Compania Editorial SA (99.6%)..................... Spain PEARSON EDUCATION Addison Wesley Longman Inc.................................. US Addison Wesley Educational Publishers Inc................... US Macmillan USA Inc........................................... US Pearson Education Ltd....................................... England Prentice Hall Inc........................................... US THE PENGUIN GROUP Penguin Putnam Inc.......................................... US The Penguin Publishing Co Ltd............................... England Penguin Books Australia Ltd................................. Australia PEARSON TELEVISION Pearson Television Ltd*..................................... England Pearson Television Productions Ltd.......................... England Pearson Television North America Inc........................ US Pearson Television International Ltd........................ England
- ------------------------ *Direct investment of Pearson plc F-89 PEARSON PLC PRINCIPAL SUBSIDIARIES AND ASSOCIATES (CONTINUED) AS AT DECEMBER 31, 1999 ASSOCIATES
COUNTRY OF INCORPORATION BENEFICIAL CLASS OF SHARE ACCOUNTING OR REGISTRATION INTEREST SHARE CAPITAL YEAR END --------------- ---------- ------------- -------- ----------- % LM FT GROUP The Economist Newspaper Ltd..... England 50 Ord 5p 1.1 March 100 'B' 5p 0.1 Nil 'A' 5p Nil Trust 5p - PEARSON TELEVISION Channel 5 Television Group England 20.0 Ord 1p voting 0.8 December Ltd........................... 25.0 Ord 1p 4.0 non-voting 19.2 Preference - 1.7 Deferred -
The principal partnerships are shown on page F-27. Subsequent to the year end, the beneficial interest in Channel 5 Television Group Ltd increased (see note 31). F-90 PEARSON PLC INTERIM RESULTS FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) The financial information included on the following pages F-92 through F-100 represents the consolidated financial position of Pearson plc and its subsidiaries as of June 30, 2000 and the results of their operations and changes in their financial position (cash flows) prepared in accordance with UK GAAP. This financial information is included because it is publicly available in the UK and has been publicly distributed to shareholders in the UK and provided to the London stock exchange. This financial information has been prepared in accordance with UK GAAP and has not been reconciled to accounting principles generally accepted in the US. F-91 PEARSON PLC CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED)
1999 1999 2000 HALF YEAR FULL YEAR HALF YEAR RESTATED RESTATED NOTE --------- --------- --------- LM LM LM SALES....................................................... 2 Continuing operations....................................... 1,490 1,306 3,332 Acquisitions................................................ 55 - - ----- ----- ----- TOTAL SALES................................................. 1,545 1,306 3,332 OPERATING PROFIT............................................ 2 Continuing operations--group................................ (13) 13 247 Acquisitions--group......................................... (6) - - ----- ----- ----- Total operating (loss)/profit--group........................ (19) 13 247 ----- ----- ----- Share of operating profit of associates and joint ventures: Continuing operations....................................... 5 12 23 Acquisitions................................................ (5) - - ----- ----- ----- - 12 23 Discontinued operations..................................... 8 21 48 ----- ----- ----- TOTAL SHARE OF OPERATING PROFIT OF ASSOCIATES AND JOINT VENTURES.................................................. 8 33 71 ===== ===== ===== Total operating profit analysed between: Operating profit before internet enterprises, goodwill amortisation and other items.............................. 156 133 588 Internet enterprises........................................ (84) (7) (39) Goodwill amortisation....................................... (72) (63) (131) Other items................................................. (11) (17) (100) ----- ----- ----- TOTAL OPERATING (LOSS)/PROFIT............................... (11) 46 318 Continuing operations: Profit on sale of fixed assets and investments.............. 3 2 22 349 (Loss) on sale of businesses and associates................. 4 (15) (17) (44) Discontinued operations: Profit on sale of businesses and associates................. 4 231 - - 218 5 305 ----- ----- ----- Profit on sale of businesses and associates by an associate--continuing operations.......................... - - 1 PROFIT BEFORE INTEREST...................................... 207 51 624 NET FINANCE COSTS Net interest payable--group................................. (67) (70) (145) Net interest payable--associates and joint ventures......... (1) (1) (2) Arrangement fee............................................. 5 (16) - - ----- ----- ----- (84) (71) (147) ----- ----- ----- PROFIT/(LOSS) BEFORE TAXATION............................... 123 (20) 477 Taxation.................................................... 7 (32) (18) (177) ----- ----- ----- Profit/(loss) after taxation................................ 91 (38) 300 Equity minority interests................................... (3) (3) (6) ----- ----- ----- PROFIT/(LOSS) FOR THE FINANCIAL PERIOD...................... 88 (41) 294 DIVIDENDS ON EQUITY SHARES.................................. (58) (54) (138) ----- ----- ----- PROFIT/(DEFICIT) RETAINED................................... 30 (95) 156 ===== ===== ===== ADJUSTED EARNINGS PER EQUITY SHARE BEFORE INTERNET ENTERPRISES............................................... 6 10.0p 7.1p 53.3p ADJUSTED (LOSS)/EARNINGS PER EQUITY SHARE AFTER INTERNET ENTERPRISES............................................... 6 (0.6)p 6.3p 48.5p EARNINGS/(LOSS) PER EQUITY SHARE............................ 6 14.2p (6.6)p 48.2p DILUTED EARNINGS/(LOSS) PER EQUITY SHARE.................... 6 13.8p (6.5)p 47.5p DIVIDENDS PER EQUITY SHARE.................................. 8 9.2p 8.6p 22.5p ===== ===== =====
- ------------------------------ 1999 has been restated to reflect the adoption of FRS16 "Current Tax". The results for the 1999 full year are an abridged version of the full accounts which have received an unqualified audit report from the auditors and have been filed with the Registrar of Companies. First half figures are neither audited nor reviewed. F-92 PEARSON PLC CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2000 (UNAUDITED)
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM FIXED ASSETS Intangible assets........................................... 3,018 2,340 2,457 Tangible assets............................................. 453 435 405 Investments: Associates.................................................. 289 208 234 Other....................................................... 191 291 99 ------ ------ ------ 3,951 3,274 3,195 ------ ------ ------ CURRENT ASSETS Stocks...................................................... 945 724 691 Debtors..................................................... 1,233 1,093 1,132 Investments................................................. 3 5 4 Cash at bank and in hand.................................... 369 351 328 ------ ------ ------ 2,550 2,173 2,155 ------ ------ ------ CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR Short-term borrowing........................................ (902) (594) (47) Other creditors............................................. (1,356) (1,162) (1,441) ------ ------ ------ (2,258) (1,756) (1,488) ------ ------ ------ NET CURRENT ASSETS.......................................... 292 417 667 ------ ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES....................... 4,243 3,691 3,862 CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium and long term borrowing.............................. (2,011) (2,297) (2,276) Other creditors............................................. (58) (43) (32) ------ ------ ------ (2,069) (2,340) (2,308) PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation........................................... (17) (22) (21) Other provisions for liabilities and charges................ (213) (222) (206) ------ ------ ------ NET ASSETS.................................................. 1,944 1,107 1,327 ------ ------ ------ CAPITAL AND RESERVES Called up share capital..................................... 156 153 153 Share premium account....................................... 774 504 517 Profit and loss account..................................... 901 413 651 ------ ------ ------ EQUITY SHAREHOLDERS' FUNDS.................................. 1,831 1,070 1,321 EQUITY MINORITY INTERESTS................................... 113 37 6 ------ ------ ------ 1,944 1,107 1,327 ====== ====== ======
F-93 PEARSON PLC STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED)
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Profit/(loss) for the financial period...................... 88 (41) 294 Other net gains and losses recognised in reserves: Currency translation differences............................ 97 71 36 ----- ----- ----- TOTAL RECOGNISED GAINS RELATING TO THE PERIOD............... 185 30 330 ===== ===== =====
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS FOR THE SIX MONTHS TO JUNE 30, 2000
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Profit/(loss) for the financial period...................... 88 (41) 294 Dividends on equity shares.................................. (58) (54) (138) ----- ----- ----- 30 (95) 156 Currency translation differences............................ 97 71 36 Goodwill written back....................................... 126 40 63 Shares issued............................................... 257 6 18 ----- ----- ----- Net movement for the period................................. 510 22 273 Equity shareholders' funds at beginning of the period....... 1,321 1,048 1,048 ----- ----- ----- EQUITY SHAREHOLDERS' FUNDS AT END OF THE PERIOD............. 1,831 1,070 1,321 ===== ===== =====
F-94 PEARSON PLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED)
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR NOTE --------- --------- --------- LM LM LM NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES......................................... 9 (200) (52) 433 ------ ------ ------ DIVIDENDS FROM ASSOCIATES AND JOINT VENTURES......... 43 31 44 ------ ------ ------ Interest received.................................... 23 30 41 Interest paid........................................ (105) (98) (182) Debt issue costs..................................... - - (5) Dividends paid to minority interests................. - - (1) ------ ------ ------ RETURNS ON INVESTMENTS AND SERVICING OF FINANCE...... (82) (68) (147) ------ ------ ------ TAXATION............................................. (30) (33) (156) ------ ------ ------ Purchase of tangible fixed assets.................... (65) (41) (102) Sale of tangible fixed assets........................ 8 10 36 Purchase of investments.............................. (90) (19) (24) Sale of investments.................................. 3 108 624 ------ ------ ------ CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT......... (144) 58 534 ------ ------ ------ Purchase of subsidiary undertakings.................. (482) (17) (249) Net debt acquired with subsidiary undertakings....... (19) - - Purchase of associates and joint ventures............ (88) (48) (54) Sale of subsidiary undertakings...................... 3 31 44 Net cash disposed with subsidiary undertakings....... - (3) (3) Sale of associates and joint ventures................ 394 12 12 ------ ------ ------ ACQUISITIONS AND DISPOSALS........................... (192) (25) (250) ------ ------ ------ EQUITY DIVIDENDS PAID................................ (87) (79) (132) ------ ------ ------ NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID FINANCING RESOURCES AND FINANCING.................. (692) (168) 326 ------ ------ ------ Liquid resources acquired............................ (49) (9) (9) Liquid resources disposed............................ 44 10 10 Collateral deposit placed............................ (61) - - ------ ------ ------ MANAGEMENT OF LIQUID RESOURCES....................... (66) 1 1 ------ ------ ------ Issue of equity share capital........................ 257 6 18 Capital element of finance lease rentals............. (4) (5) (11) Loan facility repaid................................. (676) (326) (1,112) 4.625% [EURO]uro Bonds 2004 advanced................. - - 358 7% Sterling Bonds 2014 advanced...................... - - 250 6.125% [EURO]uro Bonds 2007 advanced................. 368 -- -- Loan notes advanced.................................. 131 -- -- Net movement in other borrowings..................... 597 525 202 ------ ------ ------ FINANCING............................................ 673 200 (295) ------ ------ ------ (DECREASE)/INCREASE IN CASH IN THE PERIOD............ (85) 33 32 ====== ====== ======
F-95 PEARSON PLC NOTES TO THE INTERIM RESULTS FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) 1. BASIS OF PREPARATION The interim results for the six months to June 30, 2000 have been prepared in accordance with the accounting policies set out in the 1999 Annual Report. FRS15 "Tangible Fixed Assets' has been adopted. FRS16 "Current Tax' has also been adopted and comparative figures have been restated to reflect that UK dividend income is now presented net of UK tax credits. 2. SECTOR ANALYSIS
SALES --------------------------------- 2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Pearson Education........................................... 647 554 1,725 FT Group.................................................... 408 330 687 The Penguin Group........................................... 326 263 565 Pearson Television.......................................... 164 159 355 ----- ----- ----- Continuing operations....................................... 1,545 1,306 3,332 ===== ===== =====
Sales in respect of internet enterprises, the group's discrete internet operations, are included within the FT Group L16m (1999 half year: L2m; 1999 full year: L7m).
OPERATING PROFIT OPERATING PROFIT --------------------------------- --------------------------------- (BEFORE INTERNET ENTERPRISES, (AFTER INTERNET ENTERPRISES, GOODWILL AMORTISATION AND GOODWILL AMORTISATION AND OTHER ITEMS) OTHER ITEMS) --------------------------------- --------------------------------- 2000 1999 1999 2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- --------- --------- --------- LM LM LM LM LM LM Pearson Education.......... (26) (38) 257 (108) (116) 36 FT Group................... 109 86 150 35 77 103 The Penguin Group.......... 33 31 65 25 31 64 Pearson Television......... 32 33 68 29 33 67 ---- ---- ---- ---- ---- ---- Continuing operations...... 148 112 540 (19) 25 270 Discontinued operations.... 8 21 48 8 21 48 ---- ---- ---- ---- ---- ---- 156 133 588 (11) 46 318 ==== ==== ==== ==== ==== ====
The results of internet enterprises are included within Pearson Education L19m (1999 half year: Lnil; 1999 full year: L3m), within FT Group L64m (1999 half year: L7m; 1999 full year: L36m) and within Pearson Television L1m (1999 half year: Lnil; 1999 full year: Lnil). Other items comprises exceptional items of L11m (1999 half year L15m; 1999 full year L95m) and Year 2000 compliance costs of Lnil (1999 half year L2m; 1999 full year L5m). Exceptional items comprise integration costs of L8m (1999 half year L15m; 1999 full year L95m) following the acquisition of Simon & Schuster in 1998 which all relate to the Pearson Education business sector and integration costs of L3m following the acquisition of Dorling Kindersley in May 2000 which all F-96 PEARSON PLC NOTES TO THE INTERIM RESULTS (CONTINUED) FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) 2. SECTOR ANALYSIS (CONTINUED) relate to the Penguin Group business sector. Discontinued operations relate to the withdrawal of the Group from the banking business following its disposal of Lazard on March 3, 2000. Included in the analysis of operating profit above are the following amounts in respect of associates and joint ventures:
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Pearson Education........................................... 4 4 6 FT Group.................................................... (8) 7 14 Pearson Television.......................................... 4 1 3 Continuing operations....................................... - 12 23 Discontinued operations..................................... 8 21 48 ----- ----- ----- 8 33 71 ===== ===== =====
3. PROFIT ON SALE OF FIXED ASSETS AND INVESTMENTS
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Profit on disposal of interest in BSB Holdings Ltd.......... - 16 345 Loss on sale of fixed assets relating to the Simon & Schuster acquisition...................................... - - (3) Net profit on sale of other investments and property interests................................................. 2 6 7 ----- ----- ----- Continuing operations....................................... 2 22 349 ----- ----- ----- Taxation.................................................... - (3) (90) ===== ===== =====
4. (LOSS)/PROFIT ON SALE OF BUSINESSES AND ASSOCIATES
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Loss on sale of Extel research products business............ - (16) (19) Loss on closure of Simon & Schuster businesses.............. - (3) (12) Net (loss)/profit on sale of other businesses............... (15) 2 (13) ----- ----- ----- Continuing operations....................................... (15) (17) (44) ----- ----- ----- Profit on sale of Lazard--discontinued operations........... 231 - - ----- ----- ----- Taxation.................................................... (31) (3) 5 ===== ===== =====
5. ARRANGEMENT FEE The amortisation of an arrangement fee in respect of a borrowing facility has been accelerated due to the early redemption of the facility. F-97 PEARSON PLC NOTES TO THE INTERIM RESULTS (CONTINUED) FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) 6. EARNINGS AND ADJUSTED EARNINGS PER EQUITY SHARE In order to show results from operating activities on a comparable basis two adjusted earnings per equity share are presented. Firstly, an adjusted earnings per equity share is presented which excludes profits or losses on the sale of fixed assets and investments, businesses and associates (see notes 3 and 4), Year 2000 compliance costs, integration costs in respect of the acquisitions of Simon & Schuster and Dorling Kindersley and the accelerated amortisation of a financing arrangement fee. Goodwill amortisation has also been excluded from the adjusted earnings calculation following the prospective implementation of FRS10 "Goodwill and Intangible Assets' in 1998. Due to a significant level of expenditure on new internet enterprises, a second adjusted earnings per equity share is presented in which the results of these are also excluded from earnings.
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Profit/(loss) for the financial period...................... 88 (41) 294 Adjustments: (Profit) on sale of fixed assets and investments: continuing operations................................................ (2) (22) (349) Loss on sale of businesses and associates: continuing operations................................................ 15 17 44 (Profit) on sale of businesses and associates: discontinued operations................................................ (231) - (Profit) on sale of businesses and associates by an associate: Continuing Operations....................................... - - (1) Internet enterprises........................................ 84 7 39 Interest on internet enterprises............................ 2 - - Minority share of internet enterprises...................... (2) - - Goodwill amortisation....................................... 72 63 131 Simon & Schuster integration costs.......................... 8 15 95 Dorling Kindersley integration costs........................ 3 - - Arrangement fee............................................. 16 - - Year 2000 compliance costs.................................. - 2 5 Taxation on above items..................................... 9 2 67 ----- ----- ----- Adjusted earnings before internet enterprises............... 62 43 325 ----- ----- ----- Internet enterprises........................................ (84) (7) (39) Interest on internet enterprises............................ (2) - - Minority share of internet enterprises...................... 2 - - Taxation on internet enterprises............................ 18 2 10 ----- ----- ----- Adjusted (loss)/earnings after internet enterprises......... (4) 38 296 ----- ----- ----- Profit/(loss) for the financial period...................... 88 (41) 294 Tax on the conversion of ordinary shares.................... (1) - (1) ----- ----- ----- Diluted earnings............................................ 87 (41) 293 ----- ----- ----- Weighted average number of equity shares (millions) --for earnings and adjusted earnings...................... 620.4 609.7 610.2 Effect of dilutive share options............................ 8.2 6.8 7.0 ----- ----- ----- Weighted average number of equity shares (millions) --for diluted earnings.................................... 628.6 616.5 617.2 ----- ----- ----- Adjusted earnings per equity share before internet enterprises............................................... 10.0p 7.1p 53.3p Adjusted (loss)/earnings per equity share after internet enterprises............................................... (0.6)p 6.3p 48.5p Earnings/(loss) per equity share............................ 14.2p (6.6)p 48.2p Diluted earnings/(loss) per equity share.................... 13.8p (6.5)p 47.5p ===== ===== =====
F-98 PEARSON PLC NOTES TO THE INTERIM RESULTS (CONTINUED) FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) 7. TAXATION The tax rate provided in the profit and loss account for the half year is based on the estimated effective rate for the full year and is analysed as follows:
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR % % % --------- --------- --------- United Kingdom tax rate..................................... 30.0 30.2 30.2 Effect of utilisation of tax losses in the USA.............. (4.5) (10.6) (7.7) Other items................................................. (0.5) 5.4 2.5 ----- ----- ----- Tax rate reflected in adjusted earnings..................... 25.0 25.0 25.0 ----- ----- ----- Effect of profits/(losses) excluded from adjusted earnings.................................................. 1.0 n/a 12.5 ----- ----- ----- Tax rate reflected in earnings.............................. 26.0 n/a 37.5 ----- ----- -----
Taxation is analysed as:
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM Parent and subsidiaries..................................... 28 10 162 Associates.................................................. 4 8 15 ----- ----- ----- 32 18 177 ===== ===== =====
The group continues to have substantial tax losses available in the US which are not recognised in the accounts and hence the tax rate reflected in adjusted earnings is lower than the UK tax rate. 8. DIVIDENDS The directors have declared an interim dividend of 9.2p per equity share, payable on October 27, 2000 to shareholders on the register at the close of business on August 11, 2000. F-99 PEARSON PLC NOTES TO THE INTERIM RESULTS (CONTINUED) FOR THE SIX MONTHS TO JUNE 30, 2000 (UNAUDITED) 9. NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS
2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- LM LM LM RECONCILIATION OF OPERATING (LOSS)/PROFIT TO NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES Total operating (loss)/profit............................... (11) 46 318 Share of profit of associates and joint ventures............ (8) (33) (71) Depreciation charges........................................ 44 41 82 Goodwill amortisation....................................... 70 63 130 (Increase) in stocks........................................ (137) (69) (57) Decrease/(increase) in debtors.............................. 37 46 (71) (Decrease)/increase in creditors............................ (199) (114) 127 (Decrease) in operating provisions.......................... (6) (29) (33) Other and non-cash items.................................... 10 (3) 8 ----- ----- ----- NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES......... (200) (52) 433 Purchase of fixed assets and finance lease payments......... (69) (46) (113) Sale of operating tangible fixed assets..................... 5 2 24 Dividends from associates and joint ventures................ 43 31 44 Other....................................................... 3 4 8 ----- ----- ----- OPERATING CASH FLOW......................................... (218) (61) 396 ----- ----- ----- Analysed as: Operating cash flow before internet enterprises and other items..................................................... (104) (8) 540 Cash effect of other items.................................. (26) (49) (110) Cash effect of internet enterprises......................... (88) (4) (34) ----- ----- ----- OPERATING CASH FLOW......................................... (218) (61) 396 ===== ===== =====
10. EXCHANGE RATES Pearson earns a significant proportion of its sales and profits in overseas currencies, the most prominent being the US dollar and the Euro. The relevant rates are as follows:
L VERSUS US$ L VERSUS EURO --------------------------------- --------------------------------- 2000 1999 1999 2000 1999 1999 HALF YEAR HALF YEAR FULL YEAR HALF YEAR HALF YEAR FULL YEAR --------- --------- --------- --------- --------- --------- LM LM LM LM LM LM Average for operating profits................... 1.56 1.61 1.61 1.65 1.50 1.53 Period end rate............. 1.51 1.58 1.61 1.58 1.53 1.61
F-100 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Viacom Inc.: In our opinion, the accompanying carve-out balance sheets and the related carve-out statements of operations and of cash flows presents fairly, in all material respects, the financial position of Simon & Schuster (Excluding Consumer), as defined in Note 1 to the financial statements (the "Company"), at December 31, 1997, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. PricewaterhouseCoopers, New York June 17, 1998 F-101 SIMON & SCHUSTER (EXCLUDING CONSUMER) CARVE-OUT STATEMENTS OF OPERATIONS
JANUARY 1, 1998 THROUGH YEAR ENDED NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Revenues......................................... 1,663 1,915 1,784 1,631 Expenses Operating...................................... (700) (757) (689) (573) Selling, general and administrative............ (872) (851) (816) (781) Depreciation and amortization (note 1)......... (142) (145) (135) (126) ------ ------ ------ ------ TOTAL EXPENSES................................... (1,714) (1,753) (1,640) (1,480) ------ ------ ------ ------ Operating (loss)/income.......................... (51) 162 144 151 Other income/(expense) Net interest income/(expense)(note 3).......... 1 (6) (5) (6) Other items, net (note 9)...................... (15) (8) 8 (1) ------ ------ ------ ------ (Loss)/earnings before income taxes.............. (65) 148 147 144 Provision for income taxes (note 6).............. (2) (82) (80) (78) ------ ------ ------ ------ NET (LOSS)/EARNINGS.............................. (67) 66 67 66 ====== ====== ====== ======
See notes to carve-out financial statements. F-102 SIMON & SCHUSTER (EXCLUDING CONSUMER) CARVE-OUT BALANCE SHEET
NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Assets Current assets Cash........................................... 41 35 31 45 Receivables, less allowances for sales returns and doubtful accounts of $181 (1998), $204 (1997), $176 (1996) and $162 (1995).......... 473 545 502 407 Inventories (note 1)........................... 287 284 278 319 Prepaid and other current assets............... 125 98 90 76 ------ ------ ------ ------ TOTAL CURRENT ASSETS............................. 926 962 901 847 ------ ------ ------ ------ Property and equipment, net (note 1)............. 163 165 171 160 Intangibles, net (note 1)........................ 2,851 2,941 3,011 3,052 Prepublication costs, net of accumulated amortization of $423 (1998), $312 (1997), $240 (1996) and $187 (1995) (note 1)................ 326 325 314 270 Other assets..................................... 114 124 89 105 ------ ------ ------ ------ 4,380 4,517 4,486 4,434 ====== ====== ====== ====== LIABILITIES AND VIACOM EQUITY INVESTMENT Current liabilities Accounts payable............................... 123 223 229 193 Accrued expenses............................... 103 78 96 91 Royalty payable................................ 74 87 83 78 Subscription liability......................... 44 44 43 38 Accrued compensation........................... 227 192 183 176 Other current liabilities...................... 72 71 83 126 Current portion of long-term debt (note 3)..... 22 26 7 41 ------ ------ ------ ------ TOTAL CURRENT LIABILITIES........................ 665 721 724 743 Long-term debt (note 3).......................... 23 27 22 14 Deferred income taxes (note 6)................... 14 21 19 - Other liabilities................................ 13 5 15 8 Commitments and contingencies (note 7) Viacom equity investment (note 4)................ 3,665 3,743 3,706 3,669 ------ ------ ------ ------ 4,380 4,517 4,486 4,434 ====== ====== ====== ======
See notes to carve-out financial statements. F-103 SIMON & SCHUSTER (EXCLUDING CONSUMER) CARVE-OUT STATEMENTS OF CASH FLOWS
JANUARY 1, 1998 THROUGH YEAR ENDED NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Operating activities Net earnings.......................................... (67) 66 67 66 Adjustments to reconcile net earnings to net cash flow from operating activities Gain on sale of investment.......................... - - (8) - Depreciation and amortization....................... 142 145 135 126 Decrease/(increase) in receivables.................. 62 (46) (90) (19) (Increase)/decrease in inventories.................. (4) (14) 37 (98) (Increase)/in other assets.......................... (40) (54) (34) (31) Increase in prepublication costs.................... (1) (13) (50) (49) (Decrease)/increase in accounts payable and other liabilities....................................... (51) (29) 34 33 ---- ---- ---- --- NET CASH FLOW FROM OPERATING ACTIVITIES................. 41 55 91 28 ---- ---- ---- --- Investing activities Capital expenditures.................................. (28) (34) (31) (42) Proceeds from dispositions............................ 2 14 42 10 Acquisitions, net of cash acquired.................... - (13) (49) (54) Proceeds from sale of buildings and equipment......... - 16 6 5 ---- ---- ---- --- NET CASH FLOW FROM INVESTING ACTIVITIES................. (26) (17) (32) (81) ---- ---- ---- --- Financing activities Net distributions to Viacom........................... (76) (157) (147) (43) Amounts paid by Viacom on behalf of Publishing (excluding consumer)................................ 75 134 116 104 Principal payment on capital lease obligations........ (1) (11) (4) (2) Repayments of long-term debt, net..................... (7) - (38) - ---- ---- ---- --- NET CASH FLOW FROM FINANCING ACTIVITIES................. (9) (34) (73) 59 ---- ---- ---- --- Net increase/(decrease) in cash......................... 6 4 (14) 6 Cash at beginning of year............................... 35 31 45 39 ---- ---- ---- --- Cash at end of year..................................... 41 35 31 45 ==== ==== ==== === Noncash investing and financing activities Property and equipment acquired under capitalized leases.............................................. 13 21 16 11 ---- ---- ---- ---
See notes to carve-out financial statements. F-104 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Simon & Schuster (Excluding Consumer) consists of Simon & Schuster and its subsidiaries, which are wholly-owned by Viacom Inc. ("Viacom"), excluding the Consumer division (the "Company"). The Company publishes and distributes books, audiobooks, software (including CD-ROM products, educational textbooks, supplemental educational materials, multimedia curricula, and information and reference materials for schools, businesses and professionals. The Company's flagship imprints include Allyn & Bacon, Computer Curriculum Corporation, Prentice Hall, Silver Burdett Ginn and Macmillan-Registered Trademark- USA. The Company also distributes its products directly as well as through third parties and delivers content and sells products on Internet Web sites operated by various imprints or linked to individual titles. The Company operates principally in one segment of business--the production, publication and sale of educational and professional materials. On May 17, 1998, Viacom entered into an agreement to sell the Company to Pearson plc. for $4.6 billion in cash. Viacom will retain the Consumer division, including the Simon & Schuster name. The transaction was completed on November 27, 1998. The accompanying carve-out financial statements and related notes reflect the carve-out historical results of operations, financial position and cash flows of the Company. These financial statements are not necessarily indicative of results that would have occurred if the Company had been a separate stand-alone entity during the periods presented or of future results of the Company. PRINCIPLES OF COMBINATION The carve-out financial statement include the accounts of the Company and all investments of more than 50% in subsidiaries. All significant intercompany transactions with combined entities have been eliminated. Investments in affiliated companies over which the Company has significant control or ownership of more than 20% but less than or equal to 50% are accounted for under the equity method. Investments of 20% or less are accounted for under the cost method. Investments in affiliates are included in Other Assets. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could subsequently differ from those estimates. The significant estimates that affect the financial statement include, but are not limited to, book returns, doubtful accounts, recoverability of advances to authors and recoverability of long-term assets such as intangibles, prepublication costs and software developed for external use. RETURNS RESERVES A provision for estimated sales returns is made at time of sale is generally based upon a percentage of gross sales using historical return rates. F-105 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts charged to expense was $17m, $17m, $15m and $12m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997, respectively. INVENTORIES Inventories, which consists principally of paper, printing costs, binding and in-bound freight costs and finished products are stated at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following:
JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Raw materials......................................... 15 16 12 24 Work-in-process....................................... 25 23 24 38 Finished goods........................................ 247 245 242 257 ---- ---- ---- ---- TOTAL................................................. 287 284 278 319 ==== ==== ==== ====
PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed principally by the straight-line basis over the estimated useful lives as follows: Building and building improvements........... 40 years for building; 10 years for building improvements Leasehold improvements....................... lesser of useful life or lease term Equipment and other.......................... 3 to 10 years
F-106 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Balances of major classes of assets and allowances for depreciation and amortization are as follows:
JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 DECEMBER 31, ------------ ------------------------------ (UNAUDITED) 1997 1996 1995 ------------ -------- -------- -------- $M $M $M $M Land...................................................... 7 7 18 19 Building and building improvements........................ 32 34 55 55 Leasehold improvements.................................... 20 20 17 12 Equipment and other....................................... 250 222 178 153 ---- ---- ---- ---- TOTAL..................................................... 309 283 268 239 Less: allowances for depreciation and amortization....... (146) (118) (97) (79) ---- ---- ---- ---- Property and equipment, net............................... 163 165 171 160 ==== ==== ==== ====
Maintenance and repair costs are charged to expense as incurred, and renewals and improvements that extend the useful life of the assets are capitalized. Depreciation expense, including capitalized lease and software amortization, was $52m, $46m, $37m and $30m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997. Property and equipment includes capital leases of $34m, $34m, $23m and $13m at November 27, 1998, December 31, 1997, 1996 and 1995, respectively, net of accumulated amortization of $32m, $18m, $8m and $4m, respectively. Amortization expense related to capital leases was $14m, $10m, $5m and $2m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1998. In 1997, the Company sold its Englewood Cliffs, New Jersey facility resulting in a gain of $5m. In 1996, the Company sold its Paramus, New Jersey facility resulting in a gain of $2m. F-107 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLES Intangible assets consist of the following:
JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Goodwill......................................... 2,869 2,869 2,840 2,783 Publishing rights................................ 441 441 441 441 ------ ------ ------ ------ TOTAL............................................ 3,310 3,310 3,281 3,224 Less: accumulated amortization................... (459) (369) (270) (172) ------ ------ ------ ------ Intangibles, net................................. 2,851 2,941 3,011 3,052 ====== ====== ====== ======
Publishing rights are amortized on a straight-line basis over the estimated remaining economic life of the titles or contracts, which does not exceed 17 years. The cost of acquired businesses in excess of the fair value of tangible assets and liabilities acquired ("goodwill") is generally amortized using the straight-line method over estimated useful lives of up to 40 years. Amortization expense related to intangible assets was $90m, $99m, $98m and $96m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997. PREPUBLICATION COSTS Prepublication costs include principally art, composition, typesetting, film, copy editing, proofreading and other nonrecurring preproduction costs related to product development. Units that publish products with life cycles longer than one year generally capitalize prepublication costs and amortize these costs over the life of the product up to 5 years. Expense related to prepublication costs, which is included in operating expenses, was $168m, $177m, $134m and $105m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997, respectively. IMPAIRMENT EVALUATION In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards for the evaluation and measurement of impairment of long-lived assets, including identifiable intangibles and goodwill. There was no material effect on the financial statements from the adoption of SFAS 121 because the Company's prior impairment recognition practice was generally consistent with SFAS 121. Under the provisions of SFAS 121, impairment is indicated when expected future cash flows are less than the related assets' carrying value. Accordingly, when indicators of impairment are present, the Company F-108 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) evaluates the carrying value of the related asset, including goodwill, in relation to the fair value and the carrying value of the underlying assets is adjusted if the fair value is lower. REVENUE RECOGNITION Revenues are generally recognized in the period when merchandise is shipped. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company's foreign business' assets and liabilities are translated at exchange rates in effect at the balance sheet date, while results of operations are translated at average exchange rates for the respective periods. The resulting translation gains and losses are included as part of Viacom's equity investment. Foreign currency transaction gains and losses have been included in "Other items, net". INCOME TAXES Income taxes are provided based on the liability method of accounting pursuant to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes are recorded to reflect the tax benefit and consequences of future years differences between the tax bases of assets and liabilities and their financial reporting basis. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings per Share" which establishes standards for computing and presenting earnings per share and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Given the nature of the capital structure of the combined entities that form the Company, earnings per share data has not been presented. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. The components of the Viacom Equity Investment, which include certain components required to be displayed by SFAS 130, are presented in note 4. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. In February 1998, the FASB issued SFAS 132, "Employer's Disclosures about Pensions and Other Post-Retirement Benefits" (SFAS 132"), which is effective for fiscal years beginning after December 15, 1997. SFAS 132 standardizes the disclosure requirements for pension and other post-retirement benefits and requires additional information on benefit obligations and the fair value of plan assets. Given the proposed sale of the Company and the nature of these financial F-109 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements as described in note 1, the Company has not made an assessment relative to the impct of SFAS 131 and SFAS 132. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for years beginning after June 15, 2000, as amended. Given the sale of the Company as described in note 1, no assessment relative to the impact of SFAS 133 has been made. There are no other recently issued accounting pronouncements that are anticipated to have a material impact on the Company. UNAUDITED FINANCIAL INFORMATION The unaudited financial information for the period January 1, 1998 through November 27, 1998 has been prepared by management and includes all adjustments, consisting of recurring entries which management believes necessary to present fairly the financial position at November 27, 1998 and the results of operations and cash flows for the period January 1, 1998 through November 27, 1998. The results of operations for the period January 1, 1998 through November 27, 1998 are not necessarily indicative of the operating results to be expected for the full year. 2. ACQUISITIONS AND DISPOSITIONS In 1997, the Company acquired all the outstanding stock of Skylight Training & Publishing Inc. for approximately $5m in cash and a note for $14m payable from 1998 through 2002. In 1996, the Company acquired all the outstanding stock of Invest Learning, a company which provides technology-based adult basic skills training solutions for the adult education market, for approximately $31m in cash. The acquisitions were accounted for as purchases and the net assets and results of operations are included in the Company's consolidated financial statements from the date of each respective acquisition. The costs of the acquisitions were allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. The goodwill associated with these acquisitions is being amortized on a straight-line basis over estimated useful lives of up to 40 years. In 1997, the Company disposed of Judy/Instructo, Good Apple, Fearon Teaching Aids, American Teaching Aids and Shining Star, which provide supplemental instruction manipulatives and supplemental teacher resource materials to the K-8 market. The businesses were sold for net cash consideration of $11m. Concurrent with the Asset Sale Agreement, a Transition Services Agreement and a Trademark License Agreement were entered into with the buyer, for net cash consideration of $6m. In 1995, the Company disposed of Prentice Hall Legal & Financial Services ("PHL&FS") which represented the combination of Prentice Hall Corporate Services, Infosearch, Charles E. Simon and Statewide/PH OnLine. PHL&FS was sold to two separate buyers for net cash consideration of $30m and a 35% ownership interest in one of the buyers, valued at $21m, F-110 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 2. ACQUISITIONS AND DISPOSITIONS (CONTINUED) respectively. This interest was subsequently sold in 1996. The Company did not realize any material gains or losses on the above dispositions except as discussed in note 9. Acquisitions and divestitures noted above did not materially impact consolidated results, therefore no pro forma information is provided. The Company acquired and disposed of other businesses in the periods presented which are not considered material to the financial statements presented herein. 3. DEBT The Company's debt represents capital lease commitments, 7.8% promissory notes and other notes payable for acquisitions (see note 2). The components of debt are as follows:
DECEMBER 31, NOVEMBER 27, 1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Current Obligations under capital leases...................... 15 12 7 3 Promissory notes...................................... - 7 - - Notes payable......................................... 7 7 - 38 TOTAL CURRENT DEBT...................................... 22 26 7 41 Long-Term Obligations under capital leases...................... 16 20 15 7 Promissory notes...................................... - - 7 7 Notes payable......................................... 7 7 - - --- --- --- --- TOTAL LONG-TERM DEBT.................................... 23 27 22 14 --- --- --- --- TOTAL DEBT.............................................. 45 53 29 55 === === === ===
Interest costs incurred and interest income, which also reflect amounts for certain intercompany loans between the Company and certain Viacom subsidiaries (see note 4), are summarized below:
JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, NOVEMBER 27,1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ---------------- -------- -------- -------- $M $M $M $M Interest incurred........................................ (3) (9) (8) (10) Interest income.......................................... 4 3 3 4 -- -- -- --- 1 (6) (5) (6) == == == ===
F-111 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 4. VIACOM EQUITY INVESTMENT An analysis of the Viacom equity investment activity is as follows:
JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, NOVEMBER 27, 1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Balance as of the beginning of the year.......... 3,743 3,706 3,669 3,542 Net (loss)/earnings.............................. (67) 66 67 66 Net cash distributions to Viacom................. (76) (157) (147) (43) Allocated charges from Viacom.................... 75 134 116 104 Currency translation adjustment and other........ (10) (6) 1 - ------ ------ ------ ------ BALANCE AS OF THE END OF THE YEAR................ 3,665 3,743 3,706 3,669 ====== ====== ====== ======
Viacom funds the working capital requirements of its businesses based upon a centralized cash management system. The Viacom equity investment includes accumulated equity as well as any payables and receivables due to/from Viacom resulting from cash transfers and other intercompany activity. Viacom generally does not charge the Company interest on intercompany balances; however, the Company has certain loans directly with certain Viacom subsidiaries on which interest is charged. The following is a summary of the allocated charges from Viacom that are reflected in the foregoing analysis of Viacom equity investment activity:
JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, NOVEMBER 27, 1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Income and miscellaneous operating taxes.............. 13 75 52 42 Salaries and benefits payments........................ 44 47 53 50 Other................................................. 18 12 11 12 --- ---- ---- ---- ALLOCATED CHARGES FROM VIACOM......................... 75 134 116 104 === ==== ==== ====
5. RELATED PARTY TRANSACTIONS Viacom provides the Company with certain general and administrative services, including insurance, legal, financial and other corporate functions. The charges for insurance and legal expenses were $3m, $5m, $5m and $7m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997, respectively, and are included in selling, general and administrative expenses. The cost of financing activities and certain other corporate functions, which did not benefit the Company, were absorbed by Viacom. See note 8 for pension plan and additional employee benefit costs charged by Viacom to the Company. The Company shares with the Consumer division certain general and administrative services, including warehousing and customer service functions, as well as certain other corporate functions, including purchasing, payroll, accounting and systems and technology support. The Company has F-112 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 5. RELATED PARTY TRANSACTIONS (CONTINUED) charged Consumer for Consumer's share of these services in the amount of $34m, $37m, $39m and $38m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1997, respectively. Management believes that the methodologies used to allocate charges for the services described above from Viacom and to Consumer are reasonable. The Company, through the normal course of business, is involved in transactions with companies owned by or affiliated with Viacom which did not have a material impact on the financial position or results of operations presented herein. 6. INCOME TAXES The Company has been included in consolidated federal, state and local income tax returns filed by Viacom. However, the tax expense reflected in the carve-out Statements of Operations and tax liabilities reflected in the carve-out Balance Sheets have been prepared on a separate return basis as though the Company had filed stand alone income tax returns. The current income tax liabilities for the periods presented have been satisfied by Viacom. These amounts have been reflected in the Viacom equity investment in the carve-out Balance Sheets. In connection with the transactions described in note 1, Viacom has agreed to indemnify the Company against income tax assessments, if any, arising from federal, state or local tax audits for periods in which the Company was a member of Viacom's consolidated tax group. Earnings accounted for under the equity method of accounting are shown net of tax on the carve-out Statements of Operations. Earnings before income taxes are attributable to the following jurisdictions:
YEAR ENDED JANUARY 1, 1998 DECEMBER 31, THROUGH $M NOVEMBER 27, 1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M United States......................................... (55) 114 122 113 Foreign............................................... (10) 34 25 31 ---- ---- ---- ---- (65) 148 147 144 ==== ==== ==== ====
F-113 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 6. INCOME TAXES (CONTINUED) Components of the provision for income taxes are as follows:
JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, NOVEMBER 27, 1998 ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Federal Current................................................. - 55 34 25 Deferred................................................ 3 2 29 30 State and local Current................................................. - 13 9 10 Deferred................................................ - - 3 2 Foreign Current................................................. 9 12 5 11 Deferred................................................ (10) - - - --------- --- --- --- PROVISIONS FOR INCOME TAXES ON EARNINGS BEFORE INCOME TAXES............................ 2 82 80 78 ========= === === ===
A reconciliation of the U.S. Federal statutory tax rate to the Company's effective tax rate on earnings before income taxes is as follows:
JANUARY 1, 1998 THROUGH YEAR ENDED NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- Statutory U.S. tax rate................................. (35.0%) 35.0% 35.0% 35.0% Amortization of goodwill................................ 32.1 20.5 20.5 18.7 State and local taxes, net of federal tax benefit....... 0.1 5.3 5.1 5.1 Effect of foreign operations............................ 3.0 (6.1) (6.7) (5.5) Other, net.............................................. 2.1 0.7 0.5 0.9 ----- ---- ---- ---- EFFECTIVE TAX RATE...................................... 2.3% 55.4% 54.4% 54.2% ===== ==== ==== ====
F-114 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 6. INCOME TAXES (CONTINUED) The following is a summary of the deferred tax accounts in accordance with SFAS 109.
NOVEMBER 27, 1998 DECEMBER 31, ----------------- ------------------------------ (UNAUDITED) 1997 1996 1995 ----------------- -------- -------- -------- $M $M $M $M Current deferred tax assets Sales returns and allowance........................... 46 57 50 44 Publishing costs...................................... 14 10 9 10 Employee compensation and other related expenses...... 46 35 30 28 Net operating loss.................................... 13 - - - ---- ---- ---- --- NET CURRENT DEFERRED TAX ASSETS......................... 119 102 89 82 ---- ---- ---- --- Noncurrent deferred tax liabilities Fixed asset basis differences......................... (120) (107) (83) (52) Intangible asset basis differences and other reserves............................................ (13) (16) (25) (17) ---- ---- ---- --- NET NONCURRENT DEFERRED TAX LIABILITIES................. (133) (123) (108) (69) NET DEFERRED TAX (LIABILITIES)/ASSETS................... (14) (21) (19) 13 ==== ==== ==== ===
7. COMMITMENTS AND CONTINGENCIES The Company has long-term noncancelable lease commitments for various real property, office space, and equipment which expire at various dates. Certain leases contain renewal and escalation clauses for a proportionate share of operating expenses. At November 27, 1998, minimum rental payments under noncancelable leases, net of sublease income are as follows:
OPERATING CAPITAL --------- -------- $M $M 1999 46 17 2000 36 10 2001 30 4 2002 22 3 2003 20 1 2004 and thereafter 142 1 ---- ---- TOTAL MINIMUM LEASE PAYMENTS................................ 296 36 Less amount representing interest........................... - (4) ---- ---- PRESENT VALUE OF NET MINIMUM PAYMENTS....................... 296 32 ==== ====
Rent expense was $31m for the period January 1, 1998 through December 31, 1998 and $55m, $56m and $48m for the three years ended December 31, 1997, respectively. F-115 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has entered into various purchase commitments with third party vendors in the ordinary course of business, that include cancellation penalties upon termination. Management does not consider these to be material to the Company's results of operations, financial position or liquidity. The Company has royalty advance commitments which are not reflected on the balance sheet as of November 27, 1998 aggregating approximately $30m. The advance commitments are primarily contingent upon delivery of finished manuscripts and or products at various stages of completion. The Company is involved in ordinary and routine litigation incidental to its business. Management believes that any ultimate liability resulting from those actions or claims will not have a material adverse effect on the Company's results of operations, financial position or liquidity. The Company has entered into various acquisitions and dispositions of businesses. These transactions include indemnification clauses in the sale and purchase agreements. There are no material indemnification claims pending against the Company. 8. PENSION PLANS AND OTHER EMPLOYEE BENEFITS Viacom has a noncontributory defined benefit pension plan covering substantially all of its employees, including the employees of the Company. Retirement benefits are based principally on years of service and salary. Viacom has charged the Company for pension expense of $5m, $7m, $6m and $12m for the period January 1, 1998 through November 27, 1998 and for the three years ended December 31, 1998, respectively. The related pension liability was $42m, $37m, $29m and $34m at November 27, 1998 and December 31, 1997, 1996 and 1995, respectively. Viacom also provides other employee benefits to the Company's employees, including certain post employment benefits, medical and dental insurance costs and contributions to a 401(K) savings plan and medical benefits to substantially all of the retirees of the Company. Viacom charged the Company $5m, $8m, $9m and $14m for the period January 1, 1998 through November 27, 1998, and for the three years ended December 31, 1997, respectively for these benefits. The related liability for these other employee benefits was $96m, $105m, $106m and $102m at November 27, 1998 and December 31, 1997, 1996 and 1995, respectively. December 31, 1997, 1996 and 1995, respectively. Management believes that the methodologies used to allocated pension and other employee benefit charges to the Company are reasonable. 9. OTHER ITEMS, NET "Other items, net" principally reflects foreign currency transaction losses for the periods presented and, for 1996, reflects a gain of $8m from the Company's sales of an equity investment (see note 2). F-116 SIMON & SCHUSTER (EXCLUDING CONSUMER) NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED) AND THE THREE YEARS ENDED DECEMBER 31, 1997 10. OPERATIONS BY GEOGRAPHIC AREA
NOVEMBER 27, 1998 DECEMBER 31, ------------ ------------------------------ (UNAUDITED) 1997 1996 1995 ------------ -------- -------- -------- $M $M $M $M Revenues United States...................................... 1,371 1,557 1,489 1,378 International...................................... 292 358 295 253 ------ ------ ------ ------ TOTAL REVENUES....................................... 1,663 1,915 1,784 1,631 ====== ====== ====== ====== Operating income United States (1).................................. (44) 116 105 114 International...................................... (7) 46 39 37 ------ ------ ------ ------ TOTAL OPERATING INCOME............................... (51) 162 144 151 ====== ====== ====== ====== Identifiable assets United States (2).................................. 4,161 4,235 4,230 4,230 International...................................... 219 282 256 204 ------ ------ ------ ------ TOTAL IDENTIFIABLE ASSETS............................ 4,380 4,517 4,486 4,434 ====== ====== ====== ======
- ------------------------ Intercompany transfers between geographic areas are not significant. (1) Includes all intangible amortization. (2) Includes all intangible assets. F-117 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------ TABLE OF CONTENTS
Page -------- Presentation of Financial Information; Exchange Rate Information........................ ii Prospectus Summary................... 1 Risk Factors......................... 11 Forward-Looking Statements........... 14 The US Rights Offering............... 15 NCS Acquisition...................... 24 Use of Proceeds...................... 25 Market Information................... 25 Dividends............................ 26 Capitalization....................... 27 Selected Consolidated Financial Data............................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 31 Business............................. 58 Management........................... 75 Principal Stockholders............... 83 Description of Share Capital......... 83 Description of American Depositary Shares............................. 89 Tax Considerations................... 95 Plan of Distribution................. 100 Service of Process and Enforcement of Liabilities........................ 103 Where You Can Find More Information.. 103 Validity of Securities............... 104 Experts.............................. 104 UK Prospectus........................ 104 Index to Consolidated Financial Statements......................... F-1
------------------------ Through and including September 26, 2000, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. PEARSON PLC Rights Offering of Ordinary Shares and American Depositary Shares -------------------- PROSPECTUS ------------------ JOINT GLOBAL COORDINATORS GOLDMAN SACHS CAZENOVE INTERNATIONAL & CO.
------------------------ GOLDMAN, SACHS CAZENOVE & CO. INC.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The follow table sets forth the expenses (other than underwriting compensation we expect to incur) in connection with the rights offering. All of these amounts (except the SEC registration fee) are estimated. SEC registration fee........................................ $ 87,516 New York and London Stock Exchange fees and related expenses.................................................. 225,000 NASD and Blue Sky fees and expenses......................... 15,000 Printing and engraving costs................................ 750,000 Legal fees and expenses..................................... 2,000,000 Accounting fees and expenses................................ 3,000,000 Registrar and Depositary fees and expenses.................. 300,000 Miscellaneous............................................... 2,500,000 ---------- Total....................................................... $8,877,516 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Subject to applicable English law, our directors and officers will be indemnified by us and/or exempted by us from all costs, charges, losses and liabilities incurred by them in the actual or purported exercise or discharge of their powers or duties. This indemnity and exemption includes any liability incurred by them in defending any civil or criminal proceedings which relate to anything done or alleged to have been done by them as our officer or employee and in which judgment is given in their favor; or where proceedings are disposed of without any finding or admission of any material breach of duty on their part; or in which they are acquitted or in respect of which relief from liability is granted. Our directors have the power to purchase and maintain insurance for, or for the benefit of, any persons that are or were at any time a director or officer of us or any company we control or that is part of our group (a "Relevant Company") or that are or were trustees of any pension fund or employees' share scheme in which employees of any Relevant Company are interested. Such insurance may include insurance against any liability incurred by them in respect of any act or omission in the actual or purported exercise or discharge of their powers or duties in relation to any Relevant Company, or such pension fund or employees' share scheme. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information is furnished with regard to all securities issued by us within the last three years which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). Also set forth is the section of the Securities Act or rule of the Securities and Exchange Commission under which exemption from registration was claimed. ORDINARY SHARES In August 1998, we sold 28.9 million ordinary shares to institutional investors for an aggregate consideration of approximately L328,000,000. In January 2000, we sold 11.5 million ordinary shares to institutional investors for an aggregate consideration of approximately L253,000,000. II-1 OPTIONS From time to time over the past three years, the Company has granted to its employees and to others options to purchase ordinary shares at a range of exercise prices. Certain of these options have been exercised and others remain outstanding. Set forth below is information regarding the grant and exercise of options within the last three fiscal years:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- SIX MONTHS ENDED 1997 1998 1999 JUNE 30, 2000 ------------------ ------------------ ----------- ---------------- (IN THOUSANDS) Number of options granted............. 3,790 4,912 4,966 6,547 Number of options exercised........... 3,900 3,389 2,115 965 Options outstanding at year end....... 13,328 13,029 14,960 19,759 Exercise price range of grants (pence)............................. 744-757 948-1,090 1,210-1,285 1,599-2,501
The securities issued in the foregoing transactions were either (i) offered and sold pursuant to Regulation S outside the United States to persons not citizens or residents of the United States, (ii) offered and sold in reliance upon exemptions from the Securities Act registration requirements set forth in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated thereunder, relating to sales by an issuer not involving any public offering, or (iii) in the case of certain options to purchase ordinary shares, such offers and sales were pursuant to compensatory arrangements made in reliance upon an exemption from registration under Rule 701 of the Securities Act. No underwriters were involved in the foregoing sales of securities. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Underwriting Agreement dated 31 July 2000 between Pearson plc, Goldman Sachs International and Cazenove & Co. 1.2 Form of Amending Agreement to Underwriting Agreement between Pearson plc, Goldman Sachs International and Cazenove & Co. 3.1 Memorandum of Association 3.2 Articles of Association 4.1 Specimen certificate for ordinary shares of Pearson plc, 25p par value 4.2 Form of Amended Deposit Agreement between Pearson plc and The Bank of New York and Form of ADR 4.3 Form of Rights Agency Agreement between Pearson plc and The Bank of New York 4.4 Form of Provisional Allotment Letter 4.5 Form of American Depositary Share Warrant 5 Opinion of Freshfields Bruckhaus Deringer 10.1 Stock Purchase Agreement dated as of May 17, 1998 among Viacom International Inc., Pearson plc and Pearson Inc. and Amendment No. 1 thereto (Simon & Schuster Acquisition Agreement) 10.2 Agreement and Plan of Merger dated as of July 30, 2000 among Pearson plc, PN Acquisition Subsidiary Inc. and National Computer Systems, Inc. 10.3 Amendment No. 1 to the Agreement and Plan of Merger dated as of August 4, 2000 among Pearson plc, PN Acquisition Subsidiary Inc. and National Computer Systems, Inc. 10.4 Form of Service Contract for Executive Directors 21 List of Subsidiaries 23.1 Consent of PricewaterhouseCoopers 23.2 Consent of PricewaterhouseCoopers LLP* 23.3 Consent of Freshfields Bruckhaus Deringer (contained in Exhibit 5) 24 Powers of Attorney (included on signature page)
- ------------------------ * To be filed by amendment (b) Financial Statement Schedules ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes as follows: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: II-3 (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act of 1933 if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To file a post-effective amendment to the registration statement to include any financial statements required by Section 3-19 of Regulation S-X at the start of any delayed offering or throughout a continuous offering. (5) The undersigned registrant hereby undertakes to provide to the underwriters certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (6) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of London, on August 7, 2000. PEARSON PLC By: /s/ JOHN MAKINSON ----------------------------------------- By: /s/ DAVID BELL -----------------------------------------
POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Marjorie Scardino, John Makinson and Peter Gill, and each of them acting alone, his or her true and lawful attorney-in-fact, with full power of substitution, to execute and cause to be filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933, as amended, any and all amendments and post-effective amendments to this registration statement, and including any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act, with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof.
NAME TITLE DATE ---- ----- ---- /s/ STEVENSON ------------------------------------ Chairman August 7, 2000 Lord Stevenson /s/ MARJORIE SCARDINO Chief Executive Officer, ------------------------------------ Director August 7, 2000 Marjorie Scardino (principal executive officer) /s/ JOHN MAKINSON ------------------------------------ Finance Director August 7, 2000 John Makinson (principal financial officer)
II-5
NAME TITLE DATE ---- ----- ---- /s/ PETER GILL ------------------------------------ Director, Financial Operations August 7, 2000 Peter Gill (principal accounting officer) /s/ DAVID BELL ------------------------------------ Director August 7, 2000 David Bell /s/ BURNS ------------------------------------ Director August 7, 2000 Lord Burns /s/ GILLIAN LEWIS ------------------------------------ Director August 7, 2000 Gillian Lewis /s/ REUBEN MARK ------------------------------------ Director August 7, 2000 Reuben Mark /s/ VERNON SANKEY ------------------------------------ Director August 7, 2000 Vernon Sankey /s/ RANA TALWAR ------------------------------------ Director August 7, 2000 Rana Talwar US Authorized Representative Pearson, Inc. By: /s/ PHILIP HOFFMAN ------------------------------------ Name: Philip Hoffman Title: President
II-6 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Underwriting Agreement dated 31 July 2000 between Pearson plc, Goldman Sachs International and Cazenove & Co. 1.2 Form of Amending Agreement to Underwriting Agreement between Pearson plc, Goldman Sachs International and Cazenove & Co. 3.1 Memorandum of Association 3.2 Articles of Association 4.1 Specimen certificate for ordinary shares of Pearson plc, 25p par value 4.2 Form of Amended Deposit Agreement between Pearson plc and The Bank of New York and Form of ADR 4.3 Form of Rights Agency Agreement between Pearson plc and The Bank of New York 4.4 Form of Provisional Allotment Letter 4.5 Form of American Depositary Share Warrant 5 Opinion of Freshfields Bruckhaus Deringer 10.1 Stock Purchase Agreement dated as of May 17, 1998 among Viacom International Inc., Pearson plc and Pearson Inc. and Amendment No. 1 thereto (Simon & Schuster Acquisition Agreement) 10.2 Agreement and Plan of Merger dated as of July 30, 2000 among Pearson plc, PN Acquisition Subsidiary Inc. and National Computer Systems, Inc. 10.3 Amendment No. 1 to the Agreement and Plan of Merger dated as of August 4, 2000 among Pearson plc, PN Acquisition Subsidiary Inc. and National Computer Systems, Inc. 10.4 Form of Service Contract for Executive Directors 21 List of Subsidiaries 23.1 Consent of PricewaterhouseCoopers 23.2 Consent of PricewaterhouseCoopers LLP* 23.3 Consent of Freshfields Bruckhaus Deringer (contained in Exhibit 5) 24 Powers of Attorney (included on signature page)
- ------------------------ * To be filed by amendment EX-1.1 2 ex-1_1.txt EXHIBIT 1.1 Exhibit 1.1 DATED 31ST JULY, 2000 PEARSON PLC - AND - GOLDMAN SACHS INTERNATIONAL - AND - CAZENOVE & CO. ----------------------------- A G R E E M E N T RELATING TO A RIGHTS ISSUE OF ORDINARY SHARES OF 25P EACH IN PEARSON PLC ----------------------------- Slaughter and May 35 Basinghall Street London EC2V 5DB (DRJ/ARR) CE003695632 CONTENTS PAGE ---- 1. Interpretation 1 2. Admission to listing and trading 6 3. Obligations of the Company 7 4. Conditions 8 5. Certain Overseas Qualifying Holders 10 6. Allotment 10 7. Subscription of New Shares 11 8. Underwriting 14 9. Announcements 16 10. Warranties 17 11. Commissions and Expenses 17 12. Indemnity 19 13. Miscellaneous 22 14. Contracts (Rights of Third Parties) Act 1999 22 15. Notices 22 16. Governing Law 24 Schedule 1 25 Schedule 2 27 THIS AGREEMENT is made on 31st July, 2000 BETWEEN: (1) PEARSON PLC (registered in England with number 53723) whose registered office is at 3 Burlington Gardens, London W1X 1LE (the "COMPANY"); (2) GOLDMAN SACHS INTERNATIONAL of Peterborough Court, 133 Fleet Street, London EC4A 2BB ("GOLDMAN SACHS"); and (3) CAZENOVE & CO. of 12 Tokenhouse Yard, London EC2R 7AN ("CAZENOVE"). WHEREAS: (A) The Company proposes to issue the New Shares pursuant to the Rights Issue and the Directors have authority and have been empowered under Sections 80 and 95 of the Companies Act 1985, respectively, to allot the New Shares and to do so otherwise than in compliance with Section 89 of that Act. (B) Goldman Sachs and Cazenove have agreed, on the terms and subject to the conditions referred to in this Agreement, to underwrite the Rights Issue and have sought and are proposing to seek sub-underwriters of the Rights Issue. WHEREBY IT IS AGREED AS FOLLOWS: 1. INTERPRETATION 1.1 In this Agreement (including the Schedules) the following expressions shall, unless the context otherwise requires, have the following meanings:- "ACCEPTANCE DATE" means the date for acceptance and payment in full under the Rights Issue expected to fall 21 days after the Posting Date Provided always that it shall not be later than the date falling three Dealing Days before the day falling 43 days after the date of this Agreement; "ACCOUNTS DATE" means 31st December 1999; "ACQUISITION" means the proposed acquisition by a wholly owned subsidiary of the Company of National Computer Systems, Inc. to be effected by means of the tender offer (and subsequent merger)as detailed in the Acquisition Documents; 2 "ACQUISITION DOCUMENTS" means the merger agreement between the Company, a wholly-owned subsidiary of the Company and National Computer Systems, Inc. dated 30th July 2000 (the "Merger Agreement") and a tender offer document to be sent to National Computer Systems Inc.'s shareholders; "AUSTRALIAN HOLDERS" means Qualifying Holders with registered addresses in the Commonwealth of Australia, its territories or possessions; "BROKERS" means Cazenove & Co. and Goldman Sachs in their capacity as brokers to the Company; "CIRCULAR" means the circular to be issued by the Company to its shareholders giving details of the Rights Issue, the Interim Results, and the Acquisition, and constituting a Prospectus; "COMMENCEMENT OF DEALINGS" means the commencement of dealings in the New Shares (nil paid) on and with the authority of the London Stock Exchange; "DEALING DAY" means a day upon which dealings in domestic securities may take place on and with the authority of the London Stock Exchange; "DIRECTORS" means the directors of the Company; "EXCLUDED HOLDERS" means Qualifying Holders to whom, in accordance with Clause 5, no Provisional Allotment Letter is to be sent; "GROUP" means the Company and its subsidiaries and subsidiary undertakings; "INTERIM RESULTS" means the unaudited interim results of the Group for the six months ended 30th June, 2000 as set out in the Press Announcement; "IRISH HOLDERS" means Qualifying Holders with registered addresses in the Republic of Ireland; "LISTING RULES" means the current edition of the publication entitled "The Listing Rules" produced by the UK Listing Authority and incorporating the listing rules made by the UK Listing Authority pursuant to Part IV of the Financial Services Act 1986; 3 "LONDON STOCK EXCHANGE" means the London Stock Exchange plc; "NEW SHARES" means the 170,500,067 new Ordinary Shares to be allotted pursuant to the Rights Issue; "NORTH AMERICAN HOLDERS" means Qualifying Holders with registered addresses either in the United States of America or any of its states, territories or possessions, including the District of Columbia; "OFFICIAL LIST" means the Official List of the UK Listing Authority; "ORDINARY SHARES" means ordinary shares of 25p each in the capital of the Company; "ORDINARY SHAREHOLDERS" means holders of Ordinary Shares; "POSTING DATE" means the date not later than 17th August, 2000 or such other date as the Company and the Underwriters may agree in writing that the Circular and Provisional Allotment Letter are, subject to clause 5, issued by the Company to Qualifying Holders; "PRESS ANNOUNCEMENT" means the press announcement giving details of the Rights Issue, the Interim Results and the Acquisition in the form of the draft initialled by or on behalf of the Company and the Underwriters for the purpose of identification only and MARKED "A"; "PROSPECTUS" means a prospectus for the purposes of the listing rules made by the UK Listing Authority pursuant to Part IV of the Financial Services Act 1986 relating to the Company and the New Shares; "PROVISIONAL ALLOTMENT LETTER" means the form of the renounceable provisional allotment letter to be issued by the Company, subject to CLAUSE 5, to Qualifying Holders in connection with the Rights Issue; "QUALIFYING HOLDERS" means Ordinary Shareholders on the register of members of the Company as at the close of business on the Record Date; "RECEIVING BANKER" means Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA; 4 "RECORD DATE" means the close of business on 28th July, 2000; "REPORT AND ACCOUNTS" means the published annual report and audited accounts of the Group as at and for the financial period ended on the Accounts Date; "RIGHTS ISSUE" means the offer of New Shares by way of rights to Qualifying Holders (other than Excluded Holders) at the Subscription Price on the basis of:- 3 New Shares for every 11 Ordinary Shares held as at the close of businesfs on the Record Date and otherwise on the terms and subject to the conditions in the Circular and Provisional Allotment Letter; "STANDARDS" means the current edition of the Admission and Disclosure Standards produced by the London Stock Exchange; "SUBSCRIPTION PRICE" means a price of(pound)10.00 per New Share; "SUPPLEMENTARY PROSPECTUS" means any Prospectus published by the Company pursuant to Section 147 of the Financial Services Act 1986 supplementary to the Prospectus contained in the Circular; "UK LISTING AUTHORITY" means the Financial Services Authority in its capacity as the competent authority under Part IV of the Financial Services Act 1986 and in the exercise of its function in respect of admission to the Official List otherwise than in accordance with Part IV of the Financial Services Act 1986; "UNDERWRITERS" means Goldman Sachs and Cazenove; "UNDERWRITTEN NEW SHARES" means 150,000,000 New Shares. 1.2 In this Agreement unless otherwise specified:- 5 (A) references to clauses, sub-clauses, paragraphs and schedules are to clauses, sub-clauses, paragraphs of, and schedules to, this Agreement; (B) words and expressions defined in the Companies Act 1985 shall bear the same meaning; (C) a reference to any statute or statutory provision shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified or re-enacted, provided that no amendment, modification or re-enactment subsequent to the date of this Agreement shall increase or extend the liability of any party under this Agreement; (D) references to this Agreement are to it as amended or supplemented from time to time ; (E) references to times of the day are to London time; and (F) headings to clauses and schedules are for convenience only and do not affect the interpretation of this Agreement. 1.3 The document referred to in this Agreement marked "A" (the Press Announcement), may be amended by agreement between the Company and the Underwriters in accordance with CLAUSE 3.7 and references in this Agreement to such documents shall, where appropriate, be construed as references to such documents as so amended. 2. ADMISSION TO LISTING AND TRADING 2.1 The Company undertakes to the Underwriters that it has, at its own expense, through the Brokers made an application to the UK Listing Authority for permission to be granted for the admission of the New Shares to the Official List in accordance with the Listing Rules and an application to the London Stock Exchange for permission to be granted for the admission of the New Shares to trading on the London Stock Exchange. 2.2 The Company will, in conjunction with the Brokers, use its best endeavours:- (A) to obtain the permissions referred to in CLAUSES 2.1 (subject only to the despatch of Provisional Allotment Letters) by not later than the Posting Date; and (B) to procure that the admission of the New Shares to the Official List becomes effective in accordance with paragraph 7.1 of the Listing Rules and the admission of the New Shares to trading becomes effective in accordance with paragraph 2.1 of the Standards by not later than 8.30 a.m. on the first Dealing Day after the Posting Date. The Company will supply all such information, give all such undertakings, execute all such documents, pay all such fees and do or procure to be done all such things as may be reasonably necessary or required by the UK Listing Authority and/or the London Stock Exchange for the purpose of obtaining such approval, permissions and admissions. 6 3. OBLIGATIONS OF THE COMPANY 3.1 The Company shall:- (A) so far as it is able procure that forthwith, and in any event by not later than 8.30 a.m. on the date of this Agreement, the Press Announcement is released to the London Stock Exchange; (B) use its best endeavours to procure delivery to the Underwriters of the documents referred to in paragraph 1 of Schedule 1 by not later than the time at which copies of the Circular are delivered to the Registrar of Companies in England and Wales in accordance with CLAUSE 3.2(A); (C) subject to the allotment of the New Shares pursuant to CLAUSE 6. 1, procure that there are delivered to the Underwriters the documents referred to in PARAGRAPH 2 of SCHEDULE 1 as provided therein. 3.2 Subject to the prior receipt from the UK Listing Authority of formal approval of the Circular as a Prospectus, the Company shall procure that:- (A) two copies of the Circular are delivered by or on behalf of the Company to the Registrar of Companies in England and Wales for registration pursuant to Section 149 of the Financial Services Act 1986 by not later than the Posting Date; (B) subject to the fulfilment of CLAUSE 3.2(A), further copies of the Circular, together with the Report and Accounts, are made available by or on behalf of the Company in accordance with paragraphs 8.4, 8.4A, 8.5, 8.6 and 8.21 of the Listing Rules; (C) subject to the fulfilment of CLAUSE 3.2(A) and the provisional allotments of the New Shares having been made subject to and in accordance with CLAUSE 6.1, the Circular and Provisional Allotment Letters are posted, subject to CLAUSE 5, to all Qualifying Holders (other than Excluded Holders) by not later than the Posting Date with such Provisional Allotment Letters recording the respective entitlements of each such Qualifying Holder to subscribe New Shares; and (D) the relevant announcements referred to in paragraph 4.20 of the Listing Rules shall be lodged with the Company Announcements Office of the London Stock Exchange as required by such paragraph. 3.3 The Company shall notify the Underwriters forthwith of any event referred to in paragraph (a) or (b) of Section 147(1) of the Financial Services Act 1986 which arises between the time of publication of the Circular and the Commencement of Dealings and, without prejudice to CLAUSES 4.1(D) AND 9.2, shall deal with every such matter in accordance with Section 147 of that Act and paragraphs 5.14, 5.15, 5.16 and 8.20 of the Listing Rules. 7 3.4 The Company undertakes that it will not, without the consent in writing of the Underwriters, prior to completion of the Acquisition make any material increase in the terms of the tender offer. 3.5 The Company shall not make any material amendment to the Circular, the Press Announcement or the Provisional Allotment Letter without the prior written consent of the Underwriters, such consent not to be unreasonably withheld or delayed. 4. CONDITIONS 4.1 The obligations of the Underwriters under CLAUSES 7 (other than CLAUSES 7.6 TO 7.8) AND 8 are conditional upon:- (A) the release of the Press Announcement to the London Stock Exchange in accordance with CLAUSE 3.1(A); (B) the posting of the Circular and Provisional Allotment Letters in accordance with CLAUSE 3.2(C); (C) none of the representations, warranties or undertakings being breached or untrue or inaccurate or misleading in any respect when made which in any such case is material in the context of the Rights Issue or the underwriting of the New Shares and there being no change in fact or circumstance or in the knowledge, opinion, intention or expectation such that, if repeated at any time up to immediately prior to the Commencement of Dealings by reference to the facts and circumstances and the knowledge, opinions, intentions and expectations of the Directors then existing, any of such representations, warranties or undertakings would be breached or untrue or inaccurate or misleading in any respect, which in any such case is material in the context of the Rights Issue or the underwriting of the New Shares; (D) no event referred to in paragraph (a) or (b) of Section 147(1) of the Financial Services Act 1986 arising between the time of publication of the Circular and the Commencement of Dealings and no Supplementary Prospectus being published by or on behalf of the Company; (E) the admission of the New Shares to the Official List becoming effective in accordance with paragraph 7.1 of the Listing Rules and the admission of the New Shares to trading becoming effective in accordance with paragraph 2.1 of the Standards by not later than 8.30 a.m. on the first Dealing Day after the Posting Date; (F) the Acquisition not ceasing to be capable of completion by reason of any condition in Exhibit A to the Merger Agreement being invoked; and (G) no act of the Company having been carried out in breach of CLAUSE 3.4 (whether prior to or after the Commencement of Dealings). 8 4.2 The conditions referred to in CLAUSE 4.1 (other than those set out in CLAUSES 4.1(B) AND (E)) may be waived, in whole or in part, by notice in writing given by the Underwriters to the Company and the respective times for satisfaction of the conditions referred to in CLAUSE 4.1 may be extended by notice in writing given by the Underwriters to the Company. 4.3 If the conditions referred to in CLAUSE 4.1 are not fulfilled (or waived) on or by the required times or dates therefor, the Company shall forthwith make an announcement to the London Stock Exchange to that effect and this Agreement (other than Clauses 7.6 to 7.8) shall ipso facto cease and terminate and neither party shall have any claim against the other for any costs, damages, compensation or otherwise under this Agreement except:- (A) as regards any breach of any provision of this Agreement which has occurred prior to such termination; and (B) that the provisions of CLAUSES 11 AND 12 shall still apply in accordance with their respective terms. 5. CERTAIN OVERSEAS QUALIFYING HOLDERS 5.1 Provisional Allotment Letters sent to Qualifying Holders with registered addresses in South Africa will carry no right to renounce. 5.2 Provisional Allotment Letters will not be sent to North American Holders without the prior written consent of the Underwriters. 5.3 The Company will not exercise any right reserved to it to reject a Provisional Allotment Letter in the circumstances referred to in the Circular without first consulting with the Underwriters. 5.4 The parties will investigate in good faith the feasibility of making the Rights Issue available to Excluded Holders. 6. ALLOTMENT 6.1 Subject to:- (A) the formal approval by the UK Listing Authority of the Circular as a Prospectus by not later than the Posting Date; (B) the delivery of two copies of the Circular to the Registrar of Companies in England and Wales in accordance with CLAUSE 3.2(A); and (C) the UK Listing Authority having granted permission for the New Shares to be admitted to the Official List and the London Stock Exchange having granted permission for the New Shares to be admitted to trading on the London Stock Exchange's market for listed securities (subject only to the despatch of Provisional Allotment Letters), 9 the New Shares will be provisionally allotted on the Posting Date to Qualifying Holders (other than Excluded Holders) on the basis referred to in the definition of "Rights Issue" in CLAUSE 1.1 pursuant to a resolution of the Board of Directors (or a duly authorised Committee of such Board) and in accordance with CLAUSE 6.2. 6.2 The provisional allotment of the New Shares referred to in CLAUSE 6.1 will be made upon the terms and subject to the conditions set out in the Circular and the Provisional Allotment Letter and on the basis referred to in CLAUSE 6.4 for acceptance and payment in full by not later than 3.00 p.m. on the Acceptance Date and will be expressed to be subject to the admission of the New Shares to the Official List becoming effective in accordance with paragraph 7.1 of the Listing Rules and to the admission of the New Shares to trading becoming effective in accordance with paragraph 2.1 of the Standards by not later than 8.30 a.m. on the first Dealing Day after the Posting Date (or such later time and/or date as the Company and the Underwriters may agree). Fractions of New Shares shall not be allotted to Qualifying Holders. All such fractions will be aggregated and the resultant aggregate number of New Shares and the New Shares attributable to Excluded Holders will be dealt with in accordance with CLAUSES 7.1 AND 7.2. 6.3 Subject to:- (A) the provisional allotments of the New Shares referred to in CLAUSE 6.1 having been made; and (B) the admission of the New Shares to the Official List and to trading on the London Stock Exchange having become effective as referred to in Clause 6.2, the provisional allotments of the New Shares which have been taken up will be confirmed and the provisional allotments of the New Shares which have not been taken up will be cancelled and new allotments thereof made in favour of the persons who, pursuant to CLAUSES 7.6 AND/OR 8, are subscribing such New Shares pursuant to a resolution of the Board of Directors (or a duly authorised Committee of such Board) in each case by not later than the third Dealing Day after the Acceptance Date. 6.4 The New Shares will be allotted on terms that, when fully paid, they are free from all liens, charges and encumbrances and that they will rank pari passu in all respects with the existing issued Ordinary Shares save that they will not rank for the interim dividend in respect of the six months ended 30th June, 2000 announced on 31st July, 2000. 7. SUBSCRIPTION OF NEW SHARES 7.1 By not later than 5.00 p.m. on the Dealing Date prior to the Posting Date the Company will (or will procure that the Receiving Banker will) notify the Underwriters in writing of the number of New Shares which represents the aggregate of fractional entitlements arising in respect of the Rights Issue and of the number of New Shares attributable to Excluded Holders under the Rights Issue. On the Dealing Day before the Acceptance Date (or such earlier date as the Underwriters may specify subject to the consent of the Company, such consent not to be unreasonably withheld or delayed), the Underwriters will, as agents of the Company, instruct 10 the Brokers to endeavour to procure (a) purchaser(s) for so many of the rights to such New Shares as can be sold nil paid at a premium net of expenses (including value added tax). As soon as reasonably practicable thereafter the Underwriters will account to the Receiving Banker for the net proceeds of sale (after deduction of expenses, including Broker's commission) of so many of such rights to New Shares as shall have been so sold nil paid against delivery to the Underwriters (or as they may direct) of nil paid Provisional Allotment Letters in respect of the rights to the New Shares so sold in such names and denominations as the Underwriters may require. Such sales will be deemed to have been made in the first instance in respect of rights to New Shares attributable to Excluded Holders and, to the extent that there are sufficient such sales, thereafter in respect of rights to New Shares attributable to fractional entitlements. If any of the rights to such New Shares are not so sold by 3.00 p.m. on the Acceptance Date, such New Shares will be dealt with as New Shares not taken up in accordance with CLAUSE 7.6. 7.2 The Company will procure that the Receiving Banker pays to Excluded Holders pro rata to their holdings of Ordinary Shares as at the close of business on the Record Date the net proceeds received by the Receiving Banker in respect of the sale of rights to New Shares attributable to Excluded Holders pursuant to CLAUSE 7.1 as soon as practicable after receipt (save that individual amounts of less than (pound)3.00 per holding shall not be so paid but shall be retained by the Company). The Company will procure that the Receiving Banker pays to relevant Qualifying Holders pro rata to their fractional entitlements to New Shares the net proceeds received by the Receiving Banker in respect of the sale of such fractional entitlements pursuant to CLAUSE 7.1 as soon as practicable after receipt (save that individual amounts of less than (pound)3.00 per holding shall not be so paid but shall be retained by the Company). 7.3 If, by 3.00 p.m. on the Acceptance Date, all of the New Shares shall have been taken up, or are subsequently deemed to have been taken up by such time pursuant to the proviso to CLAUSE 7.4, the obligations of the Underwriters under CLAUSES 7.6 AND 8 shall thereupon terminate. 7.4 Subject to CLAUSE 7.5, New Shares comprised in Provisional Allotment Letters which, by 3.00 p.m. on the Acceptance Date, shall be lodged for acceptance (whether by the person to whom they were provisionally allotted or by renouncees of the right to accept allotment) in accordance with the terms of the Circular and the Provisional Allotment Letter, accompanied by cheques or other remittances for the full amount payable in respect of such New Shares (and whether or not such cheques or other remittances shall be honoured) are referred to in this Agreement as having been "taken up" provided that (i) cheques dishonoured or other applications rejected by 3.00 p.m. on Acceptance Date and notified to the Underwriters in accordance with 7.6 shall not be treated as taken up and (ii) at the discretion of the Company New Shares shall for the purpose of this Agreement be deemed to have been taken up by 3.00 p.m. on the Acceptance Date if a cheque or other remittance for the full amount payable in respect of such New Shares (and whether or not such cheque or other remittance shall be honoured) is received prior to 3.00 p.m. on the Acceptance Date from an authorised person (as defined in the Financial Services Act 1986) identifying the New Shares concerned and undertaking to lodge the relevant Provisional Allotment Letter duly completed in due course. 7.5 Notwithstanding CLAUSE 7.4, New Shares shall be deemed not to have been taken up where they are comprised in a Provisional Allotment Letter which has been lodged for acceptance and in respect of which, by not later than 7.30 a.m. on the first Dealing Day after the Acceptance Date, 11 the Company has notified the Underwriters that it is with the consent of the Underwriters rejecting such Provisional Allotment Letter on the basis that, verification of the identity of the applicant having been required and a reasonable period having elapsed, the Receiving Banker has advised the Company that it is unable to process such Provisional Allotment Letter in accordance with the Money Laundering Regulations 1993. 7.6 As soon as practicable after 3.00 p.m. on the Acceptance Date and by not later than 7.30 a.m. on the first Dealing Day after the Acceptance Date, the Company will (or will procure that the Receiving Banker will) notify the Underwriters in writing of the number of New Shares which have not been taken up or deemed taken up. The Underwriters will, as agents of the Company, instruct the Brokers to endeavour to procure (a) subscriber(s) for such New Shares (or as many as can be so procured) upon the terms (in so far as the same are applicable) of the Circular and the Provisional Allotment Letter as soon as reasonably practicable and in any event by not later than 3.00 p.m. on the second Dealing Day after the Acceptance Date if a premium over the total of the Subscription Price and expenses of procurement (including value added tax) can be obtained provided that the Underwriters may, at any time after 3.00 p.m. on the Acceptance Date, instruct the Brokers no longer to endeavour to procure any such subscriber(s) if they have been informed by the Brokers that, in the reasonable opinion of the Brokers, it is unlikely that any such subscriber(s) can be so procured at such a premium by such time. The Underwriters shall not be under any obligation to endeavour to procure any such subscriber(s) save as expressly set out in this Agreement. The Underwriters will procure payment to the Receiving Banker of the net proceeds of any such subscriptions by not later than the third Dealing Day after the Acceptance Date against delivery to the Underwriters (or as they may direct) of duly receipted fully paid Provisional Allotment Letters in respect of the New Shares for which subscribers are procured pursuant to this CLAUSE 7.6 in such names and denominations as the Underwriters may require. 7.7 The Company will procure that the Receiving Banker pays the excess of the net proceeds of subscription over the Subscription Price (less expenses, including value added tax) received by the Receiving Banker pursuant to CLAUSE 7.6 to the non-accepting Qualifying Holders to whom the relevant New Shares were provisionally allotted pro rata to their lapsed provisional entitlements as soon as practicable after receipt (save that individual amounts of less than (pound)3.00 will not be so paid but will be retained by the Company). The Company shall be entitled to retain for its own use aNd benefit the Subscription Price for each New Share subscribed and received by the Receiving Banker pursuant to CLAUSE 7.6. 7.8 Any transactions carried out by the Underwriters pursuant to this CLAUSE 7 will constitute transactions carried out at the Company's request and as its agent and not for the Underwriters' own account. The Underwriters shall, however, be entitled to receive and/or retain and/or allow the Brokers and/or its other agents to receive and/or retain any commission or brokerages paid to it or its agents in connection with the implementation of any such transactions and shall not be under any liability to account for any benefit or advantage derived from such transactions by it or any company connected with it. Neither the Underwriters nor the Brokers are to be responsible, whether to the Company, any Qualifying Holder or any other shareholder or otherwise, for any loss or damage to any person arising from any such transactions or for any insufficiency or alleged insufficiency of any dealing price at which any rights to New Shares may be sold or subscribers for New Shares may be procured by them or 12 for the timing of any such sale or subscription or any failure to procure any sale or subscription unless and to the extent that the same result from the negligence or wilful default of the Underwriters or of the Brokers. 8. UNDERWRITING 8.1 The Underwriters shall, as agents of the Company, procure subscribers, or to the extent such subscribers are not procured themselves as principal subscribe, on the terms and subject to the conditions and on the basis of the information contained in the Circular and the Provisional Allotment Letter (other than as to the time and method of acceptance and payment) for any of the New Shares notified to them in accordance with CLAUSE 7.6 as not taken up and for which subscribers are not procured pursuant to CLAUSE 7.6, provided that this obligation shall be limited to the number of Underwritten New Shares after deducting any New Shares taken up or for which subscribers are procured under pursuant to CLAUSE 7.6 (and for the avoidance of doubt if the number of New Shares taken up or for which subscribers are procured pursuant to CLAUSE 7.6 is equal to or exceeds the number of Underwritten New Shares, the obligations of the Underwriters under this CLAUSE 8.1 shall terminate). 8.2 The Underwriters shall procure payment of the Subscription Price for the Underwritten New Shares for which the Underwriters subscribe or procure subscribers pursuant to CLAUSE 8.1 to the Company (or to the Receiving Banker) by not later than the fourth Dealing Day after the Acceptance Date against delivery to the Underwriters (or as they may direct) of duly receipted fully paid Provisional Allotment Letters in respect of such Underwritten New Shares in such names and denominations as the Underwriters may require. In default of the Underwriters so doing in respect of any such Underwritten New Shares, the Company is hereby irrevocably authorised to treat this Agreement as an application by the Underwriters on the terms and subject to the conditions and on the basis of the information contained in the Circular and the Provisional Allotment Letter (other than as to the time and method of acceptance and payment) for such Underwritten New Shares and to allot and issue the same to the Underwriters on such terms and conditions, and payment of the Subscription Price in respect thereof shall be made by the Underwriters against delivery to them (or as they may direct) of duly receipted fully paid Provisional Allotment Letters in respect of such Underwritten New Shares in such names and denominations as they shall require. 8.3 The obligations of the Underwriters under this CLAUSE 8 are separate, each Underwriter being responsible only for its proportionate share of the Underwritten New Shares as set out below: (A) in respect of the first 82,000,000 Underwritten New Shares: Goldman Sachs 72.222% Cazenove 27.778% (B) in respect of any Underwritten New Shares in excess of 82,000,000: Goldman Sachs 50% 13 Cazenove 50% and for the avoidance of doubt one of the Underwriters shall not have any liability or obligation in respect of any default by the other. 9. ANNOUNCEMENTS 9.1 The Company will not, and will procure that no other member of the Group will, between the date of this Agreement and the fourth Dealing Day after the Acceptance Date (inclusive) save for the Acquisition enter into any commitment or agreement, or put itself in a position where it is obliged to announce that any commitment or agreement may be entered into, which is or may be material in the context of the Group or issue any shares or options over shares (other than pursuant to and in accordance with entitlements described in the Circular) or enter into any agreement or undertaking to do the same without in any such case the prior written consent of the Underwriters, not to be unreasonably withheld or delayed. 9.2 The Company undertakes to the Underwriters that, save for the release of the Press Announcement and the posting of the Circular and Provisional Allotment Letters in accordance with the terms of this Agreement, or as may be required by law or the requirements of the Listing Rules or by the tender offer document and any other US listing documentation no:- (A) public announcement or communication concerning any member of the Group which is or may be material in the context of the Rights Issue or the underwriting of New Shares; (B) notice, bill, poster or document announcing the publication or despatch of the Circular or the Provisional Allotment Letters or the issue of the New Shares and indicating the essential characteristics of the New Shares; or (C) document relating to the admission of the New Shares to the Official List and to trading on the London Stock Exchange, will be published, made or despatched by or on behalf of any member of the Group between the date hereof and the fourth Dealing Day after the Acceptance Date (inclusive) without the prior written consent of the Underwriters or as may be required by law or the requirements of the Listing Rules or by the tender offer document and any other US Listing documentation. The Underwriters shall not withhold or delay such consent in circumstances where such publication is required pursuant to any applicable law or regulation. 10. WARRANTIES 10.1 Execution of this Agreement by the Company shall constitute a representation, warranty and undertaking by the Company to the Underwriters in the terms set out in SCHEDULE 2. 10.2 The Company accepts that the Underwriters are entering into this Agreement in reliance upon each of such representations, warranties and undertakings. Each of such representations, warranties and undertakings shall be construed separately and shall not be limited or restricted 14 by reference to or inference from the terms of any other of such representations, warranties and undertakings or any other term of this Agreement. 10.3 The Company will notify the Underwriters immediately if it comes to the knowledge of the Company or any of the Directors that any of the representations, warranties and undertakings referred to in CLAUSE 10.1 was breached or untrue or inaccurate or misleading in any respect when made and/or that any of such representations, warranties and undertakings is or would be breached or untrue or inaccurate or misleading in any respect if it were to be repeated by reference to the facts and circumstances or the knowledge, opinions, intentions or expectations of any of the Directors subsisting at any time up to immediately prior to the Commencement of Dealings. 10.4 The representations, warranties and undertakings referred to in CLAUSE 10.1 shall remain in full force and effect notwithstanding completion of this Agreement. 11. COMMISSIONS AND EXPENSES 11.1 In consideration of their services under this Agreement, the Company will pay to the Underwriters:- (A) a commission of 0.5 per cent. of the value of the Underwritten New Shares at the Subscription Price; and (B) a commission of 0.1 per cent. of the value of the Underwritten New Shares at the Subscription Price in respect of each period of seven days or part thereof from (and including) the date falling 30 days after the date of this Agreement to (and including) the earlier of (a) the day on which sub-underwriters are informed either in writing or by the publication of an announcement on the Stock Exchange Regulatory News Service of the number of New Shares for which they are required to subscribe or (b) the third Dealing Day after the Acceptance Date or (c) the date on which the announcement referred to in CLAUSE 4.3 is made. 11.2 The commissions referred to in CLAUSE 11.1 shall be paid to the Underwriters whether or not they shall be called upon to subscribe or procure subscribers for any of the New Shares under this Agreement and whether or not any of the obligations of the Underwriters under this Agreement terminate or fail to become unconditional. Out of such commissions the Underwriters shall pay sub-underwriting commissions to such persons, if any, as they may procure to subscribe New Shares pursuant to CLAUSE 8. 11.3 The commissions referred to in CLAUSE 11.1 shall be paid by the Company to the Underwriters by not later than 3.00 p.m. on the fourth Dealing Day after the Acceptance Date or, if earlier, on the first Dealing Day after the date on which the obligations of the Underwriters under this Agreement terminate or fail to become unconditional. The Underwriters shall be entitled to deduct some or all of such commissions from any amount otherwise payable by the Underwriters to the Company under this Agreement. 15 11.4 In addition to the commissions referred to in CLAUSE 11.1, all costs and expenses of, and in connection with, the Acquisition, this Agreement, the Rights Issue and the allotment and issue of the New Shares shall be borne by the Company including, without limitation to the generality of the foregoing, any stamp duty or stamp duty reserve tax (other than any stamp duty reserve tax chargeable under sections 93 or 96 of the Finance Act 1986) and all listing fees, admission fees, registrars' fees, Receiving Banker's fees, legal fees and expenses of the Company and (to the extent the same are reasonable) those of the Underwriters, the Company's accountancy fees and expenses, costs of printing, advertising and circulating the Press Announcement, the Circular, Provisional Allotment Letters and any Supplementary Prospectus and the Company's and the Underwriters' out-of-pocket expenses. 11.5 The Company shall forthwith upon request by the Underwriters pay or reimburse the Underwriters the amount of any expenses which are to be borne by the Company and which the Underwriters may have paid. 11.6 Where in pursuance of CLAUSE 11.4 OR 11.5 or CLAUSE 12 a sum (a "RELEVANT SUM") is to be reimbursed to either Goldman Sachs or Cazenove in respect of any cost, charge or expense and that cost, charge or expense includes an amount in respect of value added tax (the "VAT ELEMENT"), the Company shall pay an amount to Goldman Sachs and/or Cazenove by reference to the VAT Element that shall be determined as follows:- (A) if the Relevant Sum constitutes for value added tax purposes (without regard to Section 47(3) Value Added Tax Act 1994) the reimbursement of the consideration for a supply of goods or services made to Goldman Sachs and/or Cazenove (and so not to the Company), a sum equal to the proportion of the VAT Element that Goldman Sachs and/or Cazenove certifies as representing irrecoverable input tax in the hands of Goldman Sachs and/or Cazenove, that certificate to be conclusive save in the case of manifest error; and (B) if the Relevant Sum constitutes for value added tax purposes the reimbursement of a cost or expense incurred by Goldman Sachs and/or Cazenove as agent for the Company, a sum equal to the whole of the VAT Element, and where a sum equal to the VAT Element has been reimbursed to Goldman Sachs and/or Cazenove under PARAGRAPH (B) above, Goldman Sachs and/or Cazenove shall provide the Company with an appropriate tax invoice in respect of the supply to which the Relevant Sum relates, that is to say a tax invoice naming the Company as the recipient of the supply and issued either by Goldman Sachs and/or Cazenove or, if Goldman Sachs and/or Cazenove have treated the relevant cost or expense as a disbursement for value added tax purposes, by the person making the supply. 12. INDEMNITY 12.1 The Company will not make any claim against Goldman Sachs or any subsidiary undertaking or parent company of Goldman Sachs or any subsidiary undertaking of any such parent company or any of their respective affiliates, directors, officers, partners, agents or employees and controlling persons (if any) (together "Goldman Sachs Indemnified Persons" and, separately, 16 each "Goldman Sachs Indemnified Person") or Cazenove or any subsidiary undertaking or parent company of Cazenove or any subsidiary undertaking of any such parent company or any of their respective affiliates, directors, officers, partners, agents or employees and controlling persons (if any) together "Cazenove Indemnified Persons" and, separately, each "Cazenove Indemnified Person") (Goldman Sachs Indemnified Persons and Cazenove Indemnified Persons together being "Indemnified Persons") to recover any loss or damage which the Company or the Directors or any other person may suffer by reason of or arising out of the carrying out or performance by any Indemnified Person or on their behalf of their obligations or services under this Agreement or in connection with the Rights Issue unless and to the extent that in the case of a Goldman Sachs Indemnified Person such loss or damage results from the negligence or wilful default of a Goldman Sachs Indemnified Person, a breach by a Goldman Sachs Indemnified Person of his or its duties or obligations under the FSA or under the regulatory system (as defined in the Rules of the Securities and Futures Authority Limited) or of his or its duties or obligations under this Agreement and in the case of a Cazenove Indemnified Person such loss or damage result from the negligence or wilful default of a Cazenove Indemnified Person, a breach by a Cazenove Indemnified Person of his or its duties or obligations under the FSA or under the regulatory system (as defined in the Rules of the Securities and Futures Authority Limited) or of his or its duties or obligations under this Agreement. 12.2 Without limitation to clause 12.1, the Company agrees with, and acknowledges to, Goldman Sachs and Cazenove that none of the Indemnified Persons shall be responsible, in the absence of specific written agreement to the contrary, to such other parties for verifying the accuracy and/or fairness of any information in the Circular or otherwise published or caused to be published by the Company in connection with the Rights Issue. 12.3 The Company undertakes to Goldman Sachs to hold each Goldman Sachs Indemnified Person and to Cazenove to hold each Cazenove Indemnified Person fully and effectively indemnified against all claims, actions, demands, liabilities, proceedings and judgements brought or established or threatened to be brought against that Indemnified Person (whether or not successful, compromised or settled) and against all losses, costs, charges and expenses (including, without limitation, legal fees and expenses properly incurred) which that Indemnified Person may suffer or incur (including, without prejudice to the generality of the foregoing, all costs, charges and expenses which such Indemnified Person suffers or incurs in investigating or disputing any such claim, action or demand) and the reasonable costs and expenses of such Indemnified Person enforcing its rights under this CLAUSE 12.3 and which in any case is occasioned by or results from or is attributable to or would not have arisen but for, directly or indirectly:- (A) any breach by the Company of any of its obligations under this Agreement and/or breach of the warranties; (B) the carrying out or performance by the Underwriters or on their behalf of any of their obligations or services under this Agreement or in connection with the Rights Issue; (C) the issue of the New Shares, the publication, release or despatch of the Press Announcement and/or the Circular and/or any of the Provisional Allotment Letters and/or any Supplementary Prospectus; or 17 (D) any breach or alleged breach of any of the representations, warranties and undertakings in this Agreement, unless and to the extent that such losses, costs, charges or expenses result (i) in respect of indemnification of a Goldman Sachs Indemnified Person from the negligence or wilful default of a Goldman Sachs Indemnified Person, a breach by a Goldman Sachs Indemnified Person of his or its duties or obligations under the FSA or under the regulatory system (as defined in the Rules of the Securities and Futures Authority Limited) or of his or its duties or obligations under this agreement or (ii) in respect of indemnification of a Cazenove Indemnified Person from the negligence or wilful default of a Cazenove Indemnified Person, a breach by a Cazenove Indemnified Person of his or its duties or obligations under the FSA or under the regulatory system (as defined in the Rules of the Securities and Futures Authority Limited) or of his or its duties or obligations under this agreement and provided that an Indemnified Person shall not be entitled to be indemnified pursuant to this Clause 12.3 in respect of any losses, costs, charges and expenses suffered or incurred by such Indemnified Person as a result of it having been required to subscribe New Shares pursuant to Clause 8 unless and to the extent that such losses, costs, charges and expenses are occasioned by, or result from, or are attributable to or would not have arisen but for (in each case directly or indirectly) any breach by the Company of any of its obligations under this Agreement or any breach of the representations, warranties and undertakings referred to in CLAUSE 10.1 or any circumstances which constitute such a breach. 12.4 If the United Kingdom Inland Revenue or any other taxing authority beings into any charge to taxation any sum payable under the indemnity contained in CLAUSE 12.3, the amount so payable shall be grossed up by such amount as will ensure that after deduction of the tax so chargeable there shall remain a sum equal to the amount than would otherwise have been payable under CLAUSE 12.3 provided that there shall be taken into account, in computing the amount payable hereunder in respect of the loss, cost, charge or expense indemnified, any amount by which the liability to tax of the Indemnified Person is reduced in consequence of such loss, cost, charge or expense. 13. MISCELLANEOUS 13.1 The Company confirms that it has instructed or will instruct the Receiving Banker and the Company's registrars to act as receiving banker and registrars respectively in connection with the Rights Issue and to perform the obligations assigned to it or them under the Circular, the Provisional Allotment Letters and this Agreement as receiving banker and registrar respectively. 13.2 No delay or omission on the part of the Underwriters in exercising any right, power or remedy under this Agreement shall impair such right, power or remedy or operate as a waiver thereof. The single or partial exercise of any right, power or remedy by the Underwriters under this Agreement shall not preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies of the Underwriters provided in this Agreement are cumulative and not exclusive of any rights, powers and remedies provided by law. 18 13.3 Any time, date or period mentioned in any Clause of or Schedule to this Agreement may be extended by agreement between the Company and the Underwriters but as regards any time, date or period originally fixed or any time, date or period so extended, time shall be of the essence. 13.4 If the performance by Goldman Sachs and/or Cazenove of any of their obligations under this Agreement shall represent for value added tax purposes the making by Goldman Sachs and/or Cazenove of any supply of goods or services to the Company that is taxable at a positive rate, the Company shall pay to Goldman Sachs and/or Cazenove, in addition to the amounts otherwise payable by the Company to Goldman Sachs and/or Cazenove pursuant to this Agreement, an amount equal to the value added tax chargeable on any such supply, that payment to be made within seven days of Goldman Sachs and/or Cazenove requesting the same and against production by Goldman Sachs and/or Cazenove of an appropriate tax invoice. 14. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 The parties to this Agreement do not intend that any term of this Agreement, should be enforceable by virtue of the Contracts (Rights of Third Parties) Act 1999 by any person who is not a party to this Agreement. 15. NOTICES 15.1 Any notice or other communication given or made under or in connection with the matters contemplated by this Agreement shall be in writing (not including writing on the screen of a visual display unit or other similar device which shall not be treated as writing for the purposes of this Clause). 15.2 Any such notice or other communication shall be addressed as provided in CLAUSE 15.3 and, if so addressed, shall be deemed to have been duly given or made as follows:- (A) if sent by personal delivery, upon delivery at the relevant address of the relevant party; (B) if sent by first class post, two Dealing Days after the date of posting; and (C) if sent by facsimile, when received. 15.3 The relevant addressee, address and facsimile number of each party for the purposes of this Agreement, subject to CLAUSE 15.4, are:- Name of Party Address Facsimile No. ------------- ------- ------------- The Company 3 Burlington Gardens 020 7411 2254 London W1X 1LE F.A.O. Gary Rinck 19 Goldman Sachs Peterborough Court 020 7774 4212 133 Fleet Street London EC4A 2BB F.A.O. Richard Murley Cazenove 12 Tokenhouse Yard 020 7796 2118 London EC2R 7AN F.A.O. John Paynter 15.4 A party may notify the other party to this Agreement of a change to its name, relevant addressee, address or facsimile number for the purposes of this Clause provided that such notification shall only be effective on:- (A) the date specified in the notification as the date on which the change is to take place; or (B) if no date is specified or the date specified is less than five Dealing Days after the date on which notice is given, the date falling five Dealing Days after notice of any such change has been given. 16. GOVERNING LAW This Agreement shall be governed by and construed in accordance with English law. 20 SCHEDULE 1 DOCUMENTS TO BE DELIVERED 1. The following documents are to be delivered by the Company to the Underwriters as referred to in CLAUSE 3.1(B):- (A) a certified copy of the Memorandum and Articles of Association of the Company; (B) a certified copy of the resolution of the Board of Directors (or of the duly authorised Committee of such Board) approving the Rights Issue and the Acquisition and approving and authorising the issue and/or execution of the Circular, the Provisional Allotment Letter, the Acquisition Documents, the Press Announcement and this Agreement (and, if the said resolution is of such a Committee, a certified copy of the resolution of the Board of Directors appointing such Committee); (C) the Circular; (D) certified copies of letters to the UK Listing Authority signed by all the Directors containing the confirmation required by paragraph 5.5 of the Listing Rules; (E) certified copies of any power of attorney pursuant to which any Director signed any of the documents mentioned above in a form reasonably acceptable to the Underwriters; (F) letters to the Underwriters from the solicitors to the Company in connection with the Rights Issue and the auditors to the Company in each case in relation to the matters referred to in paragraph 2.8 of the Listing Rules in a form reasonably acceptable to the Underwriters; (G) the working capital report relating to the Group in the form reasonably acceptable to the Underwriters; (H) a letter to the Underwriters from the Company's auditors relating to the said working capital report and the financial information contained in the in the Circular, in a form reasonably acceptable to the Underwriters; and (I) a letter to the Underwriters from the Company relating to the adequacy of the Group's working capital in the form of the draft initialled by or on behalf of the Company and the Underwriters for the purpose of identification only and marked "B". 2. The following document is to be delivered by the Company to the Underwriters forthwith after the provisional allotment of the New Shares pursuant to CLAUSE 6.1:- a certified copy of the resolution of the Board of Directors (or of the duly authorised Committee of such Board) provisionally allotting the New Shares as referred to in CLAUSE 6.1 (and, if the said resolution is of such a Committee, a certified copy of the 21 resolution of the Board of Directors appointing such Committee (if not previously delivered to the Underwriters)). 3. The following document is to be delivered by the Company to the Underwriters forthwith after the confirmation of allotments and/or new allotments of the New Shares pursuant to CLAUSE 6.3:- a certified copy of the resolution of the Board of Directors (or of the duly authorised Committee of such Board) confirming the allotments of the New Shares taken up and making new allotments of the New Shares not taken up as referred to in CLAUSE 6.3 (and, if the said resolution is of such a Committee, a certified copy of the resolution of the Board of Directors appointing such Committee (if not previously delivered to the Underwriters)). 22 SCHEDULE 2 REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS (A) All statements contained in the Press Announcement (other than expressions of opinion, intention or expectation of the Directors) are true and accurate in all material respects and not misleading in any material respect and all expressions of opinion, intention or expectation of the Directors contained therein are made on reasonable grounds and are truly and honestly held by the Directors and are fairly based and there are no other facts known or which could on reasonable inquiry have been known to the Directors the omission of which would make any such statement or expression in the Press Announcement misleading in any material respect or which are or might be material in the context of the Acquisition, the Rights Issue or the underwriting of the New Shares. (B) All statements contained in the Circular (other than expressions of opinion, intention or expectation of the Directors) will, when published, be true and accurate in all material respects and not misleading in any material respect and all expressions of opinion, intention or expectation of the Directors contained therein will, when published, be made on reasonable grounds and will be truly and honestly held by the Directors and will be fairly based and there will be no other facts known or which could on reasonable inquiry have been known to the Directors the omission of which would make any such statement or expression in the Circular misleading in any material respect or which will or might be material in the context of the Acquisition, the Rights Issue or the underwriting of the New Shares. (C) The Circular will, when published, contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Company and the rights attaching to the New Shares having regard to the matters specified in Section 146(3) of the Financial Services Act 1986. (D) With respect to the Report and Accounts and each announcement made by or on behalf of the Company to the London Stock Exchange or the UK Listing Authority since the date of publication of the Report and Accounts ("PREVIOUS ANNOUNCEMENTS"), at the date the Report and Accounts were published or, as the case may be, at the date such announcement was made, (and save as disclosed in any such document or announcement issued or made after the publication of the Report and Accounts or any other previous announcement) all statements contained therein (other than expressions of opinion, intention or expectation of the Directors) were true and accurate in all material respects and not misleading in any material respect and all expressions of opinion, intention or expectation of the Directors contained therein were made on reasonable grounds and were truly and honestly held by the Directors and were fairly based and all previous announcements complied, in all material respects, with the Companies Act 1985, the Financial Services Act 1986, the rules and regulations of the UK Listing Authority and the London Stock Exchange and all regulations made thereunder (including the Listing Rules). (E) All statements contained in any Supplementary Prospectus (other than expressions of opinion, intention or expectation of the Directors) will, when published, be true and accurate in all material respects and not misleading in any material respect and all expressions of opinion, 23 intention or expectation of the Directors contained therein will, when published, be made on reasonable grounds and will be truly and honestly held by the Directors and will be fairly based and there will be no other facts known or which could on reasonable inquiry have been known to the Directors the omission of which would make any such statement or expression in any such Supplementary Prospectus misleading in any material respect or which will be or might be material in the context of the Rights Issue or the underwriting of the New Shares. (F) If any Supplementary Prospectus is published, then the Circular, together with such Supplementary Prospectus, will, when the Supplementary Prospectus is published, contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Company and the rights attaching to the New Shares having regard to the matters specified in Section 146(3) of the Financial Services Act 1986. (G) The Interim Results contain an accurate statement in all material respects of the turnover, profit before tax and profit after tax of the Group for the six months ended 30th June, 2000 and, save for the fact that they are unaudited, have been prepared in accordance with generally accepted accounting principles consistently applied (and applied consistently with those used in the preparation of the Report and Accounts) and all relevant Statements of Standard Accounting Practice and comply with the Companies Act 1985 as applicable. (H) The Report and Accounts give a true and fair view of the state of affairs of the Company and of the Group at the Accounts Date and of the results and source and application of funds of the Group for the financial period then ended and have been prepared in accordance with generally accepted accounting principles consistently applied and all relevant Statements of Standard Accounting Practice and comply in all material respects with the Companies Act 1985 as applicable. (I) Since the Accounts Date, save as disclosed in the Circular or any previous announcement, the business of the Group has been carried on in the ordinary and usual course and there has been no material adverse change in the financial or trading position of the Group. (J) Save as disclosed in the Circular, no member of the Group is engaged in any legal or arbitration proceedings which may have or have had during the 12 months preceding the date hereof a significant effect on the financial position of the Group or which individually or collectively are material for disclosure in the context of the Acquisition, the Rights Issue or the underwriting of the New Shares. (K) The allotment and issue of the New Shares, the issue of the Press Announcement, the Circular, the Forms of Proxy and the Provisional Allotment Letters and the making of the Rights Issue will comply with the Companies Act 1985, the Financial Services Act 1986, the rules and regulations of the UK Listing Authority and the London Stock Exchange and all regulations made thereunder (including the Listing Rules and the Standards), and, in each case so far as the Directors are aware, having made such enquiries (if any) as are reasonable, the rules and regulations of any other exchange or securities market on which any of the securities of the Company are listed, quoted or traded and all other relevant laws and regulations of the United Kingdom and 24 elsewhere and there are no matters other than those disclosed in the Circular or otherwise in writing to the UK Listing Authority which should be taken into account by the UK Listing Authority in considering the suitability for listing of the New Shares. (L) The Company and the Directors have power under the Memorandum and Articles of Association of the Company to allot and issue the New Shares in the manner contemplated by this Agreement without any sanction or consent by members of the Company or any class of them and there are no consents required by the Company for the allotment and issue of the New Shares which have not been unconditionally obtained. (M) So far as the Directors are aware, having made such enquiries (if any) as are reasonable, entering into and performance of this Agreement by the Company and the issue of the New Shares will comply in all material respects with all agreements to which any member of the Group is a party or by which it or any of them or any of their respective properties or assets is bound. (N) So far as the Directors are aware, having made such enquiries (if any) as are reasonable, no event has occurred or circumstance arisen such that any person is entitled, or could, with the giving of notice and/or lapse of time and/or the fulfilment of any condition and/or the making of any determination, become entitled, to require repayment before its stated maturity of, or to take any step to enforce any security for, any indebtedness of any member of the Group. (O) The working capital forecast of the Group contained in the memorandum dated 28th July, 2000 has been approved by the Board of Directors or a Committee thereof and has been made after due and careful inquiry, all statements of fact therein are true and accurate in all material respects and not misleading in any material respect, all expressions of opinion, intention or expectation contained therein are made on reasonable grounds and are fairly based, all the assumptions on which that forecast is based are reasonable assumptions, so far as the Directors are aware, having made such inquiries (if any) as are reasonable and there are no other assumptions on which that forecast ought to have been based which have not been made. (P) Neither the Company, nor any affiliate of the Company, nor any person acting on its or their behalf has offered or sold the Rights or the New Shares by means of any (i) general solicitation or general advertising within the meaning of Rule 502(c) under the United States Securities Act of 1933 (the "Securities Act") or (ii) directed selling efforts within the meaning of Rule 903 under the Securities Act and the Company has complied and will comply with the offering restriction requirements of such Rule 903. 25 IN WITNESS whereof the parties hereto have entered into this Agreement the day and year first before written. SIGNED BY ) duly authorised for and on ) behalf of ) PEARSON PLC ) SIGNED BY ) duly authorised for and on ) behalf of GOLDMAN ) SACHS INTERNATIONAL ) SIGNED BY ) duly authorised for and on ) behalf of ) CAZENOVE & CO. ) EX-1.2 3 ex-1_2.txt EXHIBIT 1.2 Exhibit 1.2 DATED ___________ AUGUST, 2000 PEARSON PLC - AND - GOLDMAN SACHS INTERNATIONAL - AND - CAZENOVE & CO. ----------------------------- AMENDING AGREEMENT TO AN UNDERWRITING AGREEMENT ----------------------------- Slaughter and May 35 Basinghall Street London EC2V 5DB THIS AGREEMENT is made on August, 2000 BETWEEN: (1) PEARSON PLC (registered in England with number 53723) whose registered office is at 3 Burlington Gardens, London W1X 1LE (the "COMPANY"); (2) GOLDMAN SACHS INTERNATIONAL of Peterborough Court, 133 Fleet Street, London EC4A 2BB ("GOLDMAN SACHS"); and (3) CAZENOVE & CO. of 12 Tokenhouse Yard, London EC2R 7AN ("CAZENOVE"). WHEREAS: (A) Goldman Sachs and Cazenove agreed, on the terms and subject to the conditions contained in an underwriting agreement (the "Underwriting Agreement") dated 31st July 2000, to underwrite the Rights Issue (as such term is defined in the Underwriting Agreement). (B) The parties to the Underwriting Agreement have agreed to amend the Underwriting Agreement. WHEREBY IT IS AGREED AS FOLLOWS: 1. Clause 1.1 of the Underwriting Agreement shall be amended as follows: (A) New definitions shall be inserted as follows: "Canadian Holders" means Qualifying Holders with registered addresses in Canada or any of its provinces; "Dutch Holders" means Qualifying Holders with registered addresses in the Netherlands; "French Holders means Qualifying Holders with registered addresses in France; "South African Holders" means Qualifying Holders with registered addresses in the Republic of South Africa;" (B) The definition of "New Shares" shall be amended to read as follows: "New Shares" means the 170,528,278 New Ordinary Shares to be allotted pursuant to the rights issue;" 2. A new clause 3.6 shall be added to the Underwriting Agreement as follows: "3.6 The Company shall comply with the terms and provisions set out in SCHEDULE 3. The Underwriters shall not be entitled to rescind this Agreement or treat it as terminated (and shall accordingly remain bound to perform all the obligations and services which are the subject of this agreement on the terms set out in this agreement) in the event of a breach of this CLAUSE 3.6 or SCHEDULE 3 but shall be entitled to claim damages or exercise any other right, power or remedy, in each case subject to the foregoing, under this Agreement or as otherwise provided in law." 3. The following wording shall be inserted at the beginning of clause 4.3 of the Underwriting Agreement: "The conditions set out in CLAUSES 4.1 (C), (F) AND (G) shall be deemed to have been fulfilled, if they have not been invoked by the Underwriters giving written notice to the Company, by the earlier of 3.00 p.m. on the second Dealing Day after the Acceptance Date and the time at which the Underwriters instruct the Brokers no longer to endeavour to procure any subscribers in accordance with CLAUSE 7.6." 4. Clause 4.3(B) of the Underwriting Agreement shall be amended by inserting "and CLAUSE 3.6 and Sections [3] (Covenants) and [5] (Indemnities) of SCHEDULE 3" after the words "CLAUSES 11 AND 12". 5. The existing clause 5.1 of the Underwriting Agreement will be deleted and replaced with the following: "5.1 The Company will provide such documents and notifications and pay such fees to the Australian Securities Commission (and shall do so by not later than such dates) as are necessary to ensure that the Circular and the Provisional Allotment Letters can be sent to Qualifying Holders with registered addresses in the Commonwealth of Australia, its territories or possessions in compliance with Australian law." 6. The reference in clause 5.2 of the Underwriting Agreement to "North American Holders" shall be changed to "Canadian Holders, French Holders, Irish Holders, South African Holders or Dutch Holders". 7. A new clause 5.3 shall be inserted in the Underwriting Agreement as follows and the existing clauses 5.3 and 5.4 shall be renumbered 5.4 and 5.5 respectively: "5.3 The Company will not send the Circular to North American Holders. Provisional Allotment Letters will only be sent to North American Holders once (i) each of the Registration Statement (as defined in SCHEDULE 3) and the ADR Registration Statement (as defined in SCHEDULE 3) has become effective and (ii) the due diligence opinions from Sullivan & Cromwell and Morgan, Lewis & Bockius have been delivered [and such Provisional Allotment Letters shall be sent in accordance with the provisions of the Supplemental Agreement (as defined in SCHEDULE 3)." 8. In clause 7.2 (in both places in which it occurs) and clause 7.7 of the Underwriting Agreement, the following words shall be deleted: "(save that individual amounts of less than (pound)3.00 per holding shall not be so paid but shall be retained by the Company)". 9. A new clause 8.4 shall be inserted as follows: "8.4 For the avoidance of doubt, nothing in this Agreement shall oblige the Underwriters to: (i) subscribe for, or to procure subscribers for, ADR or ADSs (each as defined in SCHEDULE 3) or to purchase, or endeavour to procure purchasers for, ADRs or ADSs (each as defined in SCHEDULE 3); or (ii) to convert, or procure the conversion of, any amount from pounds sterling into any other currency or to account for, or pay to, any other person any sum in a currency other than pounds sterling." 10. In clause 10.4 of the Underwriting Agreement the words "and in SECTION [2] of SCHEDULE 3" shall be inserted after the words "CLAUSE 10.1". 11. A new clause 12.5 will be inserted as follows: "12.5 No Indemnified Person will bring a claim or seek indemnification pursuant to CLAUSE 12.3 in respect of any losses, claims, damages or liabilities (or actions in respect thereof) to the extent that the same are the subject of the indemnities set out in Section [5(A)] of Schedule 3 but will instead bring such claim or seek such indemnification under the indemnity contained in SECTION [5(A)] of SCHEDULE 3." 12. The following words will be inserted into Clause 16 after the words "This Agreement": "with the exception of SCHEDULE 3". 13. A new schedule 3 in the form of the Schedule to this Agreement shall be inserted in the Underwriting Agreement. 14. All other provisions of the Underwriting Agreement will remain unchanged. IN WITNESS whereof the parties hereto have entered into this Agreement the day and year first before written. SCHEDULE 3 PROVISIONS RELATING TO THE US RIGHTS ISSUE AND UNDERWRITING(1) The provisions set forth in this SCHEDULE 3 relate solely and exclusively to the Underwriters' activities in connection with the US Offering. No breach or inaccuracy of any representation or warranty of the Company contained herein, nor any breach of any covenant of the Company contained in the SCHEDULE 3, shall relieve the Underwriters of, or in any way affect, the obligations of the Underwriters under the Agreement. 1. DEFINITIONS In addition to the definitions in CLAUSE 1 of this Agreement, in this SCHEDULE 3, the following expressions shall, unless the context otherwise requires, have the following meanings:- "Act" The United States Securities Act of 1933, as amended "ADSs" The American Depositary Shares representing the Ordinary Shares "ADRs" The American Depositary Receipts issued by the Depositary and evidencing the ADSs "ADR Registration Statement" The registration statement on Form F-6, including all exhibits thereto, relating to the ADRs, as amended at the time it becomes effective "ADS Rights" The transferable rights to subscribe for New ADSs, pursuant to the terms of the Rights Agency Agreement in connection with the Rights Issue "ADS Subscription Agent" The Bank of New York "Agreement" The underwriting agreement entered into among the Company and the Underwriters, dated July 31, 2000, as amended by a supplemental agreement dated August 8, 2000 "Authorized Agent" Pearson Inc., New York, New York "Commission" The United States Securities and Exchange Commission "Deposit Agreement" The deposit agreement, dated as of March 21, 1998 and as amended and restated as of August 8, 2000, among the Company, the Depositary and holders from time to time of ADRs "Depositary" The Bank of New York - -------- 1 For the avoidance of doubt, this SCHEDULE 3 is divided into "SECTIONS" whereas the Agreement is divided into "CLAUSES". "Exchange Act" The United States Securities Exchange Act of 1934, as amended "Governmental Agency" Any court or governmental agency or body "Investment Company Act" The United States Investment Company Act of 1940, as amended "NCS" National Computer Systems, Inc. "New ADSs" The New ADSs to be offered pursuant to the terms of the Rights Agency Agreement "NYSE" The New York Stock Exchange "PFIC" Passive Foreign Investment Company "Registration Statement" The registration statement on Form F-1 in respect of the Ordinary Shares and ADSs, including the US Prospectus relating to the US Offering and all exhibits thereto, as amended at the time it becomes effective "Rights Agency Agreement" The agreement entered into between the Company and The Bank of New York dated August 8, 2000 relating to the issue of ADS Rights "US Offering" The Rights Issue in the United States and the reoffering of unsubscribed shares in the US by the Underwriters "US Prospectus" The prospectus included in the Registration Statement, in the form first filed with the Commission pursuant to Rule 424(b) under the Act "Underwritten Shares" The Ordinary Shares that the Underwriters are required to take up pursuant to CLAUSE 8.2 of the Agreement "Underwriters" Goldman Sachs and Cazenove and their respective US broker-dealer affiliates who are acting as selling agents in connection with the US Offering. 2. REPRESENTATIONS AND WARRANTIES In addition to the representations, warranties and undertakings referred to in CLAUSES 3 AND 10, of this Agreement, the Company represents and warrants to, and agrees with, each of the Underwriters that:- ii (A) The Registration Statement has been filed with the Commission; the Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to the Underwriters, have been declared effective by the Commission in such form; no other document with respect to the Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto, if any, has been issued and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission; (B) The Registration Statement conforms, and the US Prospectus and any further amendments or supplements to the Registration Statement or the US Prospectus will conform, at the time of the applicable effective date in the case of the Registration Statement and any amendment and as of the date of the US Prospectus and any supplement thereto, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the US Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the case of the US Prospectus, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter expressly for use therein; (C) An ADR Registration Statement has been filed with the Commission; the ADR Registration Statement in the form heretofore delivered to the Underwriters has been declared effective by the Commission in such form; no other document with respect to such registration statement has heretofore been filed with the Commission; no stop order suspending the effectiveness of the ADR Registration Statement has been issued and no proceeding for that purpose has been initiated or threatened by the Commission; and the ADR Registration Statement when it became effective conformed, and any further amendments thereto will conform as of their effective date, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not, as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (D) This Agreement, the Deposit Agreement and the Rights Agency Agreement have been duly authorized, executed and delivered by the Company, and constitute valid and legally binding agreements of the Company, and (insofar as the Agreement is governed by English law) such agreements are enforceable in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; upon issuance by the Depositary of the ADS Rights and the underlying ADRs evidencing ADSs against the deposit of Shares in respect thereof in accordance with the provisions of the Deposit Agreement, such ADS Rights and underlying ADRs will be duly and validly issued and the persons in whose names the ADS Rights are issued and the ADRs are registered will be entitled to the rights specified therein, in the Deposit Agreement and the Rights Agency Agreement; and the Deposit Agreement, the Rights Agency Agreement, the ADS Rights and the ADRs conform in all material respects to the descriptions thereof contained in the US Prospectus; (E) All dividends and other distributions declared and payable on the shares of the capital stock of the Company may, under the current laws and regulations of the United Kingdom, be paid to the Depositary in Great Britain Pounds that may be converted into iii foreign currency that may be freely transferred out of the United Kingdom and, except as set forth in the US Prospectus under the caption "Tax Considerations", all such dividends and other distributions will not be subject to withholding or other taxes under the laws and regulations of the United Kingdom and are otherwise free and clear of any other tax, withholding or deduction in the United Kingdom and without the necessity of obtaining any Governmental Authorization in the United Kingdom; (F) The issue and sale of the New Shares and the New ADSs by the Company, any deposit of the New Shares with the Depositary against issuance of New ADRs evidencing New ADSs and the compliance by the Company with all of the provisions of this Agreement, including the terms and provisions of this SCHEDULE 3, the Deposit Agreement and the Rights Agency Agreement and - the consummation of the transactions herein and therein contemplated will not result in any violation of the provisions of the Memorandum and Articles of Association of the Company or any statute or any order, rule or regulation of any Governmental Agency having jurisdiction over the Group or any of their properties or, so far as the directors are aware, having made such inquiries (if any) as are reasonable, such actions will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan stock, loan agreement or other agreement or instrument to which any member of the Group is a party or by which it or any of them is bound or to which any of their respective property or assets is subject except for such conflict, breach, violation or default as would not have a material adverse effect on the Group taken as a whole; and no consent, approval, authorization, order, registration or qualification of or with any such Governmental Agency is required for the issue and sale of the New Shares or the New ADSs, for the deposit of any New Shares being deposited with the Depositary against issuance of the New ADRs evidencing the New ADSs or the consummation by the Company of the transactions contemplated by this Agreement, including the terms and provisions of this SCHEDULE 3, except (A) the registration under the Act of the New Shares, the New ADSs and the New ADRs, (B) registration of the ordinary shares under the Exchange Act in connection with the listing on the NYSE, (C) such Governmental Authorizations as have been duly obtained and are in full force and effect and copies of which have been furnished to the Underwriters and (D) such Governmental Authorizations as may be required under state securities or Blue Sky laws or any laws of jurisdictions outside the United Kingdom and the United States in connection with the purchase and distribution of the New Shares and New ADSs by or for the account of the Underwriters; (G) Neither the Company nor any of its subsidiaries has taken, directly or indirectly, any action which was designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares and ADSs in the US; (H) The statements set forth in the US Prospectus under the caption "Description of Share Capital" and "Description of American Depositary Shares", insofar as they purport to constitute a summary of the terms of the Ordinary Shares and the ADSs, respectively, and under the caption "Tax Consideration", insofar as it purports to describe the provisions of the laws and documents referred to therein, constitute a fair summary; (I) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act; and (J) The Company is not a PFIC within the meaning of Section 1296 of the United States Internal Revenue Code of 1986, as amended, and is not likely to become a PFIC. 3. COVENANTS iv The Company agrees with each Underwriter:- (A) From time to time as practicable after the Posting Date, to furnish the Underwriters with copies of the US Prospectus in London in such quantities as they may reasonably request. If any events shall have occurred as a result of which the US Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such US Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the US Prospectus in order to comply with the Act, to notify the Underwriters and, at any time prior to the date 10 business days, but in no event later than October 7, 2000, following the Acceptance Date upon request of the Underwriters, to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Underwriters may from time to time reasonably request of an amended US Prospectus or a supplement to the US Prospectus which will correct such statement or omission or effect such compliance; (B) To use its best efforts to list, subject to notice of issuance, the ADSs on the NYSE. If the ADSs are not listed on the NYSE, to use its best efforts to qualify the Shares or ADSs under the securities laws of such jurisdictions as the Underwriters may request; (C) That it will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares and ADSs under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, the ADR Registration Statement, and the US Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing this Agreement, the Deposit Agreement, the Rights Agency Agreement, any Blue Sky Memorandum, and any other documents in connection with the offering, purchase, sale and delivery of the New Shares and New ADSs in the United States; (iii) any expenses in connection with the qualification of the New Shares and New ADSs for offering and sale under state securities laws, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the ADSs on the New York Stock Exchange; (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the New Shares and New ADSs; (vi) the reasonable fees and disbursements of the Underwriters' counsel in connection with the transactions contemplated hereby; (vii) all expenses and taxes, other than the 1.5% UK tax described in the US Prospectus, arising as a result of the deposit by the Company of the New Shares with the Depositary and the issuance and delivery of the New ADRs evidencing New ADSs in exchange therefor by the Depositary in connection with exercise of rights pursuant to the Rights Issue; (viii) the fees and expenses (excluding any applicable taxes but including fees and disbursements of counsel), if any, of the Depositary and any custodian appointed under the Deposit Agreement, and ADS Subscription Agent under the Rights Agency Agreement other than the fees and expenses to be paid by holders of ADRs (other than the Underwriters, in connection with the initial purchase of ADSs and the Shares); (ix) the fees and expenses of the Authorized Agent; (x) the cost of preparing the ADRs; (xi) the cost and charges of any transfer agent or registrar; and (xii) all other costs and expenses of the Company incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section and Section 5 hereof, the Underwriters will pay all of their own costs and expenses, stock transfer taxes on resale of any of the New Shares v and New ADSs by them, and any advertising expenses connected with any offers they may make. 4. DOCUMENTS TO BE DELIVERED ON POSTING DATE The following documents are to be delivered to the Underwriters in form and substance satisfactory to the Underwriters on the Posting Date and the Company agrees that none of the US Prospectus, the Provisional Allotment Letters or warrants evidencing ADS Rights will be posted to US shareholders until such documents have been delivered:- (A) Opinions of Sullivan & Cromwell, counsel for the Underwriters; (B) An opinion of Morgan Lewis & Bockius, US counsel for the Company; (C) An opinion of Freshfields Bruckhaus Deringer, English counsel for the Company; (D) An opinion of Emmet, Marvin and Martin, counsel for the Depositary and the ADS Subscription Agent; (E) An opinion of Slaughter and May, English counsel for the Underwriters; (E) A letter or letters from PricewaterhouseCoopers, accountants for the Company; (F) A letter or letters from Ernst & Young, accountants for NCS; 5. INDEMNITIES (A) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the ADR Registration Statement or the US Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, the ADR Registration Statement or the US Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter expressly for use therein. (B) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the ADR Registration Statement or the US Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, the ADR Registration Statement or the US Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter expressly for use therein; and will reimburse the Company for any legal vi or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (C) Promptly after receipt by an indemnified party under subsection (A) or (B) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (which shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (D) If the indemnification provided for in this Section 5 is unavailable to or insufficient to hold harmless an indemnified party under subsection (A) or (B) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Ordinary Shares and ADSs. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (C) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Ordinary Shares and ADSs (before deducting expenses) received by the Company bear to the total underwriting commissions received by the Underwriters with respect to the Ordinary Shares and ADSs. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this vii this subsection (D) were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (D). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (D) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (D), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Ordinary Shares and ADSs underwritten by it and distributed to the public in the US were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (D) to contribute are several in proportion to their respective underwriting obligations and not joint. (E) The obligations of the Company under this Section 5 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 5 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. (F) This Section 5 shall be the exclusive provision under the terms of the Agreement pertaining to indemnification and contribution arising out of the Registration Statement, the ADR Registration Statement or the US Prospectus, and no person entitled to indemnification or contribution hereunder shall have the right to proceed under any other provision of the Agreement in respect of such documents. 6. SURVIVAL OF PROVISIONS The respective indemnities, agreements, representations and warranties of the Company and the several Underwriters, as set forth in this SCHEDULE 3, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter or the Company, or any officer or director or controlling person of the Company, or any controlling person, and shall survive delivery of and payment for the Underwritten Shares. 7. BINDING EFFECT The provisions of this Schedule 3 shall be binding upon, and inure solely to the benefit of, the Underwriters and the Company and to that extent provided in Sections 5 and 6 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the New Shares or New ADSs from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 8. GOVERNING LAW AND SUBMISSION TO JURISDICTION THE TERMS AND PROVISIONS OF THIS SCHEDULE 3 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. viii Each of the parties hereto irrevocably (i) agrees that any legal suit, action or proceeding arising out of or based upon the terms and provisions of this SCHEDULE 3 or the transactions contemplated hereby may be instituted in any New York court, (ii) waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of venue of any such proceeding and (iii) submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding. The Company has appointed an Authorized Agent upon whom process may be served in any such action arising out of or based on this SCHEDULE 3 or the transactions contemplated hereby which may be instituted in any New York Court by any Underwriter or by any person who controls any Underwriter, expressly consents to the jurisdiction of any such court in respect of any such action, and waives any other requirements of or objections to personal jurisdiction with respect thereto. Such appointment shall be irrevocable. The Company represents and warrants that the Authorized Agent has agreed to act as such agent for service at process and agrees to take any and all action, including the filing of any and all documents and instruments, that may be necessary to continue such appointment in full force and effect as aforesaid. Service of process upon the Authorized Agent and written notice of such service to the Company shall be deemed, in every respect, effective service of process upon the Company. SIGNED BY ) duly authorised for and ) on behalf of ) PEARSON PLC ) SIGNED BY ) duly authorised for and ) on behalf of GOLDMAN ) SACHS INTERNATIONAL ) SIGNED BY ) duly authorised for and ) on behalf of ) CAZENOVE & CO. ) EX-3.1 4 ex-3_1.txt EXHIBIT 3.1 Exhibit 3.1 PEARSON PLC ============================== MEMORANDUM OF ASSOCIATION OF PEARSON PLC ============================== PEARSON PLC =========================================== MEMORANDUM OF ASSOCIATION INCORPORATING AMENDMENTS MADE UP TO AND INCLUDING 30 APRIL 1999 =========================================== 1. The name of the Company is 'S. Pearson & Son plc'. (1) 2. The Company is to be a public company. 3. The registered office of the Company will be situate in England. 4. The objects for which the Company is established are: (a) To carry on the business of a holding, management and investment holding company in all its branches, and to acquire by purchase, lease, concession, grant, licence or otherwise such businesses, options, rights, privileges, lands, buildings, leases, underleases, stocks, shares, debentures, debenture stock, bonds, obligations, securities, reversionary interests, annuities, policies of assurance and other property and rights and interests in property (including the whole or part of the business, property or liabilities of any other person or company) as the Board shall deem fit and generally to construct, hold, manage, develop, lease, sell, dispose of, maintain, alter, exchange or otherwise deal with the same; and to vary any of the investments of the Company, to act as trustees of any deeds constituting or securing any debentures, debenture stock or other securities or obligations; to enter into, assist, or participate in financial, commercial, mercantile, industrial and other transactions, undertakings and businesses of every description, and to establish, carry on, develop and extend the same, or sell, dispose of or otherwise turn the same to account, and to co-ordinate, finance and manage all or any part of the operations of any company of which this Company is a member or which is in any manner controlled by, or connected with, the Company, and to enter into any agreement or arrangement with, or relating to, any such company or other company as may seem desirable in the opinion of the Board, and to carry on all or any of the businesses of industrialists, trustees, financiers, financial agents, company promoters, bill discounters, insurance brokers and agents, mortgage brokers, rent and debt collectors, capitalists, stock and share brokers and dealers and commission and general agents, merchants and traders; and to carry out such operations and to manufacture, buy, sell, maintain, repair and deal in or with plant, machinery, tools, articles and things of all kinds capable of being used for the purposes of the above-mentioned businesses or any of them, or likely to be required by customers of or persons having dealings with the Company or as may seem to the Board directly or indirectly to be in the interests of the Company. - -------------------------------------------------------------------------------- (1) Name changed to Pearson plc on 1 June 1984 (b) To carry on any other trade or business whatever which, in the opinion of the Board, can be advantageously carried on in connection with or ancillary to any of the above-mentioned businesses or is calculated directly or indirectly to enhance the value of or render profitable any of the property or rights of the Company. (c) To co-ordinate, finance, manage, control, subsidise or otherwise assist any company or companies in which the Company has a direct or indirect interest, to provide financial, secretarial, administrative, technical, commercial and other services and facilities of all kinds for any such company or companies and to make payments in any manner and any arrangements with respect to any business or operations of or generally with respect to any such company or companies. (d) To sell, lease, dispose of, grant rights over or otherwise deal with the undertaking, property or assets of the Company or any part thereof or right or interest therein on such terms and for such consideration as the Board may decide and to distribute any property or assets of the Company of whatever kind in specie among the members of the Company. (e) To pay for any rights or property acquired by the Company and to remunerate any person or company, whether by cash payment or by the allotment of shares, debentures or other securities of the Company credited as paid up in full or in part, or by any combination of such methods or by any other method or combination of methods the Board may think fit. (f) To invest and deal with the moneys of the Company not immediately required and in any manner and hold and deal with any investment so made. (g) To work, develop, exercise, and promote the discovery or use of any invention or appliance, and to make or promote the making of any experiments, in which, or in or by the working, development, exercise, discovery, use or making of which, the Company is or may be in any way interested or benefited. (h) To apply for, purchase or otherwise acquire, develop, protect, maintain and renew any patents, patent rights, trade marks, designs, licences and other intellectual property rights of all kinds or any secret or other information, whether relating to any invention or otherwise, and to use, exercise, develop, experiment with, or grant licences in respect of, or otherwise deal with the property, rights or information so acquired or any property, rights or information which the Company may propose to acquire. Page 2 (i) To apply for, support, promote and obtain any Act of Parliament, charter, privilege, concession, licence, authorisation or right of any government, state or municipality, or any other department or authority, or enter into any arrangements with any such body, for enabling the Company to carry any of its objects into effect or for extending any of the powers of the Company or for effecting any modification of the constitution of the Company or for any other purpose which may seem to the Board to be expedient, and to oppose any proceedings or applications which may seem to the Board to be calculated or likely directly or indirectly to prejudice the interests of the Company. (j) To form, promote, subsidise and assist companies and syndicates of all kinds and to place or guarantee the placing of, underwrite, subscribe for or otherwise acquire, hold, dispose of and deal with, and guarantee the payment of interest, dividends and capital on, all or any of the shares, debentures, debenture stock or other securities or obligations of any company, association, government or authority and to pay or provide for brokerage, commission and underwriting in respect of any such issue upon such terms as the Board may decide, and in particular to promote any other company for the purpose of acquiring all or any of the property and liabilities of this Company, or for any other purpose which may in the opinion of the Board seem directly or indirectly calculated or likely to benefit the Company. (k) To carry on through any subsidiary or associated company any activities which the Company is authorised to carry on and to make any arrangements whatsoever with such company (including any arrangements for taking the profits or bearing the losses of any such activities) as the Board may think fit. (l) To raise or borrow money in such manner as the Board may think fit and to receive deposits and to mortgage, charge, pledge or give liens or other security over the whole or any part of the Company's undertaking, property and assets (whether present or futures, including its uncalled capital, for such purposes and in such circumstances and upon such terms and conditions as the Board may think fit. (m) To lend or advance money and to give credit and to enter (whether gratuitously or otherwise) into guarantees or indemnities of all kinds, and whether secured or unsecured, whether in respect of its own obligations or chose of some other person or company in such circumstances and upon such terms and conditions as the Board may think fit. Page 3 (n) To draw, make, accept, endorse, discount, negotiate, execute and issue cheques, promissory notes, bills of exchange, bills of lading, warrants, debentures and other negotiable and transferable instruments. (o) To pay or to provide or to make such arrangements for providing such gratuities, pensions, allowances, benefits, share option, incentive and acquisition schemes, loans, insurances and other matters and to establish, support, subsidise and subscribe to any institutions, associations, clubs, buildings, schemes, funds or trusts (whether to or for the benefit of present or past directors or employees of, or any person who provides or has provided services at any time to, the Company or its predecessors in business or of any company which is a subsidiary of the Company or is allied to or associated with the Company or with any such predecessor or subsidiary or to or for the benefit of persons who are or were related to or connected with or dependents of any such persons, or otherwise to be in the interests of the Company or any such other company as aforesaid or of its members) as may seem to the Board directly or indirectly to be in the interests of the Company or to lend money to such persons as aforesaid (so far as the same is lawful) to enable them to participate in any such share option, incentive or acquisition scheme or otherwise to purchase or subscribe for fully-paid shares of the Company or any holding company to be held by themselves by way of beneficial ownership or to the trustees of an employees' share scheme as defined in Section 743 of the Companies Act 1985 (including any statutory modification or re-enactment for the time being in force). (p) To act as agents, brokers or trustees, and to enter into such arrangements (whether by way of amalgamation, partnership, profit sharing union of interests, co-operation, joint venture or otherwise) with other persons or companies as may seem to the Board to be in the interests of the Company and to vest any property of the Company in any person or company on behalf of the Company and with or without any declaration of trust in favour of the Company. (q) To procure the Company to be registered or recognised in any part of the world. (r) To contribute to or support (including by way of giving any guarantee) any public, national, general, political, charitable, benevolent or useful object, which it may seem to the Board to be in the interests of the Company or its members to contribute to or support. (s) To do all or any of the above things in any part of the world whether as principals or agents or trustees or otherwise and either alone or jointly Page 4 with others and either by or through agents, subcontractors, trustees or otherwise. (t) To do all such other things as may be considered by the Board to further the interests of the Company or to be incidental or conducive to the attainment of the above objects or any of them. And it is hereby declared that (a) the objects set forth in each sub-clause of this clause shall not be restrictively construed but the widest interpretation shall be given thereto, and (b) the word `company' in this clause, except where used in reference to the Company, shall be deemed to include any partnership or other body of persons, whether corporate or unincorporated and whether domiciled in the United Kingdom or elsewhere, and (c) the word `Board' in this clause shall mean the directors for the time being of the Company or any of them acting as the Board of Directors of the Company, and (d) except where the context expressly so requires, none of the several paragraphs of this clause, or the objects therein specified, or the powers thereby conferred shall be limited by, or be deemed merely subsidiary or auxiliary to, any other paragraph of this clause, or the objects specified in such other paragraph, or the powers thereby conferred but may be carried out in as full and ample a manner and shall be construed in as wide a sense as if each of the said paragraphs defined the objects of a separate, distinct and independent company. 5. The liability of the Members is limited. *6. The capital of the Company is L223,500,000 divided into 894,000,000 Ordinary Shares of 25p each, to which there shall be assigned the respective rights and privileges specified in the Company's Articles of Association, with power to divide any new shares in the capital for the time being into several classes, and to attach thereto respectively such preferential, deferred or special rights or conditions as may be determined by or in accordance with the regulations of the Company. * NOTES ON CAPITAL 1. The capital of the Company on incorporation was L1,501,000 divided into 150,100 shares of L10 each, of which 50,000 were Preference Shares and 100,000 were Ordinary Shares, and 100 were Management Shares 2. On 19 December 1939 the Management Shares were converted by special resolution into Second Preference Shares. 3. On 18 May 1960 each of the Preference Shares, Second Preference Shares and Ordinary Shares of L10 each was subdivided by ordinary resolution into 10 Preference Shares, 10 Second Preference Shares or 10 Ordinary Shares all of L1 each respectively. Page 5 4. On 30 December 1968 the capital of the Company was increased by ordinary resolution to L1,521,000 by the creation of 20,000 Ordinary Shares of L1 each. 5. On 8 August 1969: (a) the rights of the Preference Shares were modified by special resolution and they became known as 5 per cent Cumulative Preference Shares; (b) the Second Preference Shares were converted by special resolution into 5 per cent Cumulative Preference Shares; (c) each of the Ordinary Shares of L1 each was subdivided by ordinary resolution into 4 Ordinary Shares of 5s. each; (d) the capital of the Company was increased by ordinary resolution to L16,001,000 by the creation of 57,920,000 Ordinary Shares of 5s. each. 6. On 25 August 1971 the capital of the Company was increased by ordinary resolution to L18,501,000 by the creation of 10,000,000 Ordinary Shares of 25p each. 7. On 28 August 1980 the capital of the Company was increased by special resolution to L21,000,000 by the creation of 9,996,000 Ordinary Shares of 25p each. 8. On 28 May 1982 the capital of the Company was increased by special resolution to L33,500,000 by the creation of 50,000,000 Ordinary Shares of 25p each. 9. On 27 May 1983 the rights of the Preference Shares were modified by special resolution and they became known as 3.5 per cent Cumulative Preference Shares. 10. On 3 May 1985 the capital of the Company was increased by ordinary resolution to L67,250,000 by the creation of 135,000,000 Ordinary Shares of 25p each. 11. On 1 May 1987 the capital of the Company was increased by ordinary resolution to L75,375,000 by the creation of 32,500,000 Ordinary Shares of 25p each. 12. On 6 May 1988 the capital of the Company was increased by ordinary resolution to L79,000,000 by the creation of 14,500,000 Ordinary Shares of 25p each. Page 6 13. On 12 May 1989 the capital of the Company was increased by ordinary resolution to L94,885,000 by the creation of 63,540,000 Ordinary Shares of 25p each. 14. On 11 May 1990 the capital of the Company was increased by ordinary resolution to L199,695,000 by the creation of 19,240,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of L1 each, and US$5,000,000 by the creation of 50,000 Preference Shares of US$100 each. 15. On 21 June 1990 the capital of the Company was reduced by virtue of a special resolution, passed 11 May 1990, and with the sanction of an Order of the High Court of Justice, dated 18 June 1990, registered on 21 June 1990, by the cancellation of the 501,000 3.5 per cent Cumulative Preference Shares of L1 each, to L199,194,000 divided into 396,776,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of L1 each and US$5,000,000 divided into 50,000 Preference Shares of US$100 each. 16. On 10 May 1991 the capital of the Company was increased by ordinary resolution to L199,500,000 and US$5,000,000 by the creation of 1,224,000 Ordinary Shares of 25p each. 17. On 15 May 1992 the capital of the Company was increased by ordinary resolution to L299,750,000 and US$5,000,000 by the creation of 402,224,000 Ordinary Shares of 25p each. 18. On 13 May 1994 the capital of the Company was increased by ordinary resolution to L302,000,000 and US$5,000,000 by the creation of 9,000,000 Ordinary Shares of 25p each. 19. On 12 May 1995 the capital of the Company was increased by ordinary resolution to L302,750,000 and US$5,000,000 by the creation of 3,000,000 Ordinary Shares of 25p each. 20. On 3 May 1996 the capital of the Company was reduced by ordinary resolution by the cancellation of the 100,000,000 Preference Shares of L1 each and the 50,000 Preference Shares of US$100 each and then the capital of the Company was increased by ordinary resolution to L204,000,000 by the creation of 5,000,000 Ordinary Shares of 25p each. 21. On 2 May 1997 the capital of the Company was increased by ordinary resolution to L209,500,000 by the creation of 22,000,000 Ordinary Shares of 25p each. 22. On 1 May 1998 the capital of the Company was increased by ordinary resolution to L211,500,000 by the creation of 8,000,000 Ordinary Shares of 25p each. Page 7 23. On 30 April 1999 the capital of the Company was increased by ordinary resolution to L223,500,000 by the creation of 48,000,000 Ordinary Shares of 25p each. 24. On 12 May 2000 the capital of the Company was increased by ordinary resolution to L229,000,000 by the creation of 22,000,000 Ordinary Shares of 25p each. Page 8 We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the Company set opposite our respective names.
- ---------------------------------------------------------------- --------------------------------------- Names, addresses and descriptions of subscribers Number of Preference Shares taken by each Subscriber - ---------------------------------------------------------------- --------------------------------------- Weetman Dickinson Pearson, One Baronet, MP 10 Victoria Street, Westminster, SW, and Paddockhurst, Worth, Sussex Annie Pearson, One Paddockhurst, Worth, Sussex Wife of Sir Weetman D. Pearson, Bart., MP George Pearson Esq, One Brickendonbury, Hertford Sam Wright, One 10 Piccadilly, Bradford Solicitor Bernard Croft Cass, One Maylands, Bradford Civil Engineer Ernest William Moir, One 23 Shooters Hill Road, Blackheath Civil Engineer
Page 9 Samuel Robinson, One 46 Ryde Vale Road, Balham, SW Accountant Dated the 11th day of August 1897 Witness to the above signature of George Pearson, F.G.W. Pearson, Brickendonbury, Hertford. Gentleman. Witness to the above signatures of Sir Weetman Dickinson Pearson, Lady Annie Pearson, Samuel Wright, Bernard Croft Cass, Ernest William Moir and Samuel Robinson, William Edward Sayer, 10 Victoria Street, SW. Clerk. Page 10 EX-3.2 5 ex-3_2.txt EXHIBIT 3.2 Exhibit 3.2 PEARSON PLC ========================================== ARTICLES OF ASSOCIATION INCORPORATING AMENDMENTS MADE UP TO AND INCLUDING 2 MAY 1997 ========================================== CONTENTS
PAGE PRELIMINARY..........................................................................................1 SHARE CAPITAL........................................................................................3 CAPITAL..............................................................................................3 VARIATION OF RIGHTS..................................................................................3 SHARES...............................................................................................3 CERTIFICATES.........................................................................................5 CALLS ON SHARES......................................................................................6 LIEN.................................................................................................7 FORFEITURE OF SHARES.................................................................................8 TRANSFER OF SHARES...................................................................................9 TRANSMISSION OF SHARES..............................................................................10 STOCK...............................................................................................12 CONSOLIDATION, SUB-DIVISION AND CANCELLATION OF SHARES..............................................13 INCREASE AND REDUCTION OF CAPITAL...................................................................14 REDEEMABLE SHARES...................................................................................14 MEETINGS OF MEMBERS.................................................................................14 GENERAL MEETINGS....................................................................................14 NOTICE OF GENERAL MEETINGS..........................................................................14 PROCEEDINGS AT GENERAL MEETINGS.....................................................................15 VOTES OF MEMBERS....................................................................................17 DIRECTORS...........................................................................................19 NUMBER AND APPOINTMENT OF DIRECTORS.................................................................19 QUALIFICATION AND REMUNERATION OF DIRECTORS.........................................................20
PAGE POWERS OF DIRECTORS.................................................................................20 BORROWING...........................................................................................22 PROCEEDINGS OF THE BOARD............................................................................25 MINUTES.............................................................................................27 DISQUALIFICATION OF DIRECTORS.......................................................................27 RETIREMENT AND REMOVAL OF DIRECTORS.................................................................30 MANAGING DIRECTOR AND EXECUTIVE DIRECTORS...........................................................31 ALTERNATE DIRECTORS.................................................................................32 SECRETARY...........................................................................................33 THE SEAL............................................................................................33 ACCOUNTS AND DIVIDENDS..............................................................................34 AUDIT...............................................................................................34 DIVIDENDS AND RESERVES..............................................................................35 CAPITALISATION OF PROFITS...........................................................................40 NOTICES.............................................................................................41 WINDING UP..........................................................................................43 INDEMNITY...........................................................................................43 DISCOVERY...........................................................................................43 DESTRUCTION OF DOCUMENTS............................................................................44 UNTRACED SHAREHOLDERS...............................................................................44 INDEX TO ARTICLES OF ASSOCIATION....................................................................46
THE COMPANIES ACT 1985 COMPANY LIMITED BY SHARES ARTICLES OF ASSOCIATION OF PEARSON PLC ------------------------------------- Adopted by special resolution passed on 2nd May 1986 and amended by special resolutions passed on 11th May 1990, 10 May 1991 and 3 May 1996. PRELIMINARY 1. The regulations in Table A in the First Schedule to the Companies Act 1862 shall not apply to the Company. 2. In these Articles, if not inconsistent with the context, the words standing in the first column of the table next hereinafter contained shall bear the meanings set opposite to them respectively in the second column thereof. MEANINGS THE STATUTES: The Companies Act 1985 or any statutory re-enactment or modification thereof for the time being in force concerning companies and affecting the Company; and any reference to any section or provision of the Statutes shall be deemed to include a reference to any statutory re-enactment or modification thereof for the time being in force. THESE ARTICLES: These Articles of Association, as originally adopted, as from time to time altered by special resolution. THE OFFICE: The Registered Office of the Company. THE SEAL: The Common Seal of the Company. SHARE WARRANT: A warrant to bearer in respect of shares of the Company issued by the Company. SECURITIES SEAL: An official seal kept by the Company by virtue of Section 40 of the Companies Act 1985. TRANSFER OFFICE: The place where the register of members is situated for the time being. THE UNITED KINGDOM: Great Britain and Northern Ireland. THE DIRECTORS: The Directors for the time being of the Company. THE BOARD: The Directors or any of them acting as the Board of Directors of the Company. THE AUDITORS: The auditors for the time being of the Company. THE REGISTER: The Register of Members of the Company. PAID UP: Includes credited as paid up. DIVIDEND: Includes bonus. YEAR: Year from 1st January to 31st December inclusive. MONTH: Calendar month. IN WRITING: Written, or produced by any visible substitute for writing, or partly one and partly another CLEAR DAYS: In relation to the period of a notice, means that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect. The expressions "debenture", and "debenture holder" shall respectively include "debenture stock" and "debenture stockholder" and the words "shareholder" and "holder" shall, subject as provided in these Articles, and unless the context otherwise requires, include the bearer of any share warrant. The expression "Secretary" shall include a temporary, deputy or assistant Secretary and any person appointed by the Board to perform any of the duties of the Secretary. Words denoting the singular number only shall include the plural number and vice versa. Words denoting the masculine gender only shall include the feminine gender. Words denoting persons only shall include corporations. Page 2 Save as aforesaid any words or expressions defined in the Statutes shall, if not inconsistent with the subject or context, bear the same meaning in these Articles. SHARE CAPITAL CAPITAL 3. The share capital of the Company is L209,500,000 divided into 838,000,000 Ordinary Shares of 25p each ("Ordinary Shares"). VARIATION OF RIGHTS 4. Whenever the capital of the Company is divided into different classes of shares the special rights attached to any class may (unless otherwise provided by the terms of issue of the shares of that class), either with the consent in writing of the holders of three-fourths of the issued shares of the class, or with the sanction of an extraordinary resolution passed at a separate meeting of such holders (but not otherwise) be varied or abrogated, and may be so varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding up. To every such separate meeting all the provisions of these Articles relating to general meetings or to the proceedings thereat shall mutatis mutandis apply, but so that the necessary quorum shall be two persons at least holding or representing by proxy one-third in nominal amount of the issued shares of the class (but so that if at any adjourned meeting of such holders a quorum as above defined is not present, those of such holders who are present in person or by proxy shall be a quorum), and that the holders of shares of the class shall, on a poll, have one vote in respect of every share of the class held by them respectively. 5. The special rights conferred upon the holders of any shares or class of shares issued with preferred or other special rights shall not, unless otherwise expressly provided by these Articles or the conditions of issue of such shares, be deemed to be modified by the creation or issue of further shares ranking pari passu therewith. SHARES 6. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share may be issued with such preferred, deferred, or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time to time by ordinary resolution determine. 7. Subject to any resolution of the Company in general meeting all unissued shares shall be at the disposal of the Board and the Board may allot (with or without conferring a right of renunciation), grant options over or Page 3 otherwise dispose of them to such persons, at such times and on such terms as it thinks proper, but so that no share shall be issued at a discount except in accordance with the Statutes. This power shall not apply to redeemable shares to which the provisions of Article 49 shall instead apply. 8. In addition to all other powers of paying commissions, the Company may exercise the powers of paying commissions conferred by the Statutes. Subject to the provisions of the Statutes, such commissions may be satisfied by the payment of cash or the allotment of fully or partly paid shares or partly in one way and partly in another. The Company may also on any issue of shares pay such brokerage as may be lawful. 9. Subject to and in accordance with the provisions of the Statutes and to sanction by an extraordinary resolution passed at a separate class meeting of the holders of any class of convertible shares, the Company is authorised to purchase its own shares (including any redeemable shares). 10. Except as required by law no person shall be recognised by the Company as holding any share upon any trust, and the Company shall not be bound by or be compelled in any way to recognise any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these Articles or by law otherwise provided) any other right in respect of any share, except an absolute right to the entirety thereof in the registered holder. 11.1 If at any time the Board is satisfied that any member or other person appearing to be interested in any shares in the capital of the Company has failed within fourteen days to comply with a notice given to that person by the Company pursuant to section 212 of the Companies Act 1985 (or under any other statutory provisions for the time being in force enabling the Company by notice in writing to require any person to give any information regarding those shares) whether or not required to comply by law or has, in purported compliance with such a notice, made a statement which is false in a material particular, then the Board may serve notice in writing on any member holding shares in relation to which the Board has determined or become aware that such a default has occurred. Any such notice (hereinafter referred to as a "Default Notice") shall specify the nature of the default, the number of shares concerned and the steps to be taken to remedy such default. For the purposes of this Article, a person shall be treated as appearing to be interested in any shares if the member holding such shares has given to the Company a notification under section 212 of the Companies Act 1985 which fails to the satisfaction of the Board to establish the identities of those interested in the shares and if (after taking account of the said notification under the said section 212 and any other relevant information in the possession of the Company) the Company knows or has reasonable cause to believe that the person in question is or may be interested in the shares. Page 4 11.2 After the service of a Default Notice or, if later, the time specified therein, until such time as the member or other person on whom the Default Notice was served has complied in full with the notice given pursuant to section 212 or any other statutory provision as aforesaid (when the Board shall serve a further notice on the member or other person concerned stating that the default has been remedied), that member shall not be entitled to attend or vote at any general meeting, either personally or by proxy, or at a separate meeting of the holders of a class of shares or on a poll in respect of any share specified in the Default Notice. 11.2A Where the shares represented in the Default Notice represent at least 1/4 of one per cent. in nominal value of the issued shares of their class, then the Default Notice may additionally direct that in respect of such shares: (i) no payment shall be made by way of dividend (including shares issued in lieu of dividend) and (ii) no transfer shall be registered unless: the member is not himself in default as regards supplying the information requested and the transfer when presented for registration is accompanied by a certificate by the member in such form as the Board may in its absolute discretion require to the effect that after due and careful enquiry the member is satisfied that no person in default as regards supplying such information is interested in any of the shares the subject of the transfer or the transfer is an approved transfer." 11.2B A transfer of shares is an approved transfer if: (i) it is a transfer of shares pursuant to acceptance of a takeover offer (within the meaning of section 428(1) of the Act); (ii) the Board is satisfied that the transfer is made pursuant to a sale of the whole of the beneficial ownership of the shares the subject of the transfer to a party unconnected with the member and with any other person appearing to be interested in the shares; or (iii) the transfer results from a sale made through a recognised investment exchange as defined in the Financial Services Act 1986 or any other stock exchange outside the United Kingdom on which the Company's shares are normally traded. 11.3 The Board shall cause to be noted in the Register against the member upon whom a Default Notice has been served, details of the Default Notice and the number of shares specified therein and shall cause a further note to be entered in the Register recording that the default complained of has been remedied upon service of any further notice under paragraph (2) of this Article. Page 5 11.4 Any notice served by the Board pursuant to this Article shall be conclusive against the member concerned and its validity shall not be questioned by any person. CERTIFICATES 12.1 Every person whose name is entered as a member in the Register (except a stock exchange nominee in respect of whom the Company is not by law required to complete and have ready for delivery a certificate) shall be entitled without payment to one certificate in respect of each class of shares held by him, or, with the consent of the Board and upon payment of such sum (if any) for every certificate after the first as the Board shall determine, to several certificates, each for one or more of his shares except that shares of different classes may not be included in the same certificate. Where a member has transferred a part of the shares comprised in his holding he shall be entitled to a certificate for the balance without charge. 12.2 Every certificate shall be under the Seal or under the official seal kept by the Company by virtue of the Statutes and shall specify the shares to which it relates and the amount paid up thereon. In the case of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate for each class of shares so held, and delivery of a certificate for a share to one of several joint holders shall be deemed sufficient delivery to all. 13. If a share certificate is worn out, defaced, lost or destroyed it may be renewed without charge on such terms (if any) as to evidence and indemnity as the Board thinks fit, and in the case of defacement or wearing-out, on delivery up to the Company of the old certificate. The person availing himself of the provisions of this Article shall pay to the Company all exceptional out of pocket expenses incident to the investigation of evidence and the preparation of the requisite form of indemnity as aforesaid. CALLS ON SHARES 14. The Board may from time to time (subject to any terms upon which any shares may have been issued) make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or by way of premium), provided that (subject as otherwise fixed by the terms of issue) no call on any share shall be payable at less than fourteen clear days from the last call; and each member shall (subject to receiving at least fourteen clear days' notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked in whole or in part and payment of a call may be postponed in whole or in part by the Board. Page 6 15. A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed, and may be made payable by instalments. 16. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. 17. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate as may be fixed by the terms of allotment of the share or, if no rate is so fixed, at the appropriate rate (as defined by the Statutes); but the Board shall be at liberty to waive payment of such interest wholly or in part. 18. Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall for all the purposes of these Articles be deemed to be a call duly made and payable on the date on which, by the terms of issue, the same becomes payable, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture and otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. 19. The Board may differentiate between the holders as to the amount of calls to be paid and the times of payment. 20. The Board may, if it thinks fit, receive from any member willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him, and upon all or any of the moneys so advanced may (until the same would but for such advance become presently payable) pay interest at such rate (if any) not exceeding (unless the Company in general meeting shall otherwise direct) the appropriate rate (as defined by the Statutes) as may be agreed upon between the Board and such member. LIEN 21. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys whether presently payable or not, called or payable at a fixed time in respect of that share; but the Board may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The Company's lien (if any) on a share shall extend to all dividends and other moneys payable thereon. 22. The Company may sell, in such manner as the Board thinks fit, any shares on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable, nor until the Page 7 expiration of fourteen clear days after a notice in writing, stating and demanding payment of the sum presently payable, and stating the intention to sell in default, shall have been given to the registered holder for the time being of the share, or the person entitled by reason of death or bankruptcy to the share. 23. For giving effect to any such sale, the Board may authorise some person to transfer the shares sold to, or in accordance with the directions of, the purchaser thereof the transferee shall be registered as the holder of the shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. 24. The net proceeds of sale, after payment of the costs thereof, shall be applied in or towards payment or satisfaction of the debt or liability in respect whereof the lien exists, so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the shares prior to sale) be paid to the person entitled to the shares at the time of the sale. FORFEITURE OF SHARES 25. If a member fails to pay the whole or any part of any call or instalment of a call on the day fixed for payment thereof, the Board may, at any time thereafter during such time as any part of such call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any accrued interest and any costs, charges and expenses incurred by the Company by reason of such non-payment. 26. The notice shall name a further day (not being less than fourteen clear days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made, and shall state that, in the event of non-payment at or before the time and at the place appointed, the shares on which the call was made will be liable to be forfeited. 27. If the requirements of any such notice are not complied with, any share in respect of which such notice has been given may, at any time thereafter, before payment of all calls, interest, costs, charges and expenses due in respect thereof has been made, be forfeited by a resolution of the Board to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before the forfeiture. 28. A forfeited share may be sold, re-allotted or otherwise disposed of either to the person who was before forfeiture the holder thereof or entitled thereto, or to any other person, upon such terms and in such manner as the Board thinks fit, and at any time before sale, re-allotment or disposal, the Page 8 forfeiture may be cancelled on such terms as the Board thinks fit. The Board may authorise some person to transfer a forfeited share to any person as aforesaid. 29. A member any of whose shares have been forfeited shall cease to be a member in respect of the forfeited shares and shall surrender to the Company for cancellation the certificate for the shares forfeited, but shall, notwithstanding the forfeiture, remain liable to pay to the Company all moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares, with interest thereon at such rate as the Board shall think fit (or, if no rate is determined, at the appropriate rate as defined by the Statutes) from the date of forfeiture until payment, but the Board shall be at liberty to waive payment of such interest wholly or in part or enforce payment without any allowance for the value of the shares at the time of forfeiture or of any consideration received on their disposal and his liability shall cease if and when the Company shall have received payment in full of all moneys in respect of the shares. 30. The Board may accept the surrender of any share which it is in a position to forfeit upon such terms and conditions as may be agreed and, subject to any such terms and conditions, any share so surrendered shall be treated as if it had been forfeited. 31. A statutory declaration in writing that the declarant is a Director or the Secretary, and that a share has been duly forfeited or surrendered on a date stated in the declaration shall be conclusive evidence of such facts as against all persons claiming to be entitled to the share, and such declaration and the receipt of the Company for the consideration (if any) given for the share on the sale, re-allotment or disposal thereof shall constitute a good title to the share, and the person to whom the share is sold, re-allotted or disposed of shall be registered as the holder thereof, and his title to the share shall not be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, surrender, sale, re-allotment or disposal of the share. TRANSFER OF SHARES 32. All transfers of shares shall be effected by transfer in writing in the usual common form or in such other form as the Board may approve. 33. The instrument of transfer of a share shall be executed by or on behalf of the transferor, and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof. Registration of any instrument of transfer or other document relating to or affecting the title to any share in the Company does not require the payment of any fee, provided that in the case of a partly paid share the instrument of transfer shall also be executed by or on behalf of the transferee. Page 9 34. The Board may, in its absolute discretion, and without assigning any reason therefor, refuse to register any transfer of shares which are not fully paid, provided the exercise of such discretion does not prevent dealings in the shares from taking place on an open and proper basis. 35. The Board may also refuse to register any instrument of transfer, if: (a) the instrument of transfer is not lodged, duly stamped, at the Office or at such other place as the Board may appoint or is not accompanied by the certificate of the shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; or (b) the instrument of transfer is in respect of more than one class of share; or (c) in the case of a transfer to joint holders, they exceed four in number. 36. If the Board refuses to register a transfer, it shall within two months after the date on which the transfer was lodged with the Company, send to the transferee notice of the refusal. 37. The Register may be closed at such times and for such period as the Board may from time to time determine, provided that it shall not be closed for more than thirty days in any year. TRANSMISSION OF SHARES 38. In the case of the death of a member, the survivor where the deceased was a joint holder, and the executors or administrators of the deceased where he was a sole holder, shall be the only persons recognised by the Company as having any title to a share held by him, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share held by him jointly. 39. Any person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence as to his title being produced as may from time to time be properly required by the Board, and subject as hereinafter provided, either be registered himself as the holder of the share or elect to have some person nominated by him registered as the transferee thereof. 40. If the person so becoming entitled shall elect to be registered himself he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. If he shall elect to have his nominee registered, he shall testify his election by executing to his nominee a transfer of such share. All the limitations, restrictions and provisions of these Articles relating to the Page 10 right to transfer and the registration of transfers of shares shall be applicable to any such notice or transfer as aforesaid as if the death or bankruptcy of the member had not occurred and the notice or transfer were a transfer executed by such member. 41. A person becoming entitled to a share in consequence of the death or bankruptcy of a member shall, subject to the requirements of Article 141, be entitled to receive and may give a discharge for all dividends and other moneys payable in respect of the share, but he shall not be entitled to receive notices of or to attend or vote at meetings of the Company or to any of the rights or privileges of a member until he shall have become a member in respect of the share. The Board may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share and if the notice is not complied with within sixty' days the Board may thereafter withhold payment of all dividends or other moneys payable in respect of the share until the requirements of the notice have been complied with. 41.(A) The following provisions shall apply to share warrants: (a) The Company with respect to fully-paid shares may issue share warrants stating that the bearer is entitled to the shares therein specified, and may provide by coupons or otherwise for the payment of future dividends or other moneys on or in respect of the shares included in such share warrants. (b) A share warrant shall entitle the bearer thereof to the shares included in it, and the shares may be transferred by the delivery of the share warrant, and the provisions of these Articles with respect to transfer and transmission of shares shall not apply thereto. Each share warrant shall be issued under the Seal or under the Securities Seal or, in the case of shares on a branch register, an official seal for use in the relevant territory. (c) The Directors shall be at liberty to accept a certificate (in such form and from such person as the Directors may approve) to the effect that a specified person is shown in the records of the person issuing such certificate as being entitled to all or some of the shares comprised in a specified share warrant as sufficient evidence of the facts stated in such certificate, and may treat the deposit of such certificate at the Transfer Office (or at any other place specified from time to time by the Directors) as equivalent to the deposit there of the share warrant, and may inter alia allot to the person named in such certificate any shares to which the bearer of the share warrant referred to in such certificate may be entitled and the right of the allottee to the allotment shall not, after allotment, be questioned by any person. Page 11 (d) The Directors may determine and from time to time vary the conditions upon which share warrants shall be issued, and in particular (but without limitation) upon which a new share warrant or coupon will be issued in the place of one worn out, defaced, lost or destroyed provided that no new share warrant may be issued to replace one that has been lost unless the Directors are satisfied beyond reasonable doubt that the original share warrant has been destroyed, upon which (subject as hereinafter provided) the bearer of a share warrant shall be entitled to attend and vote at general meetings, and upon which a share warrant may be surrendered and the name of the holder entered in the Register in respect of the shares therein specified. Subject to such conditions and to these Articles, the bearer of a share warrant shall be subject to the conditions for the time being in force relating to share warrants, whether made before or after the issue of such share warrant. (e) Subject to any conditions for the time being in force relating to share warrants and as otherwise expressly provided in these Articles, the bearer of a share warrant may at any time deposit the share warrant at the Transfer Office (or at such other place as the Directors may from time to time appoint) and so long as the share warrant remains so deposited, the depositor shall have the same right of signing a requisition for calling a meeting and of attending and voting, appointing a proxy and exercising the other privileges of a member at any meeting held after the expiration of forty-eight hours from the time of deposit and be entitled to be given any notices by the Company which are to be given, after the expiration of forty-eight hours from the time of such deposit, to holders of shares of that class, as if his name were inserted in the Register as the holder of the shares included in the deposited share warrant, provided that in the case of a share warrant deposited elsewhere than at the Transfer Office (or such other place as aforesaid), the depositor shall have obtained from the person with whom the same is deposited a certificate of such deposit in such form as the Directors may require specifying inter alia the share warrant and the number of shares included therein, and shall have lodged the same at the Transfer Office (or such other place as aforesaid) not less than forty-eight hours before the time of the meeting at which the depositor desires to attend or to be represented. Not more than one person shall be recognised as a depositor of any share warrant. Every share warrant which shall have been so deposited as aforesaid shall remain so deposited until after the closing of the meeting at which the depositor desires to attend or to be represented. (f) Subject as otherwise expressly provided in these Articles or by the terms of issue of any shares or in any conditions for the time being in force relating to share warrants, no person shall, as bearer of a share warrant, be entitled to sign a requisition for calling a meeting of the Page 12 Company or give notice of intention to submit a resolution to a meeting or attend or vote or give a proxy or exercise any other privilege of a member at a meeting of the Company, or be entitled to receive any notices from the Company, but the bearer of a share warrant shall be entitled in all other respects to the same privileges and advantages as if he were named in the Register as the holder of the shares included in the share warrant, and he shall be deemed to be a member of the Company. STOCK 42. The Company may from time to time by ordinary resolution convert any paid up shares into stock, and reconvert any stock into paid up shares of any denomination. 43. The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations as and subject to which the shares from which the stock arose might previously to conversion have been transferred, or as near thereto as circumstances admit. The Board may from time to time fix the minimum amount of stock transferable and restrict or forbid the transfer of fractions of such minimum but the minimum shall not exceed the nominal amount of the shares from which the stock arose. 44. The holders of stock shall, according to the amount of the stock held by them, have the same rights, privileges and advantages as regards dividends, participation in assets on a winding up, voting at meetings and other matters, as if they held the shares from which the stock arose, but no such privilege or advantage (except participation in dividends and in assets on a winding up) shall be conferred by any such aliquot part of stock as would not, if existing in shares, have conferred such privilege or advantage. 45. All the provisions of these Articles applicable to paid up shares shall apply to stock, and the words "share" and "member" shall be construed accordingly. CONSOLIDATION, SUB-DIVISION AND CANCELLATION OF SHARES 46. The Company may from time to time by ordinary resolution: (a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares and authorise the Board to make such provisions as it thinks fit for the case of any fractions arising in the course of such consolidation and division, but so that the Board shall not be permitted to provide for the sale of shares representing actions except on terms that the net proceeds are distributed among the members in respect of whose shares the fractions arise. In giving effect to any such sale (which may be to any person including, subject to the Page 13 Statutes, the Company), the Board may authorise some person to transfer the shares sold to the purchaser thereof and the purchaser shall be registered as the holder of the shares comprised in any such transfer and he shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the transfer; (b) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association, subject nevertheless to the provisions of the Statutes and so that the resolution whereby any share is sub-divided may determine that as between the holders of the resulting shares, one or more of such shares shall have any preference or special advantage as regards dividend, capital, voting or otherwise, over, or may have any defined rights or be subject to any restrictions as compared with, the other or others but so that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each share resulting from the sub-division shall be the same as it was in the case of the share from which such shares were derived; (c) cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. INCREASE AND REDUCTION OF CAPITAL 47. The Company may from time to time by ordinary resolution increase its capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe. 48. Subject to the consents and incidents required by the Statutes, the Company may by special resolution reduce its share capital, its capital redemption reserve fund and any share premium account in any way. REDEEMABLE SHARES 49. Subject to the provisions of the Statutes, any shares may be issued on terms that they are, or at the option of the Company or the shareholder are liable, to be redeemed on such terms and in such manner as the Company before the issue of the shares may by special resolution determine. MEETINGS OF MEMBERS GENERAL MEETINGS 50. In every year the Company shall in addition to any other meetings in that year hold a general meeting as its annual general meeting, at such time (within a period of not more than fifteen months after the holding of the last Page 14 preceding annual general meeting) and place as may be determined by the Board. All general meetings other than annual general meetings shall be called extraordinary general meetings. 51. The Board may call an extraordinary general meeting whenever it thinks fit, and, on the requisition of members in accordance with the Statutes, it shall forthwith convene an extraordinary general meeting. If at any time there are not within the United Kingdom sufficient Directors capable of acting to form a quorum, any Director or any two members may convene an extraordinary general meeting in the same manner as nearly as possible as that in which meetings may be convened by the Board. NOTICE OF GENERAL MEETINGS 52. Fourteen clear days' notice at the least, or, in the case of an annual general meeting or a meeting convened to pass a special resolution, twenty-one clear days' notice at the least shall be given in manner hereinafter mentioned to such members as are, under the provisions herein contained, entitled to receive notices from the Company and also to each of the Directors and to the Auditors. 53. Every notice of meeting shall specify the place, the day and the hour of meeting, and, in the case of special business, the general nature of such business. Every notice convening an annual general meeting shall specify the meeting as such and every notice convening a meeting to pass a special or extraordinary resolution shall also specify the intention to propose the resolution as a special or extraordinary resolution, as the case may be. Every notice of meeting shall state with reasonable prominence that a member entitled to attend and vote is entitled to appoint a proxy and that such proxy need not be a member. 54. The accidental omission to give notice of any meeting, or to send a form of proxy with a notice where required by these Articles, to any person entitled to receive the same, or the non-receipt of a notice of meeting or form of proxy by such a person, shall not invalidate the proceedings at the meeting. PROCEEDINGS AT GENERAL MEETINGS 55. All business shall be deemed special that is transacted at an extraordinary general meeting, and also all business that is transacted at an annual general meeting, with the exception of sanctioning or declaring dividends, the consideration of the accounts and balance sheet, the ordinary reports of the Board and Auditors and any other documents required to be annexed to the balance sheet, the appointment or election of Directors in the place of those retiring by rotation or otherwise and the appointment or re appointment of and the fixing of the remuneration of the Auditors, and the Page 15 renewal, limitation, extension, variation or grant of any authority of or to the Board, pursuant to the Statutes, to allot securities. 56. No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. Three members present in Person and entitled to vote shall be a quorum for all purposes. A corporation being a member shall be deemed to be personally present if represented by its representative duly authorised in accordance with Article 67. 57. If within fifteen minutes from the time appointed for the meeting a quorum is not present, the meeting, if convened on the requisition of members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place, or to such time and place as may be fixed by the Chairman, and if at such adjourned meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting the members present in person or by proxy shall be a quorum. 58. The Chairman (if any) of the Board or in his absence the Deputy Chairman or some other Director nominated by the Board shall preside as Chairman at every general meeting of the Company. If there be no such Chairman or Deputy Chairman, or if at any meeting neither the Chairman, the Deputy Chairman nor such other Director (if any) be present within ten minutes after the time fixed for holding the meeting or be willing to act as Chairman, the Directors present shall choose one of their number to be Chairman, or if no Director is present, or if all the Directors present decline to take the chair, the members present shall choose one of their number to be Chairman. 59. The Chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at an adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. When a meeting is adjourned for thirty days or more or for an indefinite period, notice of the adjourned meeting shall be given in like manner as in the case of the original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. 60. At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded: (a) by the Chairman; or (b) by at least three members present in person or by proxy and entitled to vote; or Page 16 (c) by any member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or (d) by a member or members present in person or by proxy holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. Unless a poll is so demanded, a declaration by the Chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or lost, or not carried by a particular majority, and an entry to that effect in the minute books, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution. 61. If a poll is duly demanded, it shall be taken in such manner as the Chairman may direct, and the result of a poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The Chairman may appoint scrutineers (who need not be members) and fix a time and place for declaring the result of a poll. 62. A poll demanded on the election of a Chairman or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time and place as the Chairman directs, but in any case not more than twenty-eight days after the meeting at which the poll was demanded. No notice need be given of a poll not taken forthwith if the time and place at which it is to be taken are announced at the meeting at which it is demanded. In any other case at least seven clear days' notice shall be given specifying the time and place at which the poll is to be taken. 63. In the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to a further or casting vote in addition to the votes to which he may be entitled as a member or as a representative or proxy of a member. 64. The demand for a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll has been demanded, and it may be withdrawn at any time before the conclusion of the meeting or the date fixed for the taking of the poll. If a demand is withdrawn before the conclusion of the meeting the Chairman of the meeting or other members entitled may himself or themselves demand a poll. A demand for a poll which is withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made. Page 17 VOTES OF MEMBERS 65. Subject to any terms upon which any shares may be issued or may from time to time be held, every member (whether an individual or a corporation) present in person shall have one vote on a show of hands, and on a poll every member (whether an individual or a corporation) present in person or by proxy shall have one vote for every 25 pence of nominal share capital of which he is the holder. 66. In the case of joint holders of a share the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register. 67. Any corporation which is a member of the Company may, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any general meeting, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual member of the Company. Any person so authorised may be required at any general meeting which such person attends to produce evidence of such authority in a form reasonably satisfactory to the Board. 68. A member in respect of whom an order has been made by any court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder may vote, whether on a show of hands or on a poll, by his receiver, curator bonis or other person authorised in that behalf appointed by that court, and any such receiver, curator bonis or other person may, on a poll, vote by proxy provided that such evidence as the Board may require of the authority of such person shall have been deposited at the Office, or at such other place as is specified in accordance with the Articles for the deposit of instruments of proxy, not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting or for the taking of the poll at which the right to vote is to be exercised and in default the right to vote shall not be exercisable. 69. No member shall be entitled to vote at any general meeting or at any separate meeting of the holders of any class of shares in the Company, either in person or by proxy, in respect of any share held by him unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. 70. No objection shall be raised to the qualification of any vote except at the meeting or adjourned meeting or poll at which the vote objected to is given or tendered, and every vote not disallowed at such meeting shall be valid for all Page 18 purposes. Any such objection made in due time shall be referred to the Chairman of the meeting, whose decision shall be final and conclusive. 71. On a poll votes may be given personally or by proxy and a person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. 72. Proxy forms shall be sent by the Company to all persons entitled to notice of and to attend and vote at any general meeting and such proxy forms shall be in any usual or common form or any other form which the Directors shall from time to time approve. The instrument of proxy shall be in writing under the hand of the appointor or his attorney, or, if such appointor be a corporation, under its common seal, or the hand of a duly authorised officer or attorney, but the execution of such instrument need not be attested. 73. Any person may be appointed a proxy whether a member of the Company or not. 74. The instrument of proxy and the power of attorney or other written authority (if any) under which it is signed, or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 or any statutory re-enactment or modification thereof for the time being in force, or in some other way approved by the Board, of such power or written authority, shall be deposited at the Office (or at such other place as shall be specified in the notice of meeting or the proxy form accompanying such notice) not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote, or in the case of a poll taken more than forty-eight hours after it is demanded, shall be deposited as aforesaid after the poll has been demanded and not less than twenty-four hours before the time appointed for the taking of the poll, or, where the poll is not taken forthwith but is taken not more than forty-eight hours after it was demanded, shall be delivered at the meeting at which the poll was demanded to the Chairman of the meeting or the Secretary or to any Director and in default the instrument of proxy shall not be treated as valid. No instrument appointing a proxy shall be valid after the expiration of twelve months from the date named in it as the date of its execution. 75. A vote given or poll demanded by proxy or by the duly authorised representative of a corporation shall be valid, notwithstanding the previous death or incapacity of the principal, or revocation of the instrument of proxy or authorisation or of the authority under which the instrument of proxy was executed provided that no notice in writing of such death, incapacity or revocation shall have been received by the Company at the Office (or such other place at which the instrument of proxy was duly deposited) before the commencement of the meeting or adjourned meeting at which the vote is Page 19 given or the poll demanded or (in the case of a poll taken otherwise than on the same day as the meeting or adjourned meeting) the time appointed for taking the poll. DIRECTORS NUMBER AND APPOINTMENT OF DIRECTORS 76. Unless and until otherwise from time to time determined by an ordinary resolution of the Company, the Directors (other than alternate Directors) shall be not less than two in number. 77. The Board shall have power at any time, and from time to time, to appoint any other person who is willing to act to be a Director, either to fill a casual vacancy or as an addition to the existing Board, but so that the total number of Directors shall not at any time exceed the maximum number (if any) fixed by or in accordance with these Articles. Any Director so appointed shall hold office only until the next following annual general meeting, and shall then be eligible for re appointment but shall not be taken into account in determining the Directors to retire by rotation at such meeting under the provisions on their behalf contained in these Articles. 78. The continuing Directors, or a sole continuing Director, may act notwithstanding any vacancies in the Board, but, if and so long as the number of Directors is reduced below the minimum number fixed by or in accordance with these Articles, the continuing Directors or Director may act for the purpose of filling up vacancies in the Board or of summoning general meetings of the Company, but not for any other purpose. If there be no Directors or Director able or willing to act, then any two members may summon a general meeting for the purpose of appointing Directors. 79. Except as otherwise authorised by the Statutes, the election or appointment of any person proposed as a Director shall be effected by a separate resolution and a single resolution purporting to elect or appoint two or more persons to be Directors shall be ineffective and void. 80. No person other than a Director retiring at the meeting shall, unless recommended by the Board for election, be eligible for the office of a Director at any general meeting, unless not less than seven not more than forty two days before the day appointed for the meeting there shall have been given to the Secretary notice in writing by some member duly qualified to be present and vote at the meeting for which such notice is given of his intention to propose such person for election, and also notice in writing signed by the person to be proposed of his willingness to be appointed. Page 20 QUALIFICATION AND REMUNERATION OF DIRECTORS 81. Unless and until otherwise determined by the Company in general meeting, the Directors shall not be required to hold any share qualification. 82. The Directors shall be paid out of the funds of the Company by way of remuneration for their services an aggregate sum up to a maximum of L300,000* or such other sums as the Company may from time to time by ordinary resolution determine. Such remuneration shall be divided among them in such proportion and manner as the Directors may determine. Subject as aforesaid, a Director holding office for part only of a year shall be entitled to a proportionate part of a full year's remuneration. The Directors shall also be entitled to be repaid by the Company all such reasonable travelling (including hotel and incidental) expenses as they may incur in attending meetings of the Board, or of committees of the Board, or general meetings, or which they may otherwise properly incur in or about the business of the Company. 83. Any Director who by request performs special services or goes or resides abroad for any purposes of the Company may be paid such extra remuneration by way of salary, percentage of profits or otherwise as the Board may determine. POWERS OF DIRECTORS 84. The business of the Company shall be managed by the Board, and the Board may exercise all such powers of the Company as are not by the Statutes or by these Articles or by any directions given by the Company from time to time by special resolution required to be exercised by the Company in general meeting. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Board by any other Article. 85. The Board may establish any local or special boards or agencies for managing any of the affairs of the Company either in the United Kingdom or elsewhere, and may appoint any persons to be members of such local or special boards or to be managers or agents, and may fix their remuneration, and may delegate to any local or special board, manager or agent any of the powers, authorities and discretions vested in the Board (other than the powers to borrow and make calls) with power to sub-delegate, and may authorise the members of any local or special board, or any of them, to fill any vacancies therein, and to act notwithstanding vacancies, and any such appointment or delegation may be made upon such terms and subject to such conditions as the - -------------------------------------------------------------------------------- * Increased to L250,000 by an ordinary resolution passed on 11 May 1990 * Increased to L300,000 by an ordinary resolution passed on 3 May 1996 Page 21 Board may think fit, and the Board may remove any person so appointed, and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby. 86.(1) The Board may establish and maintain or procure the establishment and maintenance of any non-contributory or contributory pension, provident or superannuation funds for the benefit of and give or procure the giving of pensions, allowances, gratuities or bonuses to any persons who are or were at any time in the employment, or service of the Company, or of any company which is a subsidiary of the Company or is allied to or associated in business with the Company or with any such subsidiary company, or of any business acquired by the Company or who are or were at any time Directors or officers of the Company or of any such other company as aforesaid, and the wives, widows, families and dependants of any such persons. Any Director shall be entitled to participate in and retain for his own benefit any such pension, allowance, gratuity or bonus and may vote in favour of the exercise of any of the powers aforesaid notwithstanding that he is or may become interested therein. (2) Pursuant to section 719 of the Companies Act 1985, the Board are hereby authorised to make such provision as may seem appropriate for the benefit of persons employed or formerly employed by the Company or any of its subsidiaries in connection with the cessation or transfer of the whole or part of the undertaking of the Company or any subsidiary. Any such provision shall be made by a resolution of the Board in all respects in accordance with the said section. 87. The Board may from time to time by power of attorney under the Seal appoint any company, firm or person, or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board under these Articles) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection or convenience of persons dealing with any such attorney as the Board may think fit and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. The Board may, by power of attorney or otherwise, appoint any person to be the agent of the Company for such purposes and on such conditions as it determines, including authority for the agent to delegate all or any of his powers. 88. The Board may from time to time make and vary such regulations as it thinks fit respecting the keeping of dominion registers of members pursuant to the Statutes. Page 22 89. All cheques, promissory notes, drafts, bills of exchange and other negotiable or transferable instruments, and all receipts for moneys paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine. BORROWING 90.1 Subject as hereinafter provided the Board may exercise all the powers of the Company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures and other securities, whether outright or as collateral security, for any debt, liability or obligation of the Company or of any third party. 90.2 The Board shall restrict the borrowings of the Company and exercise all voting and other rights or powers of control exercisable by the Company in relation to its subsidiaries (if any) so as to secure (as regards subsidiaries so far as by such exercise they can secure) that the aggregate amount for the time being remaining undischarged of all moneys borrowed by the Company and/or any of its relevant subsidiaries (exclusive of moneys borrowed by the Company from and for the time being owing to any such relevant subsidiary, or by any such relevant subsidiary from and for the time being owing to the Company or another such relevant subsidiary) shall not at any time without the previous sanction of an ordinary resolution of the Company exceed a sum equal to twice the aggregate of the adjusted capital and reserves. 90.3 For the purposes of this Article the expression "the adjusted capital and reserves" means at any relevant time the amount of the issued and paid up share capital of the Company (and so that capital allotted and capital the issue of which has been underwritten shall be treated as issued and any capital already called up or payable at any fixed future date within six months shall be treated as already paid up) plus or minus the aggregate amount standing to the credit or debit of the consolidated reserves (including for the purposes of this definition profit and loss account and any share premium account), plus the amount of minority interests in any subsidiaries, all as included in the latest published audited consolidated balance sheet of the Company plus an amount equal to the goodwill (including intangible assets) which has arisen on acquisitions of interests in companies and businesses made since 1st January 1981 in which the Company or any of its relevant subsidiaries continues to have an interest as at the relevant date of calculation and which has, as at such date, been written off against the consolidated reserves referred to above in accordance with United Kingdom accounting practices, less an amount equal to the amortisation of such goodwill up to the relevant date of calculation, over 20 years on a straight line basis but: Page 23 (i) adjusted so as to exclude an amount equal to the net tangible assets of any subsidiary which is not a relevant subsidiary as included in the consolidated balance sheet of the Company; (ii) adjusted as may be appropriate to take account of (a) any increase in or reduction of the issued and paid up share capital or share premium account of the Company since the date to which the consolidated balance sheet incorporated in such accounts shall have been made up; (b) any distributions in cash or specie made (otherwise than to the Company or to a relevant subsidiary) from such reserves since such date and not provided for therein; (c) any relevant subsidiary not consolidated in such accounts, any companies which since the date of such accounts have ceased to be or have become relevant subsidiaries, and any companies which will become or will cease to be relevant subsidiaries as a result of the transaction in relation to which the calculation falls to be made; (iii) after excluding any sums provided for taxation (including deferred tax); (iv) after deducting therefrom (insofar as not otherwise deducted) a sum equivalent to the book value of any goodwill and any other intangible assets in the said consolidated balance sheet; (v) after making such other adjustments (if any) as the Auditors may consider appropriate. 90.4 For the purpose of this Article "borrowings" shall include the following: (i) the principal amount for the time being outstanding of any debentures within the meaning of section 744 of the Companies Act 1985, issued (whether for cash or otherwise) by the Company or any relevant subsidiary; (ii) the principal amount for the time being outstanding in respect of acceptances raised by the Company or any relevant subsidiary under any acceptance credit opened on its behalf (not being acceptances in relation to the purchase of goods in the normal course of trading which have been outstanding for 180 days or less); Page 24 (iii) the nominal amount of any issued share capital and the principal amount of any borrowings the repayment whereof is guaranteed by or is the subject of an indemnity from the Company or any relevant subsidiary; (iv) the nominal amount of any issued share capital (not being equity share capital) of a relevant subsidiary not being a guarantor subsidiary, which is not beneficially owned by the Company or by another relevant subsidiary; together with (in any case) any fixed or minimum premium payable on final redemption or final repayment, but shall not include: (a) amounts borrowed and otherwise falling to be taken into account pursuant to this Article and intended to be applied within six months of being so borrowed in the repayment of borrowings then outstanding which fall to be taken into account pursuant to this Article pending their application for such purpose or the expiration of such period whichever shall be the earlier; (b) borrowings from bankers or others for the purpose of financing any contract in respect of which any part of the price receivable is guaranteed or insured by the Export Credits Guarantee Department of the Department of Trade, or any institution approved by the Trustees carrying on a similar business, to an amount not exceeding that part of the price receivable thereunder which is so guaranteed or insured; (c) unsecured borrowings from bankers to the extent that there are amounts standing to the credit of the account(s) of the relevant subsidiary making the borrowing and/or any other relevant subsidiary which, in accordance with the arrangements made between the bankers and the relevant subsidiary making the borrowing or any other relevant subsidiary, are available for set-off by the bankers against the amount of such borrowings; (d) borrowings by a company, which on becoming a subsidiary after 27 May 1983 is also a relevant subsidiary, which are outstanding at the date when it becomes a subsidiary for a period of twelve months from the date of such event to the extent that a sum equal to the amount of such borrowings exceeds any increase in the relevant limit arising out of the adjustments to be made to the adjusted capital and reserves on account of the transaction whereby such company becomes a relevant subsidiary; and shall be reduced by the amounts owed, as at the relevant date of calculation, to the Company or any of its relevant subsidiaries provided that the basis of calculation of such amounts owed shall be the same basis as that Page 25 used for the calculation of the amounts of cash and liquid funds of the Company and its relevant subsidiaries for the purposes of the most recent published audited consolidated accounts of the Company. 90.5 For the purpose of determining whether the limit imposed by this Article has been exceeded, the principal amount of any borrowings expressed in a currency other than sterling shall be translated into sterling on the basis adopted for the translation of borrowings in the latest published audited consolidated accounts of the Company and no account shall be den of subsequent fluctuations in the rates between sterling and the currency or currencies of the borrowing. 90.6 Notwithstanding any provision contained in this Article no account shall be taken of any amount more than once in the determination of the amount of borrowings in relation to the limits set out in this Article. If, in the determination of any such amount, the provisions of this Article may be applied to produce more than one amount, that provision which produces the higher amount shall apply to the exclusion of the other or others. 90.7 For the purpose of this Article the expression "relevant subsidiary" means any subsidiary of the Company for the time being other than Lazard Brothers & Co., Limited (including any successor company resulting from any reconstruction of Lazard Brothers & Co., Limited unless within the period of two years following such reconstruction the Company elects otherwise) and its subsidiaries, "'guarantor subsidiary" means a relevant subsidiary which has for the time being outstanding a guarantee given pursuant to clause 5 of a trust deed dated 7 January 1983 made between the Company, the Original Guarantor Subsidiaries named therein and The Law Debenture Corporation plc. (the "Trust Deed") and "Trustees" means the trustee or trustees for the time being of the Trust Deed. 90.8 No person dealing with the Company or any of its subsidiaries shall by reason of the foregoing provisions of this Article be concerned to see or inquire whether this limit is observed, and no debt incurred or security given in excess of such limit shall be invalid or ineffectual unless the lender or the recipient of the security had at the time when the debt was incurred or security given express notice that the limit hereby imposed had been or would thereby be exceeded. PROCEEDINGS OF THE BOARD 91.1 The Board may meet together for the despatch of business, adjourn and otherwise regulate its meetings as it thinks fit. Questions arising at any meeting shall be determined by a majority of votes. In case of an equality of votes the Chairman shall not have a second or casting vote. Page 26 91.2 A Director may, and the Secretary on the requisition of a Director shall, at any time summon a meeting of the Board. It shall not be necessary to give notice of a meeting of the Board to any Director for the time being absent from the United Kingdom. 91.3 Notice of the date, time and place of each meeting of the Board shall, so far as practicable, be given to each Director at least twenty-four hours prior to such meeting and may be given personally, by telephone, telex, post, cablegram, facsimile or by such other means as the Board may approve from time to time. The accidental omission to give notice of any meeting of the Board to any Director entitled to receive the same, or the non-receipt of a notice of any such meeting by such a Director, shall not invalidate the proceedings at the meeting. 92. The quorum necessary for the transaction of the business of the Board shall be fixed by the Board, and unless so fixed at any other number shall be two. For the purpose of determining whether the quorum for the transaction of the business of the Board exists: (a) in the case of a resolution agreed by Directors in telephonic communications, all such Directors shall be counted in the quorum; (b) in the case of a meeting of Directors, in addition to the Directors present at the meeting, any Director in telephonic communication with such meeting shall be counted in the quorum. 93. The Board may elect a Chairman and, if it thinks fit, a Deputy Chairman of its meetings, determine the period for which they respectively are to hold office and may at any time remove the Chairman and/or the Deputy Chairman from their respective office. If no such Chairman or Deputy Chairman is elected, or if at any meeting neither is present within five minutes after the time appointed for holding the same, or if the Chairman or Deputy Chairman is unwilling to act, the Directors present may choose one of their number to be Chairman of the meeting. 94. A resolution in writing, signed by all the Directors entitled to receive notice of a meeting of Directors or of a committee of Directors shall, provided they constitute a quorum, be as effective as a resolution passed at a meeting of the Board or (as the case may be) a committee of the Board duly convened and held and such resolution in writing may consist of several documents in like form each signed by one or more of such Directors. For the purpose of this Article, the signature of an alternate Director shall suffice in lieu of the signature of the Director appointing him. 95. A meeting of the Board at which a quorum is present shall be competent to exercise all powers and discretions for the time being exercisable by the Board or by the Directors generally. Page 27 96. The Board may delegate any of its powers (other than the powers to make calls) to committees consisting of such member or members of its body as it thinks fit. Any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be imposed on it by the Board. 97. The meetings and proceedings of any such committee consisting of two or more members shall be governed by the provisions of these Articles regulating the meetings and proceedings of the Board, so far as the same are applicable and are not superseded by any regulations made by the Board under the last preceding Article. 98. All acts done by any meeting of the Board, or of a committee of the Board, or by any person acting as a Director or by an alternate Director, shall, notwithstanding it be afterwards discovered that there was some defect in the appointment or continuance in office of any such Director, alternate Director or person acting as aforesaid, or that they or any of them were disqualified, or had vacated office or were not entitled to vote, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director or, as the case may be, an alternate Director and had been entitled to vote. MINUTES 99. The Board shall cause minutes to be made in books provided for the purpose: (a) of all appointments of officers made by the Board; (b) of the names of the Directors present at each meeting of the Board and of any committee of the Board; (c) of all resolutions and proceedings at all meetings of the Company and of the holders of any class of shares in the Company and of the Board and of committees of the Board. Any such minutes, if purporting to be signed by the Chairman of the meeting to which they relate or of the meeting at which they are read, shall be received as prima facie evidence of the facts therein stated. DISQUALIFICATION OF DIRECTORS 100. The office of a Director shall be vacated in any of the following events, namely: (a) if (not being a Managing Director holding office as such for a fixed term) he resigns his office by notice in writing under his hand left at the Office or sent to the Office by registered post; Page 28 (b) if he becomes bankrupt or makes any arrangement or compounds with his creditors; (c) if he becomes incapable by reason of mental disorder of discharging his duties as a Director or is, or may be, suffering from mental disorder and either he is admitted to hospital in pursuance of an application for admission for treatment under the provisions of any Act relating to mental health, or an order is made by a court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the appointment of a receiver, curator bonis or other person to exercise powers with respect to his property or affairs; (d) if he shall have been absent from meetings of the Board for six months without leave, expressed by a resolution of the Board, and his alternate Director (if any) shall not have attended in his place and the Board resolves that his office be vacated; (e) if he shall be requested in writing by all his co-Directors to resign; (f) if he ceases to be a Director by virtue of any provision of the Statutes or he shall be prohibited from being a Director by any order made under any provision of the Statutes. 101.1 No Director shall be disqualified by his office from contracting with the Company either as vendor, purchaser or otherwise, or from being interested whether directly or indirectly in any contract or arrangement entered into by or on behalf of the Company. No such contract or arrangement in which any Director shall be so interested shall be avoided, nor shall any Director so contracting, or being so interested, be liable to account to the Company for any profit realised by him from such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby established. A Director so interested in any contract or arrangement shall declare the nature of his interest in accordance with the provisions of the Statutes. For the purpose of paragraph (1) of this Article an interest of which a Director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his 101.2 Save as herein provided, a Director shall not vote in respect of any contract or arrangement or any other proposal whatsoever in which he has (together with any interest of any person connected with him (as defined in section 346 of the Companies Act 1985) an interest which is, to his knowledge, a material interest, otherwise than by virtue of his interests in shares or debentures or other securities of or otherwise in or through the Company. A Director shall not be counted in the quorum at a meeting in relation to any resolution on which he is debarred from voting. Page 29 101.3 A Director shall (in the absence of some other material interest than is indicated below) be entitled to vote (and be counted in the quorum) in respect of any resolution concerning any of the following matters, namely: (a) the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiaries; (b) the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security; (c) any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a Director is to participate; (d) any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 198 to 211 Companies Act 1985) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company; (e) any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; or (f) any proposal concerning insurance which the Company proposes to maintain or purchase for the benefit of Directors or for the benefit of persons including Directors. 101.4 Where proposals are under consideration concerning the appointment (including fixing or varying the terms of appointment) of two or more Directors to offices or employments with the Company or any company in which the Company is interested, such proposals may be divided and considered in relation to each Director separately and in such cases each of the Directors concerned (if not debarred from voting under the proviso to paragraph (3) (d) of this Article) shall be entitled to vote (and be counted in the quorum) in respect of each resolution except that concerning his own appointment. 101.5 If any question shall arise at any meeting as to the materiality of a Director's interest or as to the entitlement of any Director to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, Page 30 such question shall be referred to the Chairman of the meeting or, if the Chairman of the meeting is also interested in the contract or arrangement in question, to a person appointed by the other Directors present at that meeting for such purpose who is not so interested, and the ruling of the Chairman or, if appropriate, such other person in relation to any other Director shall be final and conclusive except in a case where the nature or extent of the interests of the Director concerned have not been fairly disclosed. 102.1 A Director may be or become a director or other officer of any company promoted by the Company or in which the Company may be interested as vendor, member or otherwise, and no such Director shall (unless otherwise agreed) be accountable for any benefits received as director or other officer of such company. 102.2 The Board may exercise the voting power conferred by the shares in any company held or owned by the Company in such manner in all respects as it thinks fit (including the exercise thereof in favour of any resolution appointing its members or any of them directors of such company, or voting or providing for the payment of remuneration to the directors of such company). 102.3 Any Director may act by himself or his firm in a professional capacity for the Company (otherwise than as Auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director. RETIREMENT AND REMOVAL OF DIRECTORS 103. At every annual general meeting there shall retire from office: (a) any Directors bound to retire under any other provision of these Articles or pursuant to section 293 of the Companies Act 1985; and (b) one-third of the other Directors (excluding any Director exempt from retirement by rotation under any other provision of these Articles) or, if their number is not a multiple of three, the number nearest to one-third of them. 104. A Director retiring at a meeting shall retain office until the close or adjournment of the meeting. 105. The Directors to retire by rotation in every year shall be those who have been longest in office since their last election or appointment but, as between persons who became or were last re-elected Directors on the same day, those to retire shall (unless they otherwise agree among themselves) be determined by lot. A retiring Director shall be eligible for re-election. Page 31 106. The Company at the meeting at which a Director retires in manner aforesaid may (subject to Article 80) fill the vacated office by electing a person thereto, and in default the retiring Director shall be deemed to have been re-elected, unless at or prior to such meeting he intimates that he does not wish to be re-elected or it is expressly resolved not to fill such vacated office or a resolution for the re-election of such Director shall have been put to the meeting and lost. In the event of the vacancy not being filled at such meeting it may be filled by the Board as a casual vacancy. 107. The Company may, pursuant and subject to the provisions of section 303 of the Companies Act 1985, by ordinary resolution remove any Director before the expiration of his period of office and may by an ordinary resolution appoint another person in his stead. The person so appointed shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected a Director. MANAGING DIRECTOR AND EXECUTIVE DIRECTORS 108. The Board may from time to time appoint one or more of its body to the office of Managing Director, or to any other office (except that of Auditor) or employment under the Company, for such period and on such terms as it thinks fit and may revoke such appointment (but so that such revocation shall be without prejudice to any rights or claims which the person whose appointment is revoked may have against the Company by reason of such revocation) and may also authorise the continuation by any person appointed to be a Director in any other office or employment held by him before he was so appointed. A Director (other than a Managing Director) holding any such other office or employment is herein referred to as "an Executive Director". 109. A Director appointed to the office of Managing Director shall, while holding that office, (subject to the provisions of any contract between himself and the Company) be subject to the same provisions as to resignation and removal as the other Directors of the Company, and if he ceases from any cause to be a Director he shall ipso facto cease to be a Managing Director (but without prejudice to any rights or claims which he may have against the Company by reason of such cesser). 110. An Executive Director shall, while holding any office or employment under the Company, (subject to the provisions of any contract between him and the Company) be subject to the same provisions as to resignation and removal as the other Directors of the Company, and if he ceases from any cause to be a Director he shall ipso facto cease to be an Executive Director (but without prejudice to any rights or claims which he may have against the Company by reason of such cesser). Page 32 111. The emoluments of any Managing Director or Executive Director for his services as such shall be determined by the Board, and may be of any description. 112. The Board may entrust to and confer upon a Managing Director or Executive Director any of the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with or to the exclusion of its own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers. 113. The Board may from time to time appoint any person to be President of the Company and may also from time to time remove him from office and may appoint another person in his place. The appointment to the office of President shall be honorary. The President of the Company shall not be a Director and shall not by reason of his holding the office of President be deemed to be a Director. 114. The President shall be entitled to be repaid all such reasonable travelling (including hotel and incidental) expenses as he may incur in or about the business of the Company. ALTERNATE DIRECTORS 115. Any Director (other than an alternate Director) may without the consent of the Board appoint any other Director and may at any time appoint any person approved by the Board (such approval not to be unreasonably withheld) to be an alternate Director of the Company, and may at any time remove any alternate Director so appointed by him from office. An alternate Director so appointed shall not be entitled to receive any remuneration from the Company, nor be required to hold any share qualification. An alternate Director may be repaid by the Company such expenses as might properly have been repaid to him if he had been a Director, and he shall be entitled to be indemnified by the Company to the same extent as if he were a Director. Every person acting as an alternate Director shall be an officer of the Company and he shall not be deemed to be the agent of the Director whom he represents. 116. An alternate Director shall (subject to his giving to the Company an address within the United Kingdom at which notices may be served upon him) be entitled to receive notices of all meetings of the Board and of any committee of the Board of which the Director appointing him is a member, and to attend and vote and be counted for the purposes of a quorum as a Director at any such meeting at which the Director appointing him is not personally present, and generally perform all the functions of his appointor as a Director in his absence. Page 33 117. An alternate Director shall ipso facto cease to be an alternate Director if his appointor ceases for any reason to be a Director otherwise than by retiring and being re-elected at the same meeting or on the happening of any event which, if he were a Director, would cause him to vacate the office of Director. 118. An alternate Director may by writing under his hand left at the Office resign such appointment. 119. All appointments and removals of alternate Directors shall be effected by writing under the hand of the Director making or revoking such appointment left at the Office or in any other manner approved by the Directors. 120. A Director or any other person may act as alternate Director to represent more than one Director, and an alternate Director shall be entitled at Board Meetings and at any meeting of a committee of the Board to one vote for every Director whom he represents in addition to his own vote as Director. SECRETARY 121. The Secretary shall be appointed by the Board for such term, at such remuneration and upon such conditions as it may think fit; and any Secretary so appointed may be removed by the Board. 122. The Board may also appoint one or more persons as Deputy Secretary for such term, at such remuneration and upon such conditions as it may think fit; and any Deputy Secretary so appointed may be removed by the Board. Any Deputy Secretary may, in the absence of the Secretary, do anything which may be required or authorised to be done by or to the Secretary. 123. A provision of the Statutes or these Articles requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as, or in place of, the Secretary or Deputy Secretary. THE SEAL 124.1 The Board shall provide for the safe custody of the Seal, which shall only be used by the authority of the Board or of a committee of the Board authorised by the Board in that behalf and, subject to the provisions of this Article, every instrument to which the Seal shall be affixed shall be signed by a Director and shall be countersigned by the Secretary or by a second Director or by some other person appointed by the Board for the purpose. Page 34 124.2 All forms of certificates for shares, stock or debentures or representing any other form of security (other than letters of allotment or scrip certificates or other like documents) shall be issued under the Seal in manner above provided or under the official seal kept by the Company by virtue of the Statutes; but the Board may by resolution determine either generally or in any particular case that any signatures may be affixed to such certificates by some mechanical means or that such certificates need not be signed by any person. 125. The Company may exercise the powers conferred by the Statutes with regard to having an official seal for use abroad, and such powers shall be vested in the Board. ACCOUNTS AND DIVIDENDS 126. The Board shall cause accounting records to be kept and such other books and registers as are necessary to comply with the provisions of the Statutes. 127. The accounting records shall be kept at the Office or (subject to the provisions of the Statutes) at such other place as the Board thinks fit, and shall at all times be open to inspection by the Directors. No member (other than a Director) shall have any right of inspecting any account or book or document of the Company, except as conferred by the Statutes or authorised by the Board or by the Company in general meeting. 128. The Board shall from time to time in accordance with the Statutes cause to be prepared and to be laid before the Company in general meeting such profit and loss accounts, balance sheets, group accounts (if any) and reports as are required by the Statutes. 129. A printed copy of every balance sheet (including every document required by law to be annexed thereto) which is to be laid before the Company in general meeting and of the Board's and Auditor's reports shall, at last twenty-one days before the meeting, be delivered or sent by post to every member and debenture holder of the Company of whose address the Company is aware, or, in the case of joint holders of any share or debenture, to one of the joint holders provided that the requirements of this Article 129 shall be deemed satisfied in relation to any member by sending to each such member, where permitted by the Statutes and instead of the said copies, a summary financial statement derived from the Company's annual accounts and the report of the Directors and prepared in the form and containing the information prescribed by the Statutes and any regulations made thereunder. AUDIT 130. Auditors of the Company shall be appointed and their duties regulated in accordance with the Statutes. Page 35 131. The Auditors' report to the members made pursuant to the statutory provisions as to audit shall be read before the Company in general meeting and shall be open to inspection by any member who shall be entitled to be furnished with a copy of the balance sheet (including every document required by law to be annexed thereto) and Auditors' report in accordance with the Statutes. DIVIDENDS AND RESERVES 132. The profits of the Company available for dividend and resolved to be distributed shall be applied in the payment of dividends to the members in accordance with their respective rights and priorities. Subject to the next following Article, the Company in general meeting may declare dividends but not in excess of the amount recommended by the Board. 133. No dividend shall be paid otherwise than out of profits available for distribution under the provisions of the Statutes. 134.1 All dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for the purposes of this Article as paid on the share. All dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank for dividend as from a particular date, or be entitled to dividends declared after a particular date such share shall rank for or be entitled to such dividend accordingly. 134.2 The Directors may at their discretion make provisions to enable such member and/or other person as they shall from time to time determine to receive dividends duly declared and all redemption moneys in respect of redeemable shares in a currency or currencies other than sterling. For the purposes of the calculation of the amount receivable in respect of any dividend or payment of redemption moneys, the rate of exchange to be used to determine the foreign currency equivalent of any sum payable as a dividend or payment of redemption moneys shall be such market rate selected by the Directors as they shall consider appropriate ruling at any time between the close of business in London on the date which is the business day last preceding the date on which the Directors publicly announce their intention to recommend or pay (as the case may be) that specific dividend or (as the case may be) the Redemption Date in respect of such redeemable shares and the close of business on the date on which that specific dividend or redemption moneys are paid. 135.1 Any general meeting declaring a dividend may upon the recommendation of the Board, direct payment or satisfaction of such dividend Page 36 wholly or partly by the distribution of specific assets and in particular of fully paid up shares or debentures of any other company, and the Board shall give effect to such direction, and where any difficulty arises in regard to such distribution, the Board may settle it as it thinks expedient, and in particular may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payment shall be made to any members upon the footing of the value so fixed in order to adjust the rights of those entitled to participate in the dividend, and may vest any such specific assets in trustees upon trust for the members entitled to the dividend as may seem expedient to the Board. 135.2 The Directors may, with the sanction of an ordinary resolution of the Company, offer any holders of the Ordinary Shares (any one or more of which are hereinafter referred to as "holders") the right to elect to receive Ordinary Shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend or dividends (or some part to be determined by the Directors) as may be specified by the resolution. The following provisions shall apply: (a) the said resolution may specify a particular dividend, or may specify all or any dividends declared or to be declared or paid in respect of a specified period or periods, or for payment not later than the beginning of the annual general meeting next following the passing of such resolution or such later annual general meeting as may be specified by the resolution; (b) save where the Directors otherwise determine, the basis of allotment of Ordinary Shares shall be that the relevant value for each holder shall be as nearly as possible equal to (but not more than) the cash amount (exclusive of any imputed tax credit) that such holder would have received by way of the dividend forgone. For the purpose of this clause "relevant value" shall (save where the Directors otherwise determine) be calculated by reference to the average of the middle market quotations for the Company's Ordinary Shares on The International Stock Exchange as derived from the Daily Official List for the day when the Ordinary Shares are first quoted "ex" the relevant dividend and the four immediately following business days; (c) the Board may notify the holders in writing of any right of election offered to them, and may send to holders at any time forms of election applicable to such right of election and/or to more than one such right of election, such forms specifying the procedure to be followed and the place at which, and the latest time or date by which, duly completed forms of election, or notices from holders amending or terminating existing elections, must be lodged in order to be effective; Page 37 (d) subject to sub-paragraph (f) of this Article, the dividend (or that part of the dividend for which a right of election has been given) shall never become payable in cash on Ordinary Shares to the extent that the election has been duly effected ("elected shares") and additional Ordinary Shares shall instead be allotted to the holders of the elected shares on the basis of allotment determined as aforesaid. For such purpose the Board shall appropriate, as it sees fit, out of such of the sums standing to the credit of any reserve or fund (including the profit and loss account), whether or not the same is available for distribution, as the Board may determine, a sum equal to the aggregate nominal amount of the additional Ordinary Shares to be allotted on such basis and apply the same in paying up in full the appropriate number of unissued Ordinary Shares for allotment and distribution to and amongst the holders of the elected shares on such basis; (e) the additional Ordinary Shares so allotted shall rank pari passu in all respects with the fully paid Ordinary Shares of the same class then in issue save only as regards participation in the dividend in place of which they were allotted; (f) no fraction of an Ordinary Shares shall be allotted. The Board may make such provisions as it thinks fit for any fractional entitlements including provisions whereby, in whole or in part, the benefit thereof accrues to the Company and/or under which fractional entitlements are accrued and/or retained and in each case accumulated on behalf of any holder and such accruals or retentions are applied to the allotment by way of bonus to or cash subscription on behalf of such holder of fully paid Ordinary Shares and/or provisions whereby cash payments may be made to holders in respect of their fractional entitlements; (g) the Board may do all acts and things considered necessary or expedient to give effect to the allotment and issue of any Ordinary Shares in accordance with the provisions of this Article or otherwise in connection with any offer made pursuant to this Article and may authorise any person to enter, on behalf of all the holders concerned, into an agreement with the Company providing for such allotment and incidental matters and any agreement so made under such authority shall be binding on all such holders; (h) the Board may on any occasion decide that rights of election shall not be made available to any category of shareholders or to any shareholders in any territory where, in the absence of a registration statement or other special formalities or for any other reason, the circulation of an offer of rights of election to such shareholders or in such territory would or might be unlawful or where, in the opinion of the Board, compliance with local laws and/or regulations would be Page 38 unduly onerous and in such case the provisions of this Article shall be subject to such decision; (i) the Board may in its discretion amend, suspend or terminate any offer which is in operation; (j) the power conferred under this Article and by any authority given by the holders shall not be exercised unless the Company shall then have: (i) sufficient unissued Ordinary Shares in the capital of the Company authorised for issue; (ii) sufficient reserves or funds that may be capitalised after the basis of allotment is determined; in each case to give effect to the terms of any such scheme; and (k) every duly elected election shall be binding on every successor in title to the elected shares (or any of them) of the holder(s) who has/have effected the same. 136. Subject to the provisions of the Statutes and to Article 133, the Directors: (a) may declare and pay the fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the half-yearly or other dates prescribed for the payment thereof; and (b) may provide, in such manner and on, such terms as they may think fit, for the payment of any dividends (whether fixed or calculated by reference to or in accordance with a specified procedure or mechanism) on any class of shares carrying such a dividend on such dates as may be prescribed for the payment thereof (whether such dates are fixed or are determined or to be determined in accordance with a specified procedure or mechanism); and (c) may also from time to time declare and pay interim dividends on the shares of any class of such amount and on such dates and in respect of such periods as they think fit; Provided the Directors act in good faith they shall not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights. 137. The Board may set aside out of profits of the Company available for dividend and carry to reserve or reserves such sums as it may think proper, which shall, at the discretion of the Board be applicable for meeting Page 39 contingencies, or for the gradual liquidation of any debt or liability of the Company, or in providing for depreciation or contingencies or for writing down the value of the assets or for equalising dividends, or for any other purpose to which the profits of the Company may properly be applied, and pending such application may, at the like discretion, either be employed in the business of the Company, or be invested in such investments (other than shares of the Company) as the Board may from time to time think fit. The Board may also without placing the same to reserve carry forward any profits which it may think prudent not to distribute. 138. The Board shall transfer to share premium account as required by the Statutes sums equal to the amount or value of any premiums at which any shares of the Company shall be issued. Subject to the provisions of the Statutes the provisions of these Articles relating to sums carried or standing to reserve shall be applicable to sums carried and standing to share premium account. 139. The Board may deduct from any dividend payable to any member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise in relation to shares in the Company. 140. Subject to the rights attaching to, or the terms of issue of, any shares, any dividend on shares of any class or distribution, allotment or issue to the holders of any shares of any class (whether to be paid or made pursuant to a resolution of the Company in general meeting or a resolution of the Directors or otherwise) may be paid or made to the person registered as the holder of such shares or the persons otherwise entitled thereto at the close of business on a particular date notwithstanding that it may be a date prior to that on which the dividend, distribution, allotment or issue is to be paid or made or on which any resolution relating thereto is passed and any such dividend, distribution, allotment or issue shall be paid or made to them in accordance with their respective entitlements thereto but without prejudice to the rights inter se, in respect of such dividend, distribution, allotment or issue, of any holder or former holder of any such shares. 141. The Board may pay the dividends or interest payable on shares in respect of which any person is by transmission entitled to be registered as holder to such person upon production of such certificate and evidence as would be required if such person desired to be registered as a member in respect of such shares. 142. No dividend or other moneys payable in respect of a share shall bear interest against the Company unless otherwise provided by the rights attached to or the terms of issue of the share. 143. All dividends unclaimed for six months after having been declared may be invested or otherwise made use of by the Board for the benefit of the Page 40 Company until claimed and so that the Company shall not thereby be constituted as a trustee in respect thereof. All dividends unclaimed for a period of twelve years after having been declared shall be forfeited and shall revert to the Company. 144. Any dividend or other moneys payable in cash on or in respect of a share may be paid by cheque or warrant sent through the post to the registered address of the member or person entitled thereto (or, if two or more persons are registered as joint holders of the share or entitled thereto in consequence of the death or bankruptcy of the holder, to any one of such persons) or to such person and such address as such member or person or persons may by writing direct or may be paid by inter-bank transfer to such account in such place or by such other means as the Directors may determine or think fit. Where such dividend or other moneys are or are to be paid by cheque or warrant, every such cheque or warrant shall be made payable to the order of the person to whom it is sent or to such person as the holder or joint holders or person or persons entitled to the shares in consequence of the death or bankruptcy of the holder may direct and payment of the cheque or warrant by the bank on which it is drawn shall be good discharge to the Company. Every such cheque or warrant shall be sent at the risk of the person entitled to the moneys represented thereby. Subject to the provisions of these Articles and to the rights attaching to, or the terms of issue of, any shares, any dividend or other moneys payable on or in respect of a share may be paid in such currency as the Directors may think fit or otherwise determine. If any such cheque or warrant is returned undelivered or is left uncashed on two consecutive occasions or, following one such occasion, reasonable enquiries have failed to establish any new address of the registered holder, the Company may cease sending any further cheques or warrants in respect of any dividend to such member until such time, if ever, as such member shall notify the Company of an address to which any cheque or warrant may be sent in future. 145. If several persons are registered as joint holders of any share, any one of them may give effectual receipts for any dividend or other moneys payable in respect of the share. CAPITALISATION OF PROFITS 146.1 The Company may, upon the recommendation of the Board, resolve that it is desirable to capitalise any of the profits of the Company to which this Article applies and accordingly that the Board be authorised and directed to appropriate the profits so resolved to be capitalised to the members on the record date specified in the relevant resolution who would have been entitled thereto if distributed by way of dividend and in the same proportions. 146.2 Subject to any direction given by the Company, the Board shall make all appropriations and applications of the profits resolved to be capitalised by Page 41 any such resolution and such profits shall be applied by the Board on behalf of the members entitled thereto, either: (a) in or towards paying up the amounts (if any) for the time being unpaid on any shares held by such members respectively; or (b) in paying up in full unissued shares, debentures or obligations of the Company of a nominal amount equal to such profits, for allotment and distribution credited as fully paid up, to and amongst such members in the proportion aforesaid; or partly in one way and partly in the other; provided that the only purpose to which sums standing to capital redemption reserve or share premium account shall be applied pursuant to this Article shall be the payment up in full of unissued shares to be allotted and distributed as aforesaid. 146.3 The Board shall have power after the passing of any such resolution: (a) to make such provisions (by the issue of fractional certificates or by payment in cash or otherwise) as it thinks fit in the case of shares, debentures or obligations becoming distributable in fractions; and (b) to authorise any person to enter, on behalf of all the members entitled thereto, into an agreement with the Company providing (as the case may require) either: (i) for the payment up by the Company on behalf of such members (by the application thereto of their respective proportions of the profits resolved to be capitalised) of the amounts, or any part of the amounts, remaining unpaid on their existing shares; or (ii) for the allotment to such members respectively, credited as fully paid up, of any further shares, debentures or obligations to which they may be entitled upon such capitalisation; and any agreement made under such authority shall be effective and binding on all such members. 146.4 The profits of the Company to which this Article applies shall be any undivided profits of the Company not required for paying the fixed dividends on any preference shares or other shares issued on special conditions and shall include: (a) any profits arising from appreciation in capital assets (whether realised by sale or ascertained by valuation); and Page 42 (b) any amounts for the time being standing to any reserve or reserves or to the capital redemption reserve or to share premium or other special account. NOTICES 147. Any notice or document may be served by the Company on any member either personally or by sending it through the post in a prepaid letter addressed to such member at his registered address. In the case of joint holders of a share all notices shall be given to that one of the joint holders whose name stands first in the Register, and notice so given shall be sufficient notice to all the joint holders. 148. Any member described in the Register by an address not within the United Kingdom, who shall from time to time give to the Company an address within the United Kingdom at which notices may be served upon him, shall be entitled to have notices served upon him at such address; but save as aforesaid, no member other than a registered member described in the Register by an address within the United Kingdom shall be entitled to receive any notice from the Company. 149.1 Any notice or other document, if served by post, shall be deemed to have been served on the day following that on which the letter containing the same is posted (by whatever class of post). In proving such service it shall be sufficient to prove that the letter containing the notice or document was properly addressed, stamped and posted. 149.2 A member present, either in person or by proxy, at any meeting of the Company or of the holders of any class of shares in the Company shall be deemed to have received notice of the meeting and, where requisite, of the purposes for which it was called. 150. Any notice or document delivered or sent by post to, or left at the registered address of, any member in pursuance of these Articles shall, notwithstanding that such member be then dead or bankrupt, and whether or not the Company have notice of his death or bankruptcy, be deemed to have been duly served in respect of any share registered in the name of such member as sole or joint holder, unless his name shall, at the time of the service of the notice or document, have been removed from the Register as the holder of the share, and such service shall for all purposes be deemed a sufficient service of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. 151.1 If at any time the Company is unable effectively to convene a general meeting by notices sent through the post in the United Kingdom as a result of the suspension or curtailment of postal services, notice of such general meeting may be sufficiently given by advertisement in the United Kingdom. In Page 43 any such case the Company shall send confirmatory copies of the notice by post if at least two clear days prior to the meeting the posting of notices to addresses throughout the United Kingdom again becomes practicable. Any notice given by advertisement pursuant to this paragraph (1) of Article 151 shall be advertised on the same date in at least one national newspaper and such notice shall be deemed to have been served on the day when the advertisement appears. 151.2 Any notice required to be given by the Company to members (including for this purpose holders of share warrants) and not expressly provided for by these Articles or by the terms of issue of any shares shall be sufficiently given if given by advertisement. Any such notice shall be advertised once in a leading daily newspaper in London and shall be taken as given at noon on the day on which such advertisement appears. The holder of a share warrant shall be entitled in respect thereof to notice only by advertisement as herein provided. 152. Every person who by operation of law, transfer or other means whatsoever shall become entitled to any share shall be bound by every notice other than a notice issued by authority of Article 11 in respect of such share which, previously to his name and address being entered in the Register, shall be duly given to the person from whom he derives his title to such share. WINDING UP 153. If the Company shall be wound up, the liquidator may, with the sanction of an extraordinary resolution of the contributories, divide amongst the contributories in specie the whole or any part of the assets of the Company and may, for that purpose value any assets and determine how the division shall be carried out as between the contributories or different classes of contributories. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator with the like sanction shall think fit. 154. The power of sale of a liquidator shall include a power to sell wholly or partially for shares or stock or for the debentures, debenture stock or other obligations of another company, either then already constituted, or about to be constituted, for the purpose of carrying out the sale. INDEMNITY 155.1 The Directors, alternate Directors, Auditors, Secretary, managers and other officers of the Company shall be indemnified out of its assets against all liability incurred by them as such in defending any proceedings, whether civil or criminal, in respect of alleged negligence, default, breach of duty or breach of trust, in which judgement is given in their favour, or in which they are Page 44 acquitted or in connection with any application under the Statutes in which relief is granted to them by the Court. 155.2 Without prejudice to the provision of Article 155(1), the Directors shall have the power to purchase and maintain insurance for or for the benefit of any persons who are or were at any time Directors, officers or employees of the Company, or any company in which the Company has an interest whether direct or indirect or which is in any way allied to or associated with the Company, or of any subsidiary undertaking of the Company or any such other company, or who are or were at any time trustees of any retirement benefits scheme or employee benefits trust in which employees of the Company or any such other company or subsidiary undertaking are interested, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution or discharge of their duties or in the exercise or purported exercise of their powers or otherwise in relation to their duties, powers or offices in relation to the Company or any such other company, subsidiary undertaking or retirement benefits scheme or employee benefits trust. DISCOVERY 156. No member or meeting of members shall be entitled to discovery of or any information respecting any detail of the Company's operations or trading or any matter which may be or is in the nature of a trade secret, or which may relate to the conduct of the business of the Company, which in the opinion of the Board it would not be expedient in the interests of the members to communicate. DESTRUCTION OF DOCUMENTS 157. The Company shall be entitled to destroy all instruments of transfer of shares which have been registered at any time after the expiration of six years from the date of registration thereof and all dividend mandates and notifications of change of address at any time after the expiration of two years from the date of recording thereof and all share certificates which have been cancelled at any time after the expiration of one year from the date of the cancellation thereof and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to have been made on the basis of an instrument of transfer or other document so destroyed was duly and properly made and every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered and every share certificate so destroyed was a valid and effective certificate duly and properly cancelled and every other document herein before mentioned so destroyed was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that: Page 45 (i) the provisions aforesaid shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant; (ii) nothing herein contained shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the Company in the absence of this Article; (iii) references herein to the destruction of any document include references to the disposal thereof in any manner. UNTRACED SHAREHOLDERS 158.1 If in the period of twelve years prior to the date of publication of the advertisements referred to below (or, if published on different dates, the first thereof) at least three dividends have become payable in respect of any class of shares of the Company and all warrants and cheques in respect of the shares in question have remained uncashed during that period, the Company may sell for the best price reasonably obtainable the shares of that member or of a person entitled to such shares by virtue of transmission on death, bankruptcy, mental disorder, operation of law or any other event in such manner as the Board thinks fit provided that: (a) the Company shall, as soon as practicable after expiry of the said period of twelve years, have given notice by advertisement in a national daily newspaper and a newspaper circulating in the area of the address at which service of notices upon such member or person entitled to such shares may be effected in accordance with these Articles of its intention to sell such shares; (b) the Company has not, during the further period of three months after the date of the advertisements (or, if published on different dates the later thereof) and prior to the exercise of the power of sale, received any communication from the member or a person entitled to such shares by virtue of transmission on death or bankruptcy or otherwise; and (c) if the shares are listed on The Stock Exchange the Company shall have notified the Quotations Department of The Stock Exchange of such intention prior to the publication of such advertisements. 158.2 To give effect to any such sale the Board may authorise some person to execute as transferor an instrument of transfer of the shares to be sold to, or in accordance with the directions of, the purchaser and such instrument of transfer shall be as effective as if it had been executed by the registered holder Page 46 of, or person entitled by transmission to, such shares. The transferee shall be entered in the Register as the holder of the shares comprised in any such transfer (notwithstanding that no certificate representing the shares shall be produced), and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. 158.3 The net proceeds of sale, after payment of the costs thereof, shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount. No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments as the Board may from time to time think fit. Page 47 INDEX TO ARTICLES OF ASSOCIATION
ARTICLE PAGE Accounts, books of 126 34 Books of, where kept 127 34 copies of, to be sent to Members 129 34 inspection of 127 34 to be submitted in accordance with the Statutes 128 34 Administrators of deceased Members 39 10 Allotment 7 3 Alternate Directors 98,115-120 27,32-33 Appointment of Directors 77-79 19-20 Auditors, appointment 130 34 report 131 34 Bankruptcy, rights of person entitled in consequence of 39,40 10 Borrowing, Board's powers 90 22 definitions related to 90.3 22 Brokerage on shares 8 4 Calls on shares, Board may make from time to time 14 6 date of call 15 6 differentiation on 19 7 forfeiture of shares, for non-payment of 27 8 in arrears 69 18 interest on unpaid calls 17 6-7 joint holders jointly and severally liable 16 6 made when resolution passed 15 6 moneys may be paid up in advance and interest paid thereon 20 7 notice to be given 14 6 procedure to recover money due on calls 25 8 sums deemed to be 18 7 Capital of Company 3 3 Capital of Company, alterations to 46-48 13-14 cancellation of shares 46(c) 13 conversion of shares into stock and vice versa 42 12 consolidation of shares 46(a) 13 fractions of shares on consolidation 46(a) 13 increase of 47 14 redeemable shares, power to issue 49 14 reduction of by special resolution 48 14 rights may be varied 4-5 3 sub-division of shares 46(a) 13 Capitalisation of profits 146 40-41 Certificates 12-13 5-6 charges for 12.1 5
Page 48 lost or destroyed, new may be issued 13 6 may be delivered to any one of joint holders 12.2 6 one to every Member 12.1 5 to be sealed, but need not be signed 124.2 33 Chairman 57-64 15-17 adjourn meetings, right to 59 16 adjourned meetings, fixing of 57 15 casting vote at board meetings, no 91.1 25 casting vote at general meetings 63 17 declaration of result of vote on a show of hands 60 16 Deputy 58 15 director's interest, decision as to 101.5 30 election by board 93 26 poll, on election of Chairman 62 16-17 poll, right to demand 60 16 preside at general meetings, to 58 15 qualification of vote, decision as to 70 18 Closing of books 37 10 Commission on shares 8 4 Consolidation of shares 46(a) 13 Conversion of shares into stock and vice versa 42 12 Debentures, etc may be issued 90.1 22 Default notices 11 4-5 Definitions 2 1-2 Directors, acting in a professional capacity 102.3 30 acts valid notwithstanding defect in appointment 98 27 alternate 115-120 32-33 appointment of 76-77,79 19-20 appointment of, by separate resolution 79 19-20 Chairman and Deputy Chairman of 93 26 Chairman entitled to take chair at general meetings 58 15 Chairman to have no casting vote 91 25-26 committees, powers may be delegated to 96 27 Company may fill vacancies at general meeting 78 19 continuing Directors may act in case of vacancy 78 19 contracts, interest in to be disclosed 101.1 28 contracts, not disqualified from entering into with Company 101.1 28 contracts, power to vote on 101.2 28 disqualification of 100 27-28 election by general meeting 106 31 Executive 108-109 31 expenses 82 20 fees 82 20 if place not filled up, retiring Directors continue 106 31 indemnified against losses, indemnity insurance etc 155 43 may appoint attorneys 87 21-22
Page 49 may appoint local boards and delegate powers 85 21 may become Director of any subsidiary or other company 102.1 30 may provide for local management 85 21 meetings, a Director may at any time convene 91.2 26 meetings, Director may fix a quorum 92 26 meetings, Directors may meet as they think fit 91.1 25-26 meetings, notice of 91.3 26 meetings, proceedings at 91-98 25-27 meetings, quorum 92 26 no person other than retiring Director eligible for election without notice or Directors' recommendation 80 20 number of 76 19 office, when vacated 104 30 pensions 86 21 power to make additional appointments 77 19 powers 84-89 20-22 powers, general powers of Company vested in Directors 84 20 proceedings 91-98 25-27 qualification of 81 20 removal 103,107 30,31 remuneration 82 20 remuneration for special services 83 20 report to be submitted in accordance with the Statutes 128,129 34 resignation of 100 27-28 resolutions of 94 26 retiring Directors eligible for re-appointment 105 30 retiring, if places not filled up, to continue 106 31 rotation and retirement of 105 30 selection of Directors to retire 105 30 special services 83 20 travelling and other expenses 82 20 vacancy may be filled at general meeting 78 19 vacancy may be filled by Directors 77 19 voting by, with regard to interest in contracts 101.2 28 voting by, with regard to offices under the company or subsidiary 102 30 Discovery 156 43-44 Dividends, interim, Board may pay 136 38 joint holders 145 40 joint holders, any of them may give receipt 146 40-41 may be paid in specie or satisfied by allotment or ordinary shares if authorised by general meeting 135 35-38 may be retained until person entitled becomes a member 141 10 may cease to be sent 144 39-40
Page 50 method of payment 144 39-40 no dividends shall bear interest against Company 142 39 no larger than board recommends 133 35 on shares in proportion to amount paid up 134 35 production of evidence 141 39 recommended by Board 132 35 and reserves 137 38 subject to Statutes 133 35 when may be retained 21,41,139 7,10,39 Documents, discovery 156 43-44 power of Company to destroy 157 44 service of 147-152 41-42 to be sent to members 129 34 Executive Directors 108-112 31-32 Executors of deceased Members, rights of 39,41 10 Extraordinary General Meetings 51,55 14,15 Forfeiture, Board may accept surrender of shares liable to 30 9 day and place, etc, to be named in notice 26 8 forfeited shares 28 8 forfeiture may be cancelled 28 8 if notice not complied with sharesmay be forfeited 27 8 Member liable to pay call notwithstanding 29 8-9 notice, form of 26 8 notice requiring payment of money due 25 8 statutory declaration conclusive evidence 31 9 General Meetings 50-64 14-17 adjournment of 57,59 15,16 Annual 50 14 business of Annual 55 15 Chairman has casting vote 63 17 Chairman of 58 15 Extraordinary, all other than Annual 50 14 Extraordinary, may be convened by board or by requisition 51 14 notice of 52-54 14-15 proceedings at 55-64 15-17 quorum 56 15 time and place 53 15 voting at 60-63 16-17 Increase of capital 47 14 Indemnity 155 43 Instalments 25 8 Interpretation 45 13
Page 51 Lien, application of proceeds of sale 24 8 Board may exempt any share from these provisions 21 7 Company has first lien on shares not fully paid up, and on dividends 21 7 Company may sell shares to enforce lien 22 7 effect of sale 23 7 name of purchaser shall be entered in Register 23 7 Liquidation 153,154 43 Loan capital 90 22-25 Local management 85 21 Managing Director and Executive Directors 108-112 31-32 appointment of 108 31 not subject to retirement by rotation 109-110 31 power such as Board thinks fit 112 32 remuneration to be fixed by Board 111 32 Minutes 99 27 Notices, accidental omission of, not to invalidate resolution 54 15 binding on all persons claiming by transfer or transmission 152 42 clear days 2 2 deemed receipt 149.2 42 deemed to be served on day following that on which posted 149.1 42 deemed to be served where member deceased or bankrupt 150 42 given to first of joint holders 147 41 holders out of United Kingdom may notify an address 148 41 how given and when deemed served, etc 147-152 41-42 may be served personally or by post 147 41 may be given by advertisement 151 42 of general meetings 52-54 14-15 Pensions, establishment by Board 86.1 21 Personal representative, rights of unregistered 40,41 10-11 Poll, demand of not to prevent transaction of other business 64 17 how to be demanded 60 16 on adjournment or election of Chairman 62 16-17 result of 61 16 to be taken as Chairman directs 62 16-17 Powers of attorney 74,87 18-19, 21-22 Powers of Board 84-89 20-22 President 113,114 32
Page 52 Proceedings, at general meetings 55-64 15-17 of Board 91-98 25-27 Proxies 60,63, 16,17, 65-75 17-19 Purchase of Company's shares 9 4 Quorum, at Board Meetings 92 26 at general meetings 56 15 at meetings of classes of shares 4 3 Redeemable shares 49 14 Reduction of capital 48 14 Register, keeping of 126 34 closing of 37 10 Removal of Directors 103-107 30-31 Reserves 137 38 capitalisation of 146 40-41 Rights of Members, variation of 4,5 3 Rotation and retirement of Directors 103-107 30-31 Seal, affixing of 124,125 33 in foreign countries 125 33 Secretary 121,123 33 Deputy 122 33 if a Director 123 33 Securities Seal 2 1 shares warrants, issued under 41(A) 10-12 Services of notices and other documents 147-152 41-42 Share certificates 12-13 5-6 Share premium account 138 38 Share warrant 2 1 Company's right to issue and rights attached to 41(A) 10-12 Shares, allotment by Board 7 3 cancellation of 46(c) 13 commissions 8 4 Company may purchase its own 9 4 consolidation 46(a) 13 conversion into stock and vice versa 42 12 different clauses of 4 3 new issues of, not a variation of rights attaching to existing 5 3 shares power to deal with fractions on consolidation 46(a) 13 redeemable 49 14 sub-division of 46(b) 13 transfer and transmission of 32-41 9-10 trusts not recognised 10 4 Stock, conversion into shares 42 12 may be transferred 43 12 Stockholders, same privileges as shareholders 44 13
Page 53 `Table A' shall not apply 1 1 Transfer and Transmission 32-41 9-10 absolute discretion of Board to refuse to register 34 9 Board may refuse to register in certain other cases 35 9 form of transfer 32 9 instrument of transfer of shares to be executed by or on behalf of transferor and (in the case of partly paid shares) transferee 33 9 legal personal representatives of deceased, survivors of joint holders only persons recognised by Company 38 10 of shares of deceased or bankrupt Member 38 10 registration of transfers may be suspended 37 10 transferor holder until transferee on register 33 9 Transfer office 2 1 share warrants, deposited at 41(A) 10-12 Transmission of shares 38-41 10 Trusts not to be recognised 10 4 Underwriting commission 8 4 Untraced shareholders 158 44-45 Variation of rights 4, 5 3 Votes of Members 65-75 17-19 Chairman's casting vote 63 17 Chairman's declaration as to result of votes is final 50 14 evidence of passing resolutions 60 16 form of proxy 72 18 Members under incapacity 68 17-18 no Member entitled to vote whilst call due, etc. 69 18 no right to vote, unless Board otherwise determines 11 4-5 objection to qualification 70 18 one vote for each share, at a poll 65 17 personally or by proxy 65 17 right to vote on show of hands and on a poll 65, 71 17, 18 time and place of lodging proxy 74 18-19 vote by proxy valid unless notice of revocation received 75 19 where joint holders 66 17 Winding up 153,154 43
Page 54 EX-4.1 6 ex-4_1.txt EXHIBIT 4.1 Exhibit 4.1 - -------------------------------------------------------------------------------- Ordinary shares of 25p each Certificate No. Account No. Transfer No. Date Number of Shares of 25p each [PEARSON LOGO}] PEARSON plc (Incorporated under the Companies Acts 1862 to 1893 - No. 53723) THIS IS TO CERTIFY THAT THE UNDERMENTIONED IS/ARE THE REGISTERED HOLDER(S) OF ORDINARY SHARES OF TWENTY-FIVE PENCE EACH FULLY PAID IN PEARSON PLC, SUBJECT TO THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY. Name(s) of Holder(s) Number of Shares of 25p each Given under the Common Seal of the Company. This certificate should be kept in a safe place. It will be needed when you sell or transfer the shares. The registrar's address is: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA, Telephone 0870 600 3986 and the relevant reference for correspondence is No. 383. 383-01 PEARSON plc ORDINARY SHARES OF 25P EACH EX-4.2 7 ex-4_2.txt EXHIBIT 4.2 Exhibit 4.2 =============================================================== PEARSON PLC AND THE BANK OF NEW YORK As Depositary AND OWNERS AND HOLDERS OF AMERICAN DEPOSITARY RECEIPTS Deposit Agreement Dated as of March 21, 1995 Amended and Restated as of _____________, 2000 =============================================================== DEPOSIT AGREEMENT DEPOSIT AGREEMENT dated as of March 21, 1995, as amended and restated as of ____________, 2000 among PEARSON PLC, incorporated under the laws of England and Wales (herein called the Company), THE BANK OF NEW YORK, a New York banking corporation (herein called the Depositary), and all Owners and holders from time to time of American Depositary Receipts issued hereunder. W I T N E S S E T H : WHEREAS, the Company desires to provide, as hereinafter set forth in this Deposit Agreement, for the deposit of Shares (as hereinafter defined) of the Company from time to time with the Depositary or with the Custodian (as hereinafter defined) as agent of the Depositary for the purposes set forth in this Deposit Agreement, for the creation of American Depositary Shares representing the Shares so deposited and for the execution and delivery of American Depositary Receipts evidencing the American Depositary Shares; and WHEREAS, the American Depositary Receipts are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement; NOW, THEREFORE, in consideration of the premises, it is agreed by and between the parties hereto as follows: ARTICLE 1. DEFINITIONS. The following definitions shall for all purposes, unless otherwise clearly indicated, apply to the respective terms used in this Deposit Agreement: SECTION 1.01. American Depositary Shares. The term "American Depositary Shares" shall mean the securities representing the interests in the Deposited Securities and evidenced by the Receipts issued hereunder. Each American Depositary Share shall represent one Share, until there shall occur a distribution upon Deposited Securities covered by Section 4.03 or a change in Deposited Securities covered by Section 4.08 with respect to which additional Receipts are not executed and delivered, and thereafter American Depositary Shares shall evidence the amount of Shares or Deposited Securities specified in such Sections. SECTION 1.02. Commission. The term "Commission" shall mean the Securities and Exchange Commission of the United States or any successor governmental agency in the United States. SECTION 1.03. Company. The term "Company" shall mean Pearson plc, incorporated under the laws of England and Wales, and its successors. SECTION 1.04. Custodian. The term "Custodian" shall mean the London, England, office of The Bank of New York, as agent of the Depositary for the purposes of this Deposit Agreement, and any other firm or corporation which may hereafter be appointed by the Depositary pursuant to the terms of Section 5.05, as substitute or additional custodian or custodians hereunder, as the context shall require and shall also mean all of them collectively. SECTION 1.05. Deposit Agreement. The term "Deposit Agreement" shall mean this Agreement, as the same may be amended from time to time in accordance with the provisions hereof. SECTION 1.06. Depositary; Corporate Trust Office The term "Depositary" shall mean The Bank of New York, a New York banking corporation, and any successor as depositary hereunder. The term "Corporate Trust Office", when used with respect to the Depositary, shall mean the office of the Depositary which at the date of this Agreement is 101 Barclay Street, New York, New York, 10286. SECTION 1.07. Deposited Securities. The term "Deposited Securities" as of any time shall mean Shares at such time deposited or deemed to be deposited under this Deposit Agreement and any and all other securities, property and cash received by the Depositary or the Custodian in respect thereof and at such time held hereunder, subject as to cash to the provisions of Section 4.05. SECTION 1.08. Dollars; Pence. The term "Dollars" shall mean United States dollars. The term "pence" or "p" shall mean United Kingdom pence. SECTION 1.09. Foreign Registrar. The term "Foreign Registrar" shall mean the entity that presently carries out the duties of registrar for the Shares or any successor as registrar for the Shares and any other appointed agent of the Company for the transfer and registration of Shares. -2- SECTION 1.10. Holder. The term "Holder" shall mean any person who has a beneficial interest in any Receipt. SECTION 1.11. Owner. The term "Owner" shall mean the person in whose name a Receipt is registered on the books of the Depositary maintained for such purpose. SECTION 1.12. Receipts. The term "Receipts" shall mean the American Depositary Receipts issued hereunder in substantially the form of Exhibit A hereto evidencing American Depositary Shares, as the same may be amended from time to time in accordance with the provisions hereof. SECTION 1.13. Registrar. The term "Registrar" shall mean any bank or trust company having an office in the Borough of Manhattan, The City of New York, which shall be appointed to register Receipts and transfers of Receipts as herein provided. SECTION 1.14. Restricted Securities. The term "Restricted Securities" shall mean Shares, or Receipts representing such Shares, which are acquired directly or indirectly from the Company or its affiliates (as defined in Rule 144 under the Securities Act of 1933) in a transaction or chain of transactions not involving any public offering or which are subject to resale limitations under Regulation D under that Act or both, or which are held by an officer, director (or persons performing similar functions) or other affiliate of the Company, or which are subject to other restrictions on sale or deposit under the laws of the United States or the United Kingdom, or under a shareholder agreement or the Articles of Association and By-laws of the Company. SECTION 1.15. Securities Act of 1933. The term "Securities Act of 1933" shall mean the United States Securities Act of 1933, as from time to time amended. SECTION 1.16. Shares. The term "Shares" shall mean ordinary shares in registered form of the Company, par value twenty-five pence each, heretofore validly issued and outstanding and fully paid and free of any pre-emptive rights of the holders of outstanding Shares or hereafter validly issued and outstanding and fully paid and free of any pre-emptive rights of the holders of outstanding Shares or interim certificates representing such Shares. -3- ARTICLE 2. FORM OF RECEIPTS, DEPOSIT OF SHARES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS. SECTION 2.01. Form and Transferability of Receipts. Definitive Receipts shall be substantially in the form set forth in Exhibit A annexed to this Deposit Agreement, with appropriate insertions, modifications and omissions, as hereinafter provided. No Receipt shall be entitled to any benefits under this Deposit Agreement or be valid or obligatory for any purpose, unless such Receipt shall have been executed by the Depositary by the manual or facsimile signature of a duly authorized signatory of the Depositary and, if a Registrar for the Receipts shall have been appointed, by the manual or facsimile signature of a duly authorized signatory of the Registrar. The Depositary shall maintain books on which each Receipt so executed and delivered as hereinafter provided and the transfer of each such Receipt shall be registered. Receipts bearing the manual or facsimile signature of a duly authorized signatory of the Depositary who was at any time a proper signatory of the Depositary shall bind the Depositary, notwithstanding that such signatory has ceased to hold such office prior to the execution and delivery of such Receipts by the Registrar or did not hold such office on the date of issuance of such Receipts. The Receipts may, with the prior consent of the Company, be endorsed with or have incorporated in the text thereof such legends or recitals or modifications not inconsistent with the provisions of this Deposit Agreement as may be required by the Depositary or required to comply with any applicable law or regulations thereunder or with the rules and regulations of any securities exchange upon which American Depositary Shares may be listed or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Receipts are subject by reason of the date of issuance of the underlying Deposited Securities or otherwise. Title to a Receipt (and to the American Depositary Shares evidenced thereby), when properly endorsed or accompanied by proper instruments of transfer, shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that the Company and the Depositary, notwithstanding any notice to the contrary, may treat the Owner thereof as the absolute owner thereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all other purposes. SECTION 2.02. Deposit of Shares. Subject to the terms and conditions of this Deposit Agreement, Shares or evidence of rights to receive Shares may be deposited by delivery thereof to any Custodian hereunder, accompanied by any appropriate instrument or instruments of transfer, or endorsement, in form satisfactory to the Custodian, together with all such -4- certifications as may be required by the Depositary or such Custodian in accordance with the provisions of this Deposit Agreement, and, if the Depositary requires, together with a written order directing the Depositary to execute and deliver to, or upon the written order of, the person or persons stated in such order, a Receipt or Receipts for the number of American Depositary Shares representing such deposit. No Share shall be accepted for deposit unless accompanied by evidence satisfactory to the Depositary that any necessary approval has been granted by any governmental body in the United Kingdom which is then performing the function of the regulation of currency exchange. If required by the Depositary, Shares presented for deposit at any time, whether or not the transfer books of the Company or the Foreign Registrar, if applicable, are closed, shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Depositary, which will provide for the prompt transfer to the Custodian of any dividend, or right to subscribe for additional Shares or to receive other property which any person in whose name the Shares are or have been recorded may thereafter receive upon or in respect of such deposited Shares, or in lieu thereof, such agreement of indemnity or other agreement as shall be satisfactory to the Depositary. At the request and risk and expense of any person proposing to deposit Shares, and for the account of such person, the Depositary may receive certificates for Shares to be deposited, together with the other instruments herein specified, for the purpose of forwarding such Share certificates to the Custodian for deposit hereunder. Upon each delivery to a Custodian of a certificate or certificates for Shares to be deposited hereunder, together with the other documents above specified, such Custodian shall, as soon as transfer and recordation can be accomplished, present such certificate or certificates to the Company or the Foreign Registrar, if applicable, for transfer and recordation of the Shares being deposited in the name of the Depositary or its nominee or such Custodian or its nominee. Deposited Securities shall be held by the Depositary or by a Custodian for the account and to the order of the Depositary or at such other place or places as the Depositary shall determine. SECTION 2.03. Execution and Delivery of Receipts. Upon receipt by any Custodian of any deposit pursuant to Section 2.02 hereunder (and in addition, if the transfer books of the Company or the Foreign Registrar, if applicable, are open, the Depositary may in its sole discretion require a proper acknowledgment or other evidence from the Company that any Deposited Securities have been recorded upon the books of the Company or the Foreign Registrar, if applicable, in the name of the Depositary or its nominee or such Custodian or its nominee), together with the other documents required as above specified, such Custodian shall notify the Depositary of such deposit and the person or persons to whom or upon whose written order a Receipt or Receipts are deliverable in respect thereof and the number of American Depositary Shares to be evidenced thereby. Such notification shall be made by letter or, -5- at the request, risk and expense of the person making the deposit, by cable, telex or facsimile transmission. Upon receiving such notice from such Custodian, or upon the receipt of Shares by the Depositary, the Depositary, subject to the terms and conditions of this Deposit Agreement, shall execute and deliver at its Corporate Trust Office, to or upon the order of the person or persons entitled thereto, a Receipt or Receipts, registered in the name or names and evidencing any authorized number of American Depositary Shares requested by such person or persons, but only upon payment to the Depositary of the fees of the Depositary for the execution and delivery of such Receipt or Receipts as provided in Section 5.09, and of all taxes and governmental charges and fees payable in connection with such deposit and the transfer of the Deposited Securities. SECTION 2.04. Transfer of Receipts; Combination and Split-up of Receipts. The Depositary, subject to the terms and conditions of this Deposit Agreement, shall register transfers of Receipts on its transfer books from time to time, upon any surrender of a Receipt, by the Owner in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer, and duly stamped as may be required by the laws of the State of New York and of the United States of America. Thereupon the Depositary shall execute a new Receipt or Receipts and deliver the same to or upon the order of the person entitled thereto. The Depositary, subject to the terms and conditions of this Deposit Agreement, shall upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts, execute and deliver a new Receipt or Receipts for any authorized number of American Depositary Shares requested, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered. The Depositary shall ensure that it has on hand at all times a sufficient supply of Receipts to meet the demand for transfer. Upon the request or approval of the Company, the Depositary may appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of Receipts at designated transfer offices on behalf of the Depositary. In carrying out its functions, a co-transfer agent may require evidence of authority and compliance with applicable laws and other requirements by Owners or persons entitled to Receipts and will be entitled to protection and indemnity to the same extent as the Depositary. SECTION 2.05. Surrender of Receipts and Withdrawal of Shares. Upon surrender at the Corporate Trust Office of the Depositary of a Receipt for the purpose of withdrawal of the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, and upon payment of the fee of the Depositary for the surrender of Receipts as provided in Section 5.09 and payment of all taxes and governmental charges payable in connection with such surrender and withdrawal of the Deposited Securities, and subject to the terms and conditions of this -6- Deposit Agreement, the Owner of such Receipt shall be entitled to delivery, to him or upon his order, of the amount of Deposited Securities at the time represented by the American Depositary Shares evidenced by such Receipt. Delivery of such Deposited Securities may be made by the delivery of (a) certificates in the name of such Owner or as ordered by him or certificates properly endorsed or accompanied by proper instruments of transfer to such Owner or as ordered by him and (b) any other securities, property and cash to which such Owner is then entitled in respect of such Receipts to such Owner or as ordered by him. Such delivery shall be made, as hereinafter provided, without unreasonable delay. A Receipt surrendered for such purposes may be required by the Depositary to be properly endorsed in blank or accompanied by proper instruments of transfer in blank, and if the Depositary so requires, the Owner thereof shall execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be delivered to or upon the written order of a person or persons designated in such order. Thereupon the Depositary shall direct the Custodian to deliver at the London, England, office of such Custodian, subject to Sections 2.06, 3.01 and 3.02 and to the other terms and conditions of this Deposit Agreement, to or upon the written order of the person or persons designated in the order delivered to the Depositary as above provided, the amount of Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, except that the Depositary may make delivery to such person or persons at the Corporate Trust Office of the Depositary of any dividends or distributions with respect to the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary. At the request, risk and expense of any Owner so surrendering a Receipt, and for the account of such Owner, the Depositary shall direct the Custodian to forward any cash or other property (other than rights) comprising, and forward a certificate or certificates and other proper documents of title for, the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt to the Depositary for delivery at the Corporate Trust Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Owner, by cable, telex or facsimile transmission. SECTION 2.06. Limitations on Execution and Delivery, Transfer and Surrender of Receipts. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any Receipt or withdrawal of any Deposited Securities, the Depositary, Custodian or Registrar may require payment from the depositor of Shares or the presentor of the Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being -7- deposited or withdrawn) and payment of any applicable fees as herein provided, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the provisions of this Deposit Agreement, including, without limitation, this Section 2.06. The delivery of Receipts against deposits of Shares generally or against deposits of particular Shares may be suspended, or the transfer of Receipts in particular instances may be refused, or the registration of transfer of outstanding Receipts generally may be suspended, during any period when the transfer books of the Depositary are closed, or if any such action is deemed necessary or advisable by the Depositary or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission, or under any provision of this Deposit Agreement, or for any other reason, subject to the provisions of the following sentence. Notwithstanding any other provision of this Deposit Agreement or the Receipts, the surrender of outstanding Receipts and withdrawal of Deposited Securities may not be suspended subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders' meeting, or the payment of dividends, (ii) the payment of fees, taxes and similar charges, and (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the Receipts or to the withdrawal of the Deposited Securities. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under this Deposit Agreement any Shares required to be registered under the provisions of the Securities Act of 1933, unless a registration statement is in effect as to such Shares. The Depositary, at the reasonable expense of the Company, shall make reasonable efforts to comply with written instructions of the Company not to accept for deposit hereunder any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Company's compliance with the securities laws of the United States. SECTION 2.07. Lost Receipts, etc. In case any Receipt shall be mutilated, destroyed, lost or stolen, the Depositary shall execute and deliver a new Receipt of like tenor in exchange and substitution for such mutilated Receipt upon cancellation thereof, or in lieu of and in substitution for such destroyed, lost or stolen Receipt. Before the Depositary shall execute and deliver a new Receipt in substitution for a destroyed, lost or stolen Receipt, the Owner thereof shall have (a) filed with the Depositary (i) a request for such execution and delivery before the Depositary has notice that the Receipt has been acquired by a bona fide purchaser and (ii) a sufficient indemnity bond and (b) satisfied any other reasonable requirements imposed by the Depositary. SECTION 2.08. Cancellation and Destruction of Surrendered Receipts. -8- All Receipts surrendered to the Depositary shall be cancelled by the Depositary. The Depositary is authorized to destroy Receipts so cancelled. SECTION 2.09. Pre-Release of Receipts. Notwithstanding Section 2.03 hereof, the Depositary may execute and deliver Receipts prior to the receipt of Shares pursuant to Section 2.02 ("Pre-Release"). The Depositary may, pursuant to Section 2.05, deliver Shares upon the receipt and cancellation of Receipts which have been Pre-Released, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such Receipt has been Pre-Released. The Depositary may receive Receipts in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom Receipts are to be delivered that such person, or its customer, (i) owns the Shares or Receipts to be remitted, as the case may be, (ii) assigns all beneficial right, title and interest in such Shares or Receipts, as the case may be, to the Depositary in its capacity as such and for the benefit of the Owners, and (iii) will not take any action with respect to such Shares or Receipts, as the case may be, that is inconsistent with the transfer of beneficial ownership (including, without the consent of the Depositary, disposing of such Shares or Receipts, as the case may be), other than in satisfaction of such Pre-Release, (b) at all times fully collateralized with cash or such other collateral as the Depositary determines in good faith will provide substantially similar liquidity and security, (c) terminable by the Depositary on not more than five (5) business days notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of Shares represented by American Depositary Shares which are outstanding at any time as a result of Pre-Releases will not normally exceed thirty percent (30%) of the Shares deposited hereunder; provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may retain for its own account any compensation received by it in connection with the foregoing. -9- SECTION 2.10. Maintenance of Records. The Depositary agrees to maintain or cause its agents to maintain records of all Receipts surrendered and Deposited Securities withdrawn under Section 2.05, substitute Receipts delivered under Section 2.07, and if cancelled or destroyed Receipts under Section 2.08, in keeping with the procedures ordinarily followed by stock transfer agents located in the City of New York or as required by the laws or regulations governing the Depositary. ARTICLE 3. CERTAIN OBLIGATIONS OF OWNERS OF RECEIPTS. SECTION 3.01. Filing Proofs, Certificates and Other Information. Any person presenting Shares for deposit or any Owner of a Receipt may be required from time to time to file with the Depositary or the Custodian such proof of citizenship or residence, exchange control approval, or such information relating to the registration on the books of the Company or the Foreign Registrar, if applicable, to execute such certificates and to make such representations and warranties, as the Depositary may deem necessary or proper. The Depositary may withhold the delivery or registration of transfer of any Receipt or the distribution of any dividend or sale or distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed or such representations and warranties made. The Depositary shall provide to the Company, promptly upon its written request, copies of any such proofs of citizenship or residence or other information referred to above so requested. SECTION 3.02. Liability of Owner for Taxes. If any tax or other governmental charge shall become payable with respect to any Receipt or any Deposited Securities represented by any Receipt, such tax or other governmental charge shall be payable by the Owner of such Receipt to the Depositary. The Depositary may refuse to effect any transfer of such Receipt or any withdrawal of Deposited Securities represented by American Depositary Shares evidenced by such Receipt until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Owner thereof any part or all of the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the Owner of such Receipt shall remain liable for any deficiency. SECTION 3.03. Warranties on Deposit of Shares. Every person depositing Shares under this Deposit Agreement shall be deemed thereby to represent and warrant that such Shares and each certificate therefor are validly issued, fully paid, nonassessable and free of any pre-emptive rights of the holders of outstanding Shares and that the person making such deposit is duly authorized so to do. Every such person shall also be deemed to represent that the deposit of such Shares -10- and the sale of Receipts evidencing American Depositary Shares representing such Shares by that person are not restricted under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and issuance of Receipts. SECTION 3.04. Disclosure of Interests in Response to Disclosure Notice. Notwithstanding any other provision of this Deposit Agreement, each Owner shall, and shall procure that any other natural or legal person having an interest of any kind whatsoever in any Shares represented by American Depositary Shares evidenced by any Receipt held by such Owner (an "Additional Holder") shall, comply with any requirement (a "Disclosure Notice") received from the Company from time to time requiring the provision of information permitted to be required by Section 212 ("Section 212") of the Companies Act 1985 (the "Companies Act") as Section 212 from time to time may be amended, supplemented or superseded by other provisions of English law, or the Articles of Association of the Company, including, but not limited to, information as to the capacity in which such Owner is or was interested in Shares, the identity of any other person then or previously interested in such Shares to the extent possible and the nature of such interest. For the purposes of this Section 3.04 and Sections 3.05 and 3.06 the terms "interests in shares", "interested in shares" or any similar expression shall have the meanings given to them in Part VI of the Companies Act as of the date hereof. SECTION 3.05. Obligation to Disclose Certain Interests in Outstanding Shares. (a) Each Owner is deemed to agree (for itself and on behalf of any Additional Holder) (i) to comply with all obligations from time to time having effect under English law which require the provision to the Company by persons interested in Shares of information in respect of such interests and (ii) to take all steps necessary to inform itself as to the applicability and extent of such obligations. (b) Each Owner is deemed to acknowledge (for itself and on behalf of any Additional Holder) that the obligations referred to in Section 3.05(a) hereof include but are not limited to Section 198 of the Companies Act ("Section 198") as Section 198 from time to time may be amended, supplemented or superseded by other provisions of English law. (c) Each Owner is further deemed to agree (for itself and on behalf of any Additional Holder) to make such disclosure of interests in Shares as may be required to be made by the Owner or Additional Holder from time to time pursuant to the City Code on Take-overs and Mergers as it from time to time may be amended, supplemented or -11- superseded by other provisions of English law, and the Rules Governing Substantial Acquisitions of Shares as it from time to time may be amended, supplemented or superseded by other provisions of English law (each of which being published by the Panel on Take-overs and Mergers of the United Kingdom) and to take all steps necessary to inform itself as to the applicability and extent of such obligations. SECTION 3.06. Sanctions for Failure to Comply with Section 3.04 or Section 3.05. Each Owner is deemed to agree (for itself and on behalf of any Additional Holder) to the sanctions set forth in this Section 3.06 for failure to comply with Section 3.04 or Section 3.05. In the event that the Company shall determine that an Owner or Additional Holder has failed to comply in a timely fashion with Section 3.04 or Section 3.05 hereof, the Depositary shall, upon receipt of written instructions from the Company, take any or all of the actions set forth in the following sentence, as set forth in such instructions, with respect to such specified Owner or Additional Holder, if applicable, to the extent feasible and at the expense of the Company. As instructed by the Company and until further notice, if any, is received from the Company that any of the following restrictions cease to apply, the Depositary to the extent feasible (i) shall not register in the name of such Owner or Additional Holder any additional American Depositary Shares, (ii) shall refuse to register any transfer of American Depositary Shares to or from such Owner, (iii) shall suspend the distribution of dividends, with respect to American Depositary Shares registered in the name of such Owner, (iv) shall not vote Shares represented by American Depositary Shares registered in the name of such Owner by proxy or otherwise at any meeting of Shareholders (except in accordance with the last paragraph of Section 4.07) or exercise any other rights with respect to such Shares at any such meeting, (v) shall not give any further notices or perform any further acts under this Deposit Agreement with respect to American Depositary Shares registered in the name of such Owner, except that the Depositary shall continue to collect dividends and other distributions pertaining to the Deposited Securities underlying such American Depositary Shares (and in the case of any distribution of Shares or other Deposited Securities or portion thereof, shall sell such distribution and hold the net proceeds of any such sale together with any other distribution), which distributions may be collected by such Owner of the Receipts evidencing such American Depositary Shares upon the surrender of such Receipts to the Depositary in accordance with Section 2.05 hereof. Each of the Depositary and the Custodian agrees to use reasonable efforts to comply with Sections 3.04, 3.05 and 3.06 and any Disclosure Notice received from the Company as instructed by and at the expense of the Company, including by forwarding any such Disclosure Notice to each Owner specified in the Disclosure Notice. To the extent that the Depositary or a Custodian receives information from an Owner or Additional Holder in response to a Disclosure Notice, it shall as soon as practicable thereafter forward such information to the Company. -12- Except to the extent (if at all) provided in the Articles of Association of the Company, the Company shall be under no obligation to give, modify or withdraw a Disclosure Notice or to give any instructions to the Depositary or the Custodian in connection with any of the foregoing and shall not have any liability whatsoever to any person in respect of Sections 3.04, 3.05 and 3.06. Any resolution or determination of, or decision or exercise of any discretion or power by, the Company, the Company's Board of Directors, the Depositary or the Custodian under or pursuant to the Articles of Association of the Company or this Deposit Agreement shall be final, conclusive and binding on any Owner or Additional Holder thereby affected and all other persons concerned and shall not be open to challenge, whether as to its validity or otherwise, on any ground whatsoever, and neither the Company, the Company's Board of Directors, the Depositary nor the Custodian shall have any liability whatsoever to any person in respect thereof, or be required to give any reason for any decision, determination or declaration taken or made with respect thereto. ARTICLE 4. THE DEPOSITED SECURITIES. SECTION 4.01. Cash Distributions. Whenever the Depositary shall receive any cash dividend or other cash distribution on any Deposited Securities, the Depositary shall, subject to the provisions of Section 4.05, convert such dividend or distribution into Dollars and shall distribute the amount thus received (net of the expenses of the Depositary as provided in Section 5.09, if applicable) to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively; provided, however, that in the event that the Company or the Depositary shall be required to withhold and does withhold from such cash dividend or such other cash distribution an amount on account of taxes, the amount distributed to the Owner of the Receipts evidencing American Depositary Shares representing such Deposited Securities shall be reduced accordingly. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Owner a fraction of one cent. Any such fractional amounts shall be rounded to the nearest whole cent and so distributed to Owners entitled thereto. The Company or its agent will remit to the appropriate governmental agency in the United Kingdom all amounts withheld and owing to such agency. The Depositary will forward to the Company or its agent such information from its records as the Company may reasonably request to enable the Company or its agent to file necessary reports with governmental agencies, and the Depositary or the Company or its agent may file any such reports necessary to obtain benefits under the applicable tax treaties for the Owners of Receipts. SECTION 4.02. Distributions Other Than Cash, Shares or Rights. Subject to the provisions of Section 4.11 and 5.09, whenever the Depositary shall receive any distribution other than a distribution described in Sections 4.01, 4.03 or 4.04, the Depositary shall cause the securities or property received by it to -13- be distributed to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, in any manner that the Depositary may reasonably deem equitable and practicable for accomplishing such distribution; provided, however, that if in the opinion of the Depositary such distribution cannot be made proportionately among the Owners entitled thereto, or if for any other reason (including, but not limited to, any requirement that the Company or the Depositary withhold an amount on account of taxes or other governmental charges or that such securities must be registered under the Securities Act of 1933 in order to be distributed to Owners or holders) the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may reasonably deem equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus received, or any part thereof, and the net proceeds of any such sale (net of the fees of the Depositary as provided in Section 5.09) shall be distributed by the Depositary to the Owners entitled thereto as in the case of a distribution received in cash. SECTION 4.03. Distributions in Shares. If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Depositary may, and shall if the Company shall so request, distribute to the Owners of outstanding Receipts entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, additional Receipts evidencing an aggregate number of American Depositary Shares representing the amount of Shares received as such dividend or free distribution, subject to the terms and conditions of the Deposit Agreement with respect to the deposit of Shares and the issuance of American Depositary Shares evidenced by Receipts, including the withholding of any tax or other governmental charge as provided in Section 4.11 and the payment of the fees of the Depositary as provided in Section 5.09. In lieu of delivering Receipts for fractional American Depositary Shares in any such case, the Depositary shall sell the amount of Shares represented by the aggregate of such fractions and distribute the net proceeds, all in the manner and subject to the conditions described in Section 4.01. If additional Receipts are not so distributed, each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby. SECTION 4.04. Rights. In the event that the Company shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any other nature, the Depositary shall, after consultation with the Company, have discretion as to the procedure to be followed in making such rights available to any Owners or in disposing of such rights on behalf of any Owners and making the net proceeds available to such Owners or, if by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any Owners or -14- dispose of such rights and make the net proceeds available to such Owners, then the Depositary shall allow the rights to lapse. If at the time of the offering of any rights the Depositary determines in its discretion that it is lawful and feasible to make such rights available to all or certain Owners but not to other Owners, the Depositary, after consultation with the Company, may distribute to any Owner to whom it determines the distribution to be lawful and feasible, in proportion to the number of American Depositary Shares held by such Owner, warrants or other instruments therefor in such form as it deems appropriate. In circumstances in which rights would otherwise not be distributed, if an Owner of Receipts requests the distribution of warrants or other instruments in order to exercise the rights allocable to the American Depositary Shares of such Owner hereunder, the Depositary will make such rights available to such Owner upon written notice from the Company to the Depositary that (a) the Company has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Company has determined in its sole discretion are reasonably required under applicable law. If the Depositary has distributed warrants or other instruments for rights to all or certain Owners, then upon instruction from such an Owner pursuant to such warrants or other instruments to the Depositary from such Owner to exercise such rights, upon payment by such Owner to the Depositary for the account of such Owner of an amount equal to the purchase price of the Shares to be received upon the exercise of the rights, and upon payment of the fees of the Depositary and any other charges as set forth in such warrants or other instruments, the Depositary shall, on behalf of such Owner, exercise the rights and purchase the Shares, and the Company shall cause the Shares so purchased to be delivered to the Depositary on behalf of such Owner. As agent for such Owner, the Depositary will cause the Shares so purchased to be deposited pursuant to Section 2.02 of this Deposit Agreement, and shall, pursuant to Section 2.03 of this Deposit Agreement, execute and deliver Receipts to such Owner. In the case of a distribution pursuant to the second paragraph of this section, such Receipts shall be legended in accordance with applicable U.S. laws, and shall be subject to the appropriate restrictions on sale, deposit, cancellation, and transfer under such laws. If the Depositary determines in its discretion that it is not lawful and feasible to make such rights available to all or certain Owners, it may sell the rights, warrants or other instruments in proportion to the number of American Depositary Shares held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales (net of the fees of the Depositary as provided in Section 5.09 and all taxes and governmental charges payable in connection with such rights and subject to the terms and conditions of this Deposit Agreement) for the account of such Owners otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any -15- distinctions among such Owners because of exchange restrictions or the date of delivery of any Receipt or otherwise. The Depositary will not offer rights to Owners unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act of 1933 with respect to a distribution to all Owners or are registered under the provisions of such Act. If an Owner of Receipts requests the distribution of warrants or other instruments, notwithstanding that there has been no such registration under such Act, the Depositary shall not effect such distribution unless it has received an opinion from recognized counsel in the United States for the Company upon which the Depositary may rely that such distribution to such Owner is exempt from such registration. The Depositary shall not be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular. SECTION 4.05. Conversion of Foreign Currency. Whenever the Depositary shall receive foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the Depositary be converted on a reasonable basis into Dollars and the resulting Dollars transferred to the United States, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may determine, such foreign currency into Dollars, and such Dollars shall be distributed to the Owners entitled thereto or, if the Depositary shall have distributed any warrants or other instruments which entitle the holders thereof to such Dollars, then to the holders of such warrants and/or instruments upon surrender thereof for cancellation. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of exchange restrictions, the date of delivery of any Receipt or otherwise and shall be net of any expenses of conversion into Dollars incurred by the Depositary as provided in Section 5.09. If such conversion or distribution can be effected only with the approval or license of any government or agency thereof, the Depositary shall file such application for approval or license, if any, as it may deem desirable. If at any time the Depositary shall determine that in its judgment any foreign currency received by the Depositary is not convertible on a reasonable basis into Dollars transferable to the United States, or if any approval or license of any government or agency thereof which is required for such conversion is denied or in the opinion of the Depositary is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may distribute the foreign currency (or an appropriate document evidencing the right to receive such foreign -16- currency) received by the Depositary to, or in its discretion may hold such foreign currency uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled to receive the same. If any such conversion of foreign currency, in whole or in part, cannot be effected for distribution to some of the Owners entitled thereto, the Depositary may in its discretion make such conversion and distribution in Dollars to the extent permissible to the Owners entitled thereto and may distribute the balance of the foreign currency received by the Depositary to, or hold such balance uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled thereto. SECTION 4.06. Fixing of Record Date. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued with respect to the Deposited Securities, or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, the Depositary shall fix a record date as close as practicable to the date corresponding to the record date fixed by the Company, if any, (a) for the determination of the Owners who shall be (i) entitled to receive such dividend, distribution or rights or the net proceeds of the sale thereof or (ii) entitled to give instructions for the exercise of voting rights at any such meeting, or (b) on or after which each American Depositary Share will represent the changed number of Shares. Subject to the provisions of Sections 4.01 through 4.05 and to the other terms and conditions of this Deposit Agreement, the Owners on such record date shall be entitled, as the case may be, to receive the amount distributable by the Depositary with respect to such dividend or other distribution or such rights or the net proceeds of sale thereof in proportion to the number of American Depositary Shares held by them respectively and to give voting instructions and to act in respect of any other such matter. SECTION 4.07. Voting of Deposited Securities. Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, if requested in writing by the Company the Depositary shall, as soon as practicable thereafter, mail to the Owners a notice, the form of which notice shall be in the sole discretion of the Depositary, which shall contain (a) such information as is contained in such notice of meeting, (b) a statement that the Owners as of the close of business on a specified record date will be entitled, subject to any applicable provision of the laws of the United Kingdom and of the Articles of Association of the Company, to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the amount of Shares or other Deposited Securities represented by their respective American Depositary Shares and (c) a brief statement as to the manner in which such instructions may be given to the Depositary, including an express indication that instructions may be given to the Depositary to give a discretionary proxy to a person or persons designated by -17- the Company. Upon the written request of an Owner on such record date, received on or before the date established by the Depositary for such purpose, the Depositary shall endeavor, in so far as practicable, unless not permitted under applicable law, the provisions of the Articles of Association of the Company or the provisions of the Deposited Securities, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by the American Depositary Shares evidenced by such Receipt in accordance with the instructions set forth in such request. The Depositary shall not vote or attempt to exercise the right to vote that attaches to the Shares or other Deposited Securities, other than in accordance with such instructions. In the event no instructions are received by the Depositary, the relevant Owner will be deemed, unless otherwise requested by the Company and unless otherwise provided for in this Deposit Agreement, to have instructed (which it hereby does) the Depositary to give a discretionary proxy to any person designated by the Company for such purpose, provided, however, that no discretionary proxy shall be given pursuant to this sentence with respect to any proposition as to which the Depositary has received written instructions from the Company that no such discretionary proxy shall be given. In no event will the Depositary itself exercise any voting discretion over the Deposited Securities. SECTION 4.08. Changes Affecting Deposited Securities. In circumstances where the provisions of Section 4.03 do not apply, upon any change in nominal value, change in par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is a party, any securities which shall be received by the Depositary or a Custodian in exchange for or in conversion of or in respect of Deposited Securities, shall be treated as new Deposited Securities under this Deposit Agreement, and American Depositary Shares shall thenceforth represent the new Deposited Securities so received in exchange or conversion, unless additional Receipts are delivered pursuant to the following sentence. In any such case the Depositary may, and shall if the Company shall so request, execute and deliver additional Receipts as in the case of a dividend in Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts specifically describing such new Deposited Securities. SECTION 4.09. Reports. The Depositary shall make available for inspection by Owners at its Corporate Trust Office any reports and communications, including any proxy soliciting material, received from the Company which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the Holders of such Deposited Securities by the Company. The Depositary shall also send to the Owners copies of such reports when furnished by the Company pursuant to Section 5.06. -18- The Depositary shall promptly notify the Company and Owners of any change in the location of its Corporate Trust Office. SECTION 4.10. Lists of Owners. Promptly upon request by the Company, the Depositary shall, at the expense of the Company, furnish to it a list, as of a recent date, of the names, addresses and holdings of American Depositary Shares by all persons in whose names Receipts are registered on the books of the Depositary. SECTION 4.11. Withholding. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable to pay any such taxes or charges and the Depositary shall distribute the net proceeds of any such sale after deduction of such taxes or charges to the Owners entitled thereto in proportion to the number of American Depositary Shares held by them respectively. ARTICLE 5. THE DEPOSITARY, THE CUSTODIANS AND THE COMPANY. SECTION 5.01. Maintenance of Office and Transfer Books by the Depositary. Until termination of this Deposit Agreement in accordance with its terms, the Depositary shall maintain in the Borough of Manhattan, The City of New York, facilities for the execution and delivery, registration, registration of transfers and surrender of Receipts in accordance with the provisions of this Deposit Agreement. The Depositary shall keep books for the registration of Receipts and transfers of Receipts at its Corporate Trust Office which at all reasonable times shall be open for inspection by the Owners, provided that such inspection shall not be for the purpose of communicating with Owners in the interest of a business or object other than the business of the Company or a matter related to this Deposit Agreement or the Receipts. The Depositary may close the transfer books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties hereunder or at the reasonable request of the Company, and the Depositary will promptly so notify the Company in the event the Depositary closes the transfer books. If any Receipts or the American Depositary Shares evidenced thereby are listed on one or more stock exchanges in the United States, the Depositary shall act as -19- Registrar or appoint a Registrar or one or more co-registrars for registry of such Receipts in accordance with any requirements of such exchange or exchanges. Any such Registrar or co-registrars shall, upon the Company's request, and may, with the approval of the Company, be removed and a substitute or substitutes appointed by the Depositary. At all reasonable times during the Depositary's business day, the Company may inspect transfer and registration records of the Depositary, take copies thereof and require the Depositary and any of its agents to supply copies of such portions of such records as the Company may reasonably request, all at the Company's expense. SECTION 5.02. Prevention or Delay in Performance by the Depositary or the Company. Neither the Depositary nor the Company nor any of their directors, employees, agents or affiliates shall incur any liability to any Owner or holder of any Receipt, if by reason of any provision of any present or future law or regulation of the United States or any other country, or of any governmental or regulatory authority or stock exchange, or by reason of any provision, present or future, of the Articles of Association of the Company or of the terms of the Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control, the Depositary or the Company shall be prevented or forbidden from, or be subject to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of this Deposit Agreement it is provided shall be done or performed; nor shall the Depositary or the Company incur any liability to any Owner or holder of any Receipt by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of this Deposit Agreement it is provided shall or may be done or performed, or by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement. Where, by the terms of a distribution pursuant to Sections 4.01, 4.02, or 4.03 of the Deposit Agreement, or an offering or distribution pursuant to Section 4.04 of the Deposit Agreement, or for any other reason, such distribution or offering may not be made available to Owners, and the Depositary may not dispose of such distribution or offering on behalf of such Owners and make the net proceeds available to such Owners, then the Depositary shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse. SECTION 5.03. Obligations of the Depositary, the Custodian and the Company. The Company assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to Owners or holders of Receipts, except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith. The Depositary assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to any Owner or holder of any Receipt (including, without limitation, liability with respect to the validity or worth of the Deposited -20- Securities), except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith. Neither the Depositary nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability shall be furnished as often as may be required, and the Custodian shall not be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary. Neither the Depositary nor the Company shall be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Owner or any other person believed by it in good faith to be competent to give such advice or information. The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary. The Depositary shall not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith. No disclaimer of liability under the Securities Act of 1933 is intended by any provision of this Deposit Agreement. SECTION 5.04. Resignation and Removal of the Depositary. The Depositary may at any time resign as Depositary hereunder by written notice of its election so to do delivered to the Company, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided. The Depositary may at any time be removed by the Company by written notice of such removal effective upon the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided. In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, The City -21- of New York. Every successor depositary shall execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor; but such predecessor, nevertheless, upon payment of all sums due it and on the written request of the Company shall execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all right, title and interest in the Deposited Securities to such successor, and shall deliver to such successor a list of the Owners of all outstanding Receipts. Any such successor depositary shall promptly mail notice of its appointment to the Owners. Any corporation into or with which the Depositary may be merged or consolidated or to which the Depositary may transfer its depositary receipt business shall be the successor of the Depositary without the execution or filing of any document or any further act. SECTION 5.05. The Custodians. The Custodian shall be subject at all times and in all respects to the directions of the Depositary and shall be responsible solely to it. Any Custodian may resign and be discharged from its duties hereunder by notice of such resignation delivered to the Depositary at least 30 days prior to the date on which such resignation is to become effective. If upon such resignation there shall be no Custodian acting hereunder, the Depositary shall, promptly after receiving such notice, appoint a substitute custodian or custodians, each of which shall thereafter be a Custodian hereunder. Whenever the Depositary in its discretion determines that it is in the best interest of the Owners to do so, it may appoint substitute or additional custodian or custodians, which shall thereafter be one of the Custodians hereunder. Upon demand of the Depositary any Custodian shall deliver such of the Deposited Securities held by it as are requested of it to any other Custodian or such substitute or additional custodian or custodians. Each such substitute or additional custodian shall deliver to the Depositary, forthwith upon its appointment, an acceptance of such appointment satisfactory in form and substance to the Depositary. Upon the appointment of any successor depositary hereunder, each Custodian then acting hereunder shall forthwith become, without any further act or writing, the agent hereunder of such successor depositary and the appointment of such successor depositary shall in no way impair the authority of each Custodian hereunder; but the successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority as agent hereunder of such successor depositary. SECTION 5.06. Notices and Reports. -22- On or before the first date on which the Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action in respect of any cash or other distributions or the offering of any rights, the Company agrees to transmit to the Depositary and the Custodian a copy of the notice thereof in the form given or to be given to holders of Shares or other Deposited Securities. The Company will arrange for the prompt transmittal by the Company to the Depositary and the Custodian of such notices and any other reports and communications which are made generally available by the Company to holders of its Shares. If requested in writing by the Company, the Depositary will arrange for the mailing, at the Company's expense, of copies of such notices, reports and communications to all Owners. The Company will timely provide the Depositary with the quantity of such notices, reports, and communications, as requested by the Depositary from time to time, in order for the Depositary to effect such mailings. SECTION 5.07. Distribution of Additional Shares, Rights, etc. The Company agrees that in the event of any issuance or distribution of (1) additional Shares, (2) rights to subscribe for Shares, (3) securities convertible into Shares, or (4) rights to subscribe for such securities, (each a "Distribution") the Company will promptly furnish to the Depositary a written opinion from U.S. counsel for the Company, which counsel shall be reasonably satisfactory to the Depositary, stating whether or not the Distribution requires a Registration Statement under the Securities Act of 1933 to be in effect prior to making such Distribution available to Owners entitled thereto. If in the opinion of such counsel a Registration Statement is required, such counsel shall furnish to the Depositary a written opinion as to whether or not there is a Registration Statement in effect which will cover such Distribution. The Company agrees with the Depositary that neither the Company nor any company controlled by, controlling or under common control with the Company shall issue additional Shares, securities convertible into or exchangeable for Shares or rights to subscribe for any such securities or at any time deposit any Shares, either originally issued or previously issued and reacquired by the Company or any such affiliate, unless a Registration Statement is in effect as to such Shares under the Securities Act of 1933 or unless the offering and sale of such Shares in the United States is exempt from registration under the provisions of such Act. SECTION 5.08. Indemnification. The Company agrees to indemnify the Depositary, its directors, employees, agents and affiliates and any Custodian against, and hold each of them harmless from, any liability or expense (including, but not limited to, the fees and expenses of counsel) which may arise out of acts performed or omitted, in accordance with the provisions of this Deposit Agreement and of the Receipts, as the same may be -23- amended, modified or supplemented from time to time, (i) by either the Depositary or a Custodian or their respective directors, employees, agents and affiliates, except for any liability or expense arising out of the negligence or bad faith of either of them, or (ii) by the Company or any of its directors, employees, agents and affiliates. The indemnities contained in the preceding paragraph shall not extend to any liability or expense which may arise out of any "Pre-release Transaction". For purposes of this provision, the term "Pre-release Transaction" means any transaction entered into by the Depositary (other than any such transaction to which the Company is a party) to implement or carry out any one or more Pre-releases (including without limitation any transaction pursuant to Section 2.9), but does not include the execution and delivery, transfer or exchange, or surrender and cancellation of any Pre-released Receipts or any other act performed or omitted in accordance with the provisions of this Deposit Agreement or the Receipts. In addition, for the avoidance of doubt, it is understood that the first sentence of this subparagraph shall not apply to any liability or expense which may arise out of any misstatement or alleged misstatement or omission or alleged omission in any registration statement, proxy statement, prospectus (or placement memorandum) or preliminary prospectus (or preliminary placement memorandum) relating to the offer or sale of American Depositary Shares, except to the extent any such liability or expense arises out of (i) information relating to the Depositary or any Custodian (other than the Company), as applicable, furnished in writing and not materially changed or altered by the Company expressly for use in any of the foregoing documents, or, (ii) if such information is provided, the failure to state a material fact necessary to make the information provided not misleading. The Depositary agrees to indemnify the Company, its directors, employees, agents and affiliates and hold them harmless from any liability or expense (including, but not limited to, the fees and expenses of counsel) which may arise out of acts performed or omitted by the Depositary or a Custodian or their respective directors, employees, agents and affiliates due to their negligence or bad faith. The obligations set forth in this Section 5.08 shall survive the termination of this Deposit Agreement and the succession or substitution of any person indemnified hereby. Any person seeking indemnification hereunder (an "indemnified person") shall notify the person from whom it is seeking indemnification (the "indemnifying person") of the commencement of any indemnifiable action or claim promptly after such indemnified person becomes aware of such commencement (provided that the failure to make such notification shall not affect such indemnified person's rights under this Section 5.08) and shall consult in good faith with the indemnifying person as to the conduct of the defense of such action or claim, which shall be reasonable in the circumstances. No indemnified person shall compromise or settle any action or claim without the consent of the indemnifying person, which consent shall not unreasonably be withheld. -24- SECTION 5.09. Charges of Depositary. The Company agrees to pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any Registrar only in accordance with agreements in writing entered into between the Depositary and the Company from time to time. The Depositary shall present its statement for such charges and expenses to the Company once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary. The following charges shall be incurred by any party depositing or withdrawing Shares or by any party surrendering Receipts or to whom Receipts are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the Receipts or Deposited Securities or a distribution of Receipts pursuant to Section 4.03), whichever applicable: (1) taxes and other governmental charges, (2) such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Share register of the Company or Foreign Registrar and applicable to transfers of Shares to the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals hereunder, (3) such cable, telex and facsimile transmission expenses as are expressly provided in this Deposit Agreement, (4) such expenses as are incurred by the Depositary in the conversion of foreign currency pursuant to Section 4.05, (5) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the execution and delivery of Receipts pursuant to Sections 2.03, 4.03 or 4.04, and the surrender of Receipts pursuant to Sections 2.05 or 6.02, and (6) a fee of U.S.$.02 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement including but not limited to Sections 4.01 through 4.04 hereof, except for distributions of cash dividends. The Depositary, subject to Section 2.09 hereof, may own and deal in any class of securities of the Company and its affiliates and in Receipts. SECTION 5.10. Retention of Depositary Documents. The Depositary is authorized to destroy those documents, records, bills and other data compiled during the term of this Deposit Agreement at the times permitted by the laws or regulations governing the Depositary unless the Company requests that such papers be retained for a longer period or turned over to the Company or to a successor depositary. SECTION 5.11. Exclusivity. Subject to Sections 5.04 and 6.02, the Company agrees not to appoint any other depositary for issuance of American Depositary Receipts so long as The Bank of New York is acting as Depositary hereunder. -25- SECTION 5.12. List of Restricted Securities Owners. Upon the written request of the Depositary, the Company shall provide to the Depositary a list setting forth, to the actual knowledge of the Company, those persons or entities who beneficially own Restricted Securities. The Company agrees to advise in writing each of the persons or entities so listed that such Restricted Securities are ineligible for deposit hereunder. The Depositary may rely on such a list or update but shall not be liable for any action or omission made in reliance thereon. ARTICLE 6. AMENDMENT AND TERMINATION. SECTION 6.01. Amendment. The form of the Receipts and any provisions of this Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary in any respect which they may deem necessary or desirable. Any amendment which shall impose or increase any fees or charges (other than taxes and other governmental charges, registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or which shall otherwise prejudice any substantial existing right of Owners, shall, however, not become effective as to outstanding Receipts until the expiration of thirty days after notice of such amendment shall have been given to the Owners of outstanding Receipts. Every Owner at the time any amendment so becomes effective shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner of any Receipt to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. SECTION 6.02. Termination. The Depositary shall at any time at the direction of the Company, terminate this Deposit Agreement by mailing notice of such termination to the Owners of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination. The Depositary may likewise terminate this Deposit Agreement by mailing notice of such termination to the Company and the Owners of all Receipts then outstanding if at any time 90 days shall have expired after the Depositary shall have delivered to the Company a written notice of its election to resign and a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.04. On and after the date of termination, the Owner of a Receipt will, upon (a) surrender of such Receipt at the Corporate Trust Office of the Depositary, (b) payment of the fee of the Depositary for the surrender of Receipts referred to in Section 2.05, and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by the American Depositary Shares evidenced by such Receipt. If any Receipts shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of -26- transfers of Receipts, shall suspend the distribution of dividends to the Owners thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in this Deposit Agreement, and shall continue to deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges). At any time after the expiration of one year from the date of termination, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of Receipts which have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges). Upon the termination of this Deposit Agreement, the Company shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary under Sections 5.08 and 5.09 hereof. ARTICLE 7. MISCELLANEOUS. SECTION 7.01. Counterparts. This Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of such counterparts shall constitute one and the same instrument. Copies of this Deposit Agreement shall be filed with the Depositary and the Custodians and shall be open to inspection by any holder or Owner of a Receipt during business hours. SECTION 7.02. No Third Party Beneficiaries. This Deposit Agreement is for the exclusive benefit of the parties hereto and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person. SECTION 7.03. Severability. In case any one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in -27- any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. SECTION 7.04. Holders and Owners as Parties; Binding Effect. The holders and Owners of Receipts from time to time shall be parties to this Deposit Agreement and shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance thereof. SECTION 7.05. Notices. Any and all notices to be given to the Company shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to Pearson plc, 3 Burlington Gardens, London W1X 1LE, United Kingdom, [Attn: Company Secretary] or any other place to which the Company may have transferred its principal office. Any and all notices to be given to the Depositary shall be deemed to have been duly given if in English and personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to The Bank of New York, 101 Barclay Street, New York, New York 10286, Attention: American Depositary Receipt Administration, or any other place to which the Depositary may have transferred its Corporate Trust Office. Any and all notices to be given to any Owner shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to such Owner at the address of such Owner as it appears on the transfer books for Receipts of the Depositary, or, if such Owner shall have filed with the Depositary a written request that notices intended for such Owner be mailed to some other address, at the address designated in such request. Delivery of a notice sent by mail or cable, telex or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box. The Depositary or the Company may, however, act upon any cable, telex or facsimile transmission received by it, notwithstanding that such cable, telex or facsimile transmission shall not subsequently be confirmed by letter as aforesaid. SECTION 7.06. Governing Law. This Deposit Agreement and the Receipts shall be interpreted and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by the laws of the State of New York. -28- SECTION 7.07. Assignment. This Deposit Agreement may not, except as provided in Sections 5.04 and 6.02, be assigned by the Depositary, except upon the prior written consent of the Company. SECTION 7.08. Compliance with U.S. Securities Laws. Notwithstanding anything in this Deposit Agreement to the contrary, the Company and the Depositary each agrees that it will not exercise any rights it has under this Deposit Agreement to permit the withdrawal or delivery of Deposited Securities in a manner which would violate the U.S. securities laws, including, but not limited to, Section I.A.(1) of the General Instructions to the Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933. -29- IN WITNESS WHEREOF, PEARSON PLC and THE BANK OF NEW YORK have duly executed this agreement as of the day and year first set forth above and all Owners shall become parties hereto upon acceptance by them of Receipts issued in accordance with the terms hereof. PEARSON PLC By:_______________________ Name: Title: THE BANK OF NEW YORK, as Depositary By:_______________________ Name: Title: -30- EXHIBIT A AMERICAN DEPOSITARY SHARES (Each American Depositary Share represents one deposited Share) THE BANK OF NEW YORK AMERICAN DEPOSITARY RECEIPT FOR ORDINARY SHARES OF THE PAR VALUE OF TWENTY-FIVE PENCE EACH OF PEARSON PLC (INCORPORATED UNDER THE LAWS OF THE UNITED KINGDOM) The Bank of New York as depositary (hereinafter called the "Depositary"), hereby certifies that____________________________________________ _____________________________________, or registered assigns IS THE OWNER OF ________________________ AMERICAN DEPOSITARY SHARES representing deposited ordinary shares, par value twenty-five pence each (herein called "Shares"), of Pearson plc, incorporated under the laws of the United Kingdom (herein called the "Company"). At the date hereof, each American Depositary Share represents one Share deposited or subject to deposit under the Deposit Agreement (as such term is hereinafter defined) at the London, England, office of The Bank of New York (herein called the "Custodian"). The Depositary's Corporate Trust Office is located at a different address than its principal executive office. Its Corporate Trust Office is located at 101 Barclay Street, New York, N.Y. 10286, and its principal executive office is located at One Wall Street, New York, N.Y. 10286. THE DEPOSITARY'S CORPORATE TRUST OFFICE ADDRESS IS 101 BARCLAY STREET, NEW YORK, N.Y. 10286 1. THE DEPOSIT AGREEMENT. This American Depositary Receipt is one of an issue (herein called "Receipts"), all issued and to be issued upon the terms and conditions set forth in the deposit agreement, dated as of __________, 2000 (herein called the "Deposit Agreement"), by and among the Company, the Depositary, and all Owners and holders from time to time of Receipts issued thereunder, each of whom by accepting a Receipt agrees to become a party thereto and become bound by all the terms and conditions thereof. The Deposit Agreement sets forth the rights of Owners and holders of the Receipts and the rights and duties of the Depositary in respect of the Shares deposited thereunder and any and all other securities, property and cash from time to time received in respect of such Shares and held thereunder (such Shares, securities, property, and cash are herein called "Deposited Securities"). Copies of the Deposit Agreement are on file at the Depositary's Corporate Trust Office in New York City and at the office of the Custodian. The statements made on the face and reverse of this Receipt are summaries of certain provisions of the Deposit Agreement and are qualified by and subject to the detailed provisions of the Deposit Agreement, to which reference is hereby made. Capitalized terms defined in the Deposit Agreement and not defined herein shall have the meanings set forth in the Deposit Agreement. 2. SURRENDER OF RECEIPTS AND WITHDRAWAL OF SHARES. Upon surrender at the Corporate Trust Office of the Depositary of this Receipt, and upon payment of the fee of the Depositary provided in this Receipt and payment of all taxes and governmental charges, and subject to the terms and conditions of the Deposit Agreement, the Owner hereof is entitled to delivery, to him or upon his order, of the Deposited Securities at the time represented by the American Depositary Shares evidenced by this Receipt. Delivery of such Deposited Securities may be made by the delivery of (a) certificates in the name of the Owner hereof or as ordered by him or certificates properly endorsed or accompanied by proper instruments of transfer and (b) any other securities, property and cash to which such Owner is then entitled in respect of this Receipt. Such delivery will be made at the option of the Owner hereof, either at the office of the Custodian or at the Corporate Trust Office of the Depositary, provided that the forwarding of certificates for Shares or other Deposited Securities for such delivery at the Corporate Trust Office of the Depositary shall be at the risk and expense of the Owner hereof. 3. TRANSFERS, SPLIT-UPS, AND COMBINATIONS OF RECEIPTS. The transfer of this Receipt is registrable on the books of the Depositary at its Corporate Trust Office by the Owner hereof in person or by a duly authorized attorney, upon surrender of this Receipt properly endorsed for transfer or accompanied by proper -2- instruments of transfer and funds sufficient to pay any applicable transfer taxes and the expenses of the Depositary and upon compliance with such regulations, if any, as the Depositary may establish for such purpose. This Receipt may be split into other such Receipts, or may be combined with other such Receipts into one Receipt, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination, or surrender of any Receipt or withdrawal of any Deposited Securities, the Depositary, the Custodian, or Registrar may require payment from the depositor of the Shares or the presentor of the Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees as provided in this Receipt, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the provisions of the Deposit Agreement or this Receipt, including, without limitation, this Article 3. The delivery of Receipts against deposits of Shares generally or against deposits of particular Shares may be suspended, or the transfer of Receipts in particular instances may be refused, or the registration of transfer of outstanding Receipts generally may be suspended, during any period when the transfer books of the Depositary are closed, or if any such action is deemed necessary or advisable by the Depositary or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission, or under any provision of the Deposit Agreement or this Receipt, or for any other reason, subject to the provisions of the following sentence. Notwithstanding any other provision of the Deposit Agreement or this Receipt, the surrender of outstanding Receipts and withdrawal of Deposited Securities may not be suspended subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders' meeting, or the payment of dividends, (ii) the payment of fees, taxes and similar charges, and (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the Receipts or to the withdrawal of the Deposited Securities. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under the Deposit Agreement any Shares required to be registered under the provisions of the Securities Act of 1933, unless a registration statement is in effect as to such Shares. The Depositary, at the expense of the Company, shall make reasonable efforts to comply with written instructions of the Company not to accept for deposit hereunder any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Company's compliance with the securities laws of the United States. -3- 4. LIABILITY OF OWNER FOR TAXES. If any tax or other governmental charge shall become payable with respect to this Receipt or any Deposited Securities represented hereby, such tax or other governmental charge shall be payable by the Owner hereof to the Depositary. The Depositary may refuse to effect any transfer of this Receipt or any withdrawal of Deposited Securities represented by American Depositary Shares evidenced by this Receipt until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Owner hereof any part or all of the Deposited Securities represented by the American Depositary Shares evidenced by this Receipt, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the Owner hereof shall remain liable for any deficiency. 5. WARRANTIES OF DEPOSITORS. Every person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that such Shares and each certificate therefor are validly issued, fully paid, non-assessable, and free of any pre-emptive rights of the holders of outstanding Shares and that the person making such deposit is duly authorized so to do. Every such person shall also be deemed to represent that the deposit of such Shares and the sale of Receipts evidencing American Depositary Shares representing such Shares by that person are not restricted under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and issuance of Receipts. 6. FILING PROOFS, CERTIFICATES, AND OTHER INFORMATION. Any person presenting Shares for deposit or any Owner of a Receipt may be required from time to time to file with the Depositary or the Custodian such proof of citizenship or residence, exchange control approval, or such information relating to the registration on the books of the Company or the Foreign Registrar, if applicable, to execute such certificates and to make such representations and warranties, as the Depositary may deem necessary or proper. The Depositary may withhold the delivery or registration of transfer of any Receipt or the distribution of any dividend or sale or distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed or such representations and warranties made. The Depositary shall provide to the Company, promptly upon its written request, copies of any such proof of citizenship or residence or other information referred to above so requested. 7. CHARGES OF DEPOSITARY. The Company agrees to pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any Registrar only in accordance with agreements in writing entered into between the Depositary and the Company from time to time. The Depositary shall present its statement for such charges and expenses to the Company -4- once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary. The following charges shall be incurred by any party depositing or withdrawing Shares or by any party surrendering Receipts or to whom Receipts are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the Receipts or Deposited Securities or a distribution of Receipts pursuant to Section 4.03 of the Deposit Agreement), whichever applicable: (1) taxes and other governmental charges, (2) such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Share register of the Company or Foreign Registrar and applicable to transfers of Shares to the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals under the terms of the Deposit Agreement, (3) such cable, telex and facsimile transmission expenses as are expressly provided in the Deposit Agreement, (4) such expenses as are incurred by the Depositary in the conversion of foreign currency pursuant to Section 4.05 of the Deposit Agreement, (5) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the execution and delivery of Receipts pursuant to Sections 2.03, 4.03 or 4.04 of the Deposit Agreement and the surrender of Receipts pursuant to Sections 2.05 or 6.02 of the Deposit Agreement, and (6) a fee of U.S.$.02 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement including but not limited to Sections 4.01 through 4.04 of the Deposit Agreement, except for distributions of cash dividends. The Depositary, subject to Article 8 hereof, may own and deal in any class of securities of the Company and its affiliates and in Receipts. 8. PRE-RELEASE OF RECEIPTS. Notwithstanding Section 2.09 of the Deposit Agreement, the Depositary may execute and deliver Receipts prior to the receipt of Shares pursuant to Section 2.02 of the Deposit Agreement ("Pre-Release"). The Depositary may, pursuant to Section 2.05 of the Deposit Agreement, deliver Shares upon the receipt and cancellation of Receipts which have been Pre-Released, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such Receipt has been Pre-Released. The Depositary may receive Receipts in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom Receipts are to be delivered that such person, or its customer, (i) owns the Shares or Receipts to be remitted, as the case may be, (ii) assigns all beneficial rights, title and interest in such Shares or Receipts, as the case may be, to the Depositary in its capacity as such and for the benefit of the Owners, and (iii) will not take any action with respect to such Shares or Receipts, as the case may be, that is inconsistent with the transfer of beneficial ownership (including, without the consent of the Depositary, disposing of such Shares or Receipts, as the case may be), other than in -5- satisfaction of such Pre-Release, (b) at all times fully collateralized with cash or such other collateral as the Depositary determines in good faith will provide substantially similar liquidity and security, (c) terminable by the Depositary on not more than five (5) business days notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of Shares represented by American Depositary Shares which are outstanding at any time as a result of Pre-Releases will not normally exceed thirty percent (30%) of the Shares deposited under the Deposit Agreement; provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may retain for its own account any compensation received by it in connection with the foregoing. 9. TITLE TO RECEIPTS. It is a condition of this Receipt and every successive holder and Owner of this Receipt by accepting or holding the same consents and agrees, that title to this Receipt (and to the American Depositary Shares evidenced hereby) when properly endorsed or accompanied by proper instruments of transfer, is transferable by delivery with the same effect as in the case of a negotiable instrument, provided, however, that the Company and the Depositary, notwithstanding any notice to the contrary, may treat the person in whose name this Receipt is registered on the books of the Depositary as the absolute owner hereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in the Deposit Agreement or for all other purposes. 10. VALIDITY OF RECEIPT. This Receipt shall not be entitled to any benefits under the Deposit Agreement or be valid or obligatory for any purpose, unless this Receipt shall have been executed by the Depositary by the manual or facsimile signature of a duly authorized signatory of the Depositary and if a Registrar for the Receipts shall have been appointed, by the manual or facsimile signature of a duly authorized signatory of the Registrar. 11. REPORTS; INSPECTION OF TRANSFER BOOKS. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and, accordingly, files certain reports with the Securities and Exchange Commission (hereinafter called the "Commission"). Such reports and communications will be available for inspection and copying by holders and Owners at the public reference facilities maintained by the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549. The Depositary will make available for inspection by Owners of Receipts at its Corporate Trust Office any reports and communications, including any proxy soliciting -6- material, received from the Company which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company. The Depositary will also send to Owners of Receipts copies of such reports when furnished by the Company pursuant to the Deposit Agreement. The Depositary shall promptly notify the Company and Owners of any change in the location of its Corporate Trust Office. The Depositary will keep books for the registration of Receipts and transfers of Receipts at its Corporate Trust Office which at all reasonable times shall be open for inspection by the Owners of Receipts provided that such inspection shall not be for the purpose of communicating with Owners of Receipts in the interest of a business or object other than the business of the Company or a matter related to the Deposit Agreement or the Receipts. 12. DIVIDENDS AND DISTRIBUTIONS. Whenever the Depositary receives any cash dividend or other cash distribution on any Deposited Securities, the Depositary will, if at the time of receipt thereof any amounts received in a foreign currency can in the judgment of the Depositary be converted on a reasonable basis into United States dollars transferable to the United States, and subject to the Deposit Agreement, convert such dividend or distribution into dollars and will distribute the amount thus received (net of the expenses of the Depositary as provided in Article 7 hereof and Section 5.09 of the Deposit Agreement, if applicable) to the Owners of Receipts entitled thereto, provided, however, that in the event that the Company or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes, the amount distributed to the Owners of the Receipts evidencing American Depositary Shares representing such Deposited Securities shall be reduced accordingly. Subject to the provisions of Section 4.11 and 5.09 of the Deposit Agreement, whenever the Depositary receives any distribution other than a distribution described in Sections 4.01, 4.03 or 4.04 of the Deposit Agreement, the Depositary will cause the securities or property received by it to be distributed to the Owners of Receipts entitled thereto, in any manner that the Depositary may reasonably deem equitable and practicable for accomplishing such distribution; provided, however, that if in the opinion of the Depositary such distribution cannot be made proportionately among the Owners of Receipts entitled thereto, or if for any other reason the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may reasonably deem equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus received, or any part thereof, and the net proceeds of any such sale (net of the fees of the Depositary as provided in Article 7 hereof and Section 5.09 of the Deposit Agreement) -7- shall be distributed by the Depositary to the Owners of Receipts entitled thereto as in the case of a distribution received in cash. If any distribution consists of a dividend in, or free distribution of, Shares, the Depositary may and shall if the Company shall so request, distribute to the Owners of outstanding Receipts entitled thereto, additional Receipts evidencing an aggregate number of American Depositary Shares representing the amount of Shares received as such dividend or free distribution subject to the terms and conditions of the Deposit Agreement with respect to the deposit of Shares and the issuance of American Depositary Shares evidenced by Receipts, including the withholding of any tax or other governmental charge as provided in Section 4.11 of the Deposit Agreement and the payment of the fees of the Depositary as provided in Article 7 hereof and Section 5.09 of the Deposit Agreement. In lieu of delivering Receipts for fractional American Depositary Shares in any such case, the Depositary will sell the amount of Shares represented by the aggregate of such fractions and distribute the net proceeds, all in the manner and subject to the conditions set forth in the Deposit Agreement. If additional Receipts are not so distributed, each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable to pay any such taxes or charges, and the Depositary shall distribute the net proceeds of any such sale after deduction of such taxes or charges to the Owners of Receipts entitled thereto. 13. RIGHTS. In the event that the Company shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any other nature, the Depositary shall, after consultation with the Company, have discretion as to the procedure to be followed in making such rights available to any Owners or in disposing of such rights on behalf of any Owners and making the net proceeds available to such Owners or, if by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any Owners or dispose of such rights and make the net proceeds available to such Owners, then the Depositary shall allow the rights to lapse. If at the time of the offering of any rights the Depositary determines in its discretion that it is lawful and feasible to make such rights available to all or certain Owners but not to other Owners, the Depositary, after consultation with the Company, may distribute to any Owner to whom it determines the distribution to be lawful and feasible, in proportion to the number of American Depositary Shares held by -8- such Owner, warrants or other instruments therefor in such form as it deems appropriate. In circumstances in which rights would otherwise not be distributed, if an Owner of Receipts requests the distribution of warrants or other instruments in order to exercise the rights allocable to the American Depositary Shares of such Owner hereunder, the Depositary will make such rights available to such Owner upon written notice from the Company to the Depositary that (a) the Company has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Company has determined in its sole discretion are reasonably required under applicable law. If the Depositary has distributed warrants or other instruments for rights to all or certain Owners, then upon instruction from such an Owner pursuant to such warrants or other instruments to the Depositary from such Owner to exercise such rights, upon payment by such Owner to the Depositary for the account of such Owner of an amount equal to the purchase price of the Shares to be received upon the exercise of the rights, and upon payment of the fees of the Depositary and any other charges as set forth in such warrants or other instruments, the Depositary shall, on behalf of such Owner, exercise the rights and purchase the Shares, and the Company shall cause the Shares so purchased to be delivered to the Depositary on behalf of such Owner. As agent for such Owner, the Depositary will cause the Shares so purchased to be deposited pursuant to Section 2.02 of the Deposit Agreement, and shall, pursuant to Section 2.03 of the Deposit Agreement, execute and deliver Receipts to such Owner. In the case of a distribution pursuant to the second paragraph of this Article 13, such Receipts shall be legended in accordance with applicable U.S. laws, and shall be subject to the appropriate restrictions on sale, deposit, cancellation, and transfer under such laws. If the Depositary determines in its discretion that it is not lawful and feasible to make such rights available to all or certain Owners, it may sell the rights, warrants or other instruments in proportion to the number of American Depositary Shares held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales (net of the fees of the Depositary as provided in Section 5.09 of the Deposit Agreement and all taxes and governmental charges payable in connection with such rights and subject to the terms and conditions of the Deposit Agreement) for the account of such Owners otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such Owners because of exchange restrictions or the date of delivery of any Receipt or otherwise. The Depositary will not offer rights to Owners unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act of 1933 with respect to a distribution to all Owners or are registered under the provisions of such Act. If an Owner of Receipts requests the distribution of warrants or other instruments, notwithstanding that there has been no such registration under such -9- Act, the Depositary shall not effect such distribution unless it has received an opinion from recognized counsel in the United States for the Company upon which the Depositary may rely that such distribution to such Owner is exempt from such registration. The Depositary shall not be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular. 14. CONVERSION OF FOREIGN CURRENCY. Whenever the Depositary shall receive foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the Depositary be converted on a reasonable basis into Dollars and the resulting Dollars transferred to the United States, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may determine, such foreign currency into Dollars, and such Dollars shall be distributed to the Owners entitled thereto or, if the Depositary shall have distributed any warrants or other instruments which entitle the holders thereof to such Dollars, then to the holders of such warrants and/or instruments upon surrender thereof for cancellation. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of exchange restrictions, the date of delivery of any Receipt or otherwise and shall be net of any expenses of conversion into Dollars incurred by the Depositary as provided in Section 5.09 of the Deposit Agreement. If such conversion or distribution can be effected only with the approval or license of any government or agency thereof, the Depositary shall file such application for approval or license, if any, as it may deem desirable. If at any time the Depositary shall determine that in its judgment any foreign currency received by the Depositary is not convertible on a reasonable basis into Dollars transferable to the United States, or if any approval or license of any government or agency thereof which is required for such conversion is denied or in the opinion of the Depositary is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may distribute the foreign currency (or an appropriate document evidencing the right to receive such foreign currency) received by the Depositary to, or in its discretion may hold such foreign currency uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled to receive the same. If any such conversion of foreign currency, in whole or in part, cannot be effected for distribution to some of the Owners entitled thereto, the Depositary may in its discretion make such conversion and distribution in Dollars to the extent permissible to the Owners entitled thereto and may distribute the balance of the foreign currency -10- received by the Depositary to, or hold such balance uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled thereto. 15. RECORD DATES. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued with respect to the Deposited Securities, or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, the Depositary shall fix a record date as close as practicable to the date corresponding to the record date fixed by the Company, if any (a) for the determination of the Owners of Receipts who shall be (i) entitled to receive such dividend, distribution or rights or the net proceeds of the sale thereof or (ii) entitled to give instructions for the exercise of voting rights at any such meeting, or (b) on or after which each American Depositary Share will represent the changed number of Shares, subject to the provisions of the Deposit Agreement. 16. VOTING OF DEPOSITED SECURITIES. Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, if requested in writing by the Company, the Depositary shall, as soon as practicable thereafter, mail to the Owners of Receipts a notice, the form of which notice shall be in the sole discretion of the Depositary, which shall contain (a) such information as is contained in such notice of meeting, (b) a statement that the Owners of Receipts as of the close of business on a specified record date will be entitled, subject to any applicable provision of law and of the Articles of Association of the Company, to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the amount of Shares or other Deposited Securities represented by their respective American Depositary Shares and (c) a brief statement as to the manner in which such instructions may be given to the Depositary, including an express indication that instructions may be given to the Depositary to give a discretionary proxy to a person or persons designated by the Company. Upon the written request of an Owner of a Receipt on such record date, received on or before the date established by the Depositary for such purpose, the Depositary shall endeavor in so far as practicable, unless not permitted under applicable law, the provisions of the Articles of Association of the Company or the provisions of the Deposited Securities, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by such American Depositary Shares evidenced by such Receipt in accordance with the instructions set forth in such request. In the event that no instructions are received by the Depositary, the relevant Owner will be deemed, unless otherwise requested by the Company and unless otherwise provided for in this Deposit Agreement, to have instructed (which it hereby does) the Depositary to give a discretionary proxy to any person designated by the Company for such purpose, provided, however, that no discretionary proxy shall be given pursuant to -11- this sentence with respect to any proposition as to which the Depositary has received written instructions from the Company that no such discretionary proxy shall be given. In no event will the Depositary itself exercise any voting discretion over the Deposited Securities. 17. CHANGES AFFECTING DEPOSITED SECURITIES. In circumstances where the provisions of Section 4.03 of the Deposit Agreement do not apply, upon any change in nominal value, change in par value, split-up, consolidation, or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation, or sale of assets affecting the Company or to which it is a party, any securities which shall be received by the Depositary or a Custodian in exchange for or in conversion of or in respect of Deposited Securities shall be treated as new Deposited Securities under the Deposit Agreement, and American Depositary Shares shall thenceforth represent the new Deposited Securities so received in exchange or conversion, unless additional Receipts are delivered pursuant to the following sentence. In any such case the Depositary may, and shall if the Company shall so request, execute and deliver additional Receipts as in the case of a dividend in Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts specifically describing such new Deposited Securities. 18. LIABILITY OF THE COMPANY AND DEPOSITARY. Neither the Depositary nor the Company nor any of their directors, employees, agents or affiliates shall incur any liability to any Owner or holder of any Receipt, if by reason of any provision of any present or future law or regulation of the United States or any other country, or of any other governmental or regulatory authority or stock exchange, or by reason of any provision, present or future, of the Articles of Association of the Company or of the terms of the Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control, the Depositary or the Company shall be prevented or forbidden from or be subject to any civil or criminal penalty on account of doing or performing any act or thing which by the terms of the Deposit Agreement it is provided shall be done or performed; nor shall the Depositary or the Company incur any liability to any Owner or holder of a Receipt by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of the Deposit Agreement it is provided shall or may be done or performed, or by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement. Where, by the terms of a distribution pursuant to Sections 4.01, 4.02, or 4.03 of the Deposit Agreement, or an offering or distribution pursuant to Section 4.04 of the Deposit Agreement, or for any other reason, such distribution or offering may not be made available to Owners of Receipts, and the Depositary may not dispose of such distribution or offering on behalf of such Owners and make the net proceeds available to such Owners, then the Depositary shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse. Neither the Company nor the Depositary -12- assumes any obligation or shall be subject to any liability under the Deposit Agreement to Owners or holders of Receipts, except that they agree to perform their obligations specifically set forth in the Deposit Agreement without negligence or bad faith. The Depositary shall not be subject to any liability with respect to the validity or worth of the Deposited Securities. Neither the Depositary nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit, or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability shall be furnished as often as may be required, and the Custodian shall not be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary. Neither the Depositary nor the Company shall be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Owner or holder of a Receipt, or any other person believed by it in good faith to be competent to give such advice or information. The Depositary shall not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith. The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with a matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises, the Depositary performed its obligations without negligence or bad faith while it acted as Depositary. The Company agrees to indemnify the Depositary, its directors, employees, agents and affiliates and any Custodian against, and hold each of them harmless from, any liability or expense (including, but not limited to, the expenses of counsel) which may arise out of acts performed or omitted, in accordance with the provisions of the Deposit Agreement and of the Receipts, as the same may be amended, modified, or supplemented from time to time, (i) by either the Depositary or a Custodian or their respective directors, employees, agents and affiliates, except for any liability or expense arising out of the negligence or bad faith of either of them, or (ii) by the Company or any of its directors, employees, agents and affiliates. No disclaimer of liability under the Securities Act of 1933 is intended by any provision of the Deposit Agreement. 19. RESIGNATION AND REMOVAL OF THE DEPOSITARY; APPOINTMENT OF SUCCESSOR CUSTODIAN. The Depositary may at any time resign as Depositary hereunder by written notice of its election so to do delivered to the Company, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by written notice of such removal, effective upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. Whenever the Depositary in its discretion determines that it is in the best -13- interest of the Owners of Receipts to do so, it may appoint a substitute or additional custodian or custodians. 20. AMENDMENT. The form of the Receipts and any provisions of the Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary in any respect which they may deem necessary or desirable. Any amendment which shall impose or increase any fees or charges (other than taxes and other governmental charges, registration fees and cable, telex or facsimile transmission costs, delivery costs or other such expenses), or which shall otherwise prejudice any substantial existing right of Owners of Receipts, shall, however, not become effective as to outstanding Receipts until the expiration of thirty days after notice of such amendment shall have been given to the Owners of outstanding Receipts. Every Owner of a Receipt at the time any amendment so becomes effective shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner of any Receipt to surrender such Receipt and receive therefor the Deposited Securities represented thereby except in order to comply with mandatory provisions of applicable law. 21. TERMINATION OF DEPOSIT AGREEMENT. The Depositary at any time at the direction of the Company, shall terminate the Deposit Agreement by mailing notice of such termination to the Owners of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination. The Depositary may likewise terminate the Deposit Agreement by mailing notice of such termination to the Company and the Owners of all Receipts then outstanding if at any time 90 days shall have expired after the Depositary shall have delivered to the Company a written notice of its election to resign and a successor depositary shall not have been appointed and accepted its appointment as provided in the Deposit Agreement. On and after the date of termination, the Owner of a Receipt will, upon (a) surrender of such Receipt at the Corporate Trust Office of the Depositary, (b) payment of the fee of the Depositary for the surrender of Receipts referred to in Section 2.05 of the Deposit Agreement, and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by the American Depositary Shares evidenced by such Receipt. If any Receipts shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of transfers of Receipts, shall suspend the distribution of dividends to the Owners thereof, and shall not give any further notices or perform any further acts under the Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in the Deposit Agreement, and shall continue to deliver Deposited Securities, together with any dividends or other distributions received with -14- respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of the Deposit Agreement, and any applicable taxes or governmental charges). At any time after the expiration of one year from the date of termination, the Depositary may sell the Deposited Securities then held under the Deposit Agreement and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it thereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of Receipts which have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of the Deposit Agreement, and any applicable taxes or governmental charges). Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations under the Deposit Agreement except for its obligations to the Depositary with respect to indemnification, charges, and expenses. 22. DISCLOSURE OF INTERESTS IN RESPONSE TO DISCLOSURE NOTICE. Notwithstanding any other provision of this Deposit Agreement, each Owner shall, and shall procure that any other natural or legal person having an interest of any kind whatsoever in any Shares represented by American Depositary Shares evidenced by any Receipt held by such Owner (an "Additional Holder") shall, comply with any requirement (a "Disclosure Notice") received from the Company from time to time requiring the provision of information permitted to be required by Section 212 ("Section 212") of the Companies Act 1985 (the "Companies Act"), as Section 212 from time to time may be amended, supplemented or superseded by other provisions of English law, or the Articles of Association of the Company including, but not limited to, information as to the capacity in which such Owner is or was interested in Shares, the identity of any other person then or previously interested in such Shares to the extent possible and the nature of such interest. For the purposes of this Article 22 and Articles 23 and 24 the terms "interests in shares", "interested in shares" or any similar expression shall have the meanings given to them in Part VI of the Companies Act as of the date hereof. 23. OBLIGATION TO DISCLOSE CERTAIN INTERESTS IN OUTSTANDING SHARES. (a) Each Owner is deemed to agree (for itself and on behalf of any Additional Holder) (i) to comply with all obligations from time to time having effect under English law which require the provision to the Company by persons interested in Shares of -15- information in respect of such interests and (ii) to take all steps necessary to inform itself as to the applicability and extent of such obligations. (b) Each Owner is deemed to acknowledge (for itself and on behalf of any Additional Holder) that the obligations referred to in Article 23(a) hereof include but are not limited to Section 198 of the Companies Act ("Section 198") as Section 198 from time to time may be amended, supplemented or superseded by other provisions of English law. (c) Each Owner is further deemed to agree (for itself and on behalf of any Additional Holder) to make such disclosure of interests in Shares as may be required to be made by the Owner or Additional Holder from time to time pursuant to the City Code on Take-overs and Mergers, as it from time to time may be amended, supplemented or superseded by other provisions of English law and the Rules Governing Substantial Acquisitions of Shares as it from time to time may be amended, supplemented or superseded by other provisions of English law (each of which being published by the Panel on Take-overs and Mergers of the United Kingdom) and to take all steps necessary to inform itself as to the applicability and extent of such obligations. 24. SANCTIONS FOR FAILURE TO COMPLY WITH ARTICLE 22 OR 23. Each Owner is deemed to agree (for itself and on behalf of any Additional Holder) to the sanctions set forth in this Article 24 for failure to comply with Article 22 or Article 23. In the event that the Company shall determine that an Owner or Additional Holder has failed to comply in a timely fashion with Article 22 or Article 23 hereof, the Depositary shall, upon receipt of written instructions from the Company, take any or all of the actions set forth in the following sentence, as set forth in such instructions, with respect to such specified Owner or Additional Holder, if applicable, to the extent feasible and at the expense of the Company. As instructed by the Company and until further notice, if any, is received from the Company that any of the following restrictions cease to apply, the Depositary to the extent feasible (i) shall not register in the name of such Owner or Additional Holder any additional American Depositary Shares, (ii) shall refuse to register any transfer of American Depositary Shares to or from such Owner, (iii) shall suspend the distribution of dividends, with respect to American Depositary Shares registered in the name of such Owner, (iv) shall not vote Shares represented by American Depositary Shares registered in the name of such Owner by proxy or otherwise at any meeting of Shareholders (except in accordance with the last paragraph of Section 4.07) or exercise any other rights with respect to Shares at any such meeting, (v) shall not give any further notices or perform any further acts under this Deposit Agreement with respect to American Depositary Shares registered in the name of such Owner, except that the Depositary shall continue to collect dividends and other distributions pertaining to the Deposited Securities underlying such American Depositary Shares (and in the case of any distribution of Shares or other Deposited Securities or portion thereof, shall sell such -16- distribution and hold the net proceeds of any such sale together with any other distribution), which distributions may be collected by such Owner of the Receipts evidencing such American Depositary Shares upon the surrender of such Receipts to the Depositary in accordance with Section 2.05 hereof. Each of the Depositary and the Custodian agrees to use reasonable efforts to comply with Articles 22, 23 and 24 and any Disclosure Notice received from the Company as instructed by and at the expense of the Company, including by forwarding any such Disclosure Notice to each Owner specified in the Disclosure Notice. To the extent that the Depositary or a Custodian receives information from an Owner or Additional Holder in response to a Disclosure Notice, it shall as soon as practicable thereafter forward such information to the Company. Except to the extent (if at all) provided in the Articles of Association of the Company, the Company shall be under no obligation to give, modify or withdraw a Disclosure Notice or to give any instructions to the Depositary or the Custodian in connection with any of the foregoing and shall not have any liability whatsoever to any person in respect of Articles 22, 23 and 24. Any resolution or determination of, or decision or exercise of any discretion or power by, the Company, the Company's Board of Directors, the Depositary or the Custodian under or pursuant to the Articles of Association of the Company or this Deposit Agreement shall be final, conclusive and binding on any Owner or Additional Holder thereby affected and all other persons concerned and shall not be open to challenge, whether as to its validity or otherwise, on any ground whatsoever, and neither the Company, the Company's Board of Directors, the Depositary nor the Custodian shall have any liability whatsoever to any person in respect thereof, or be required to give any reason for any decision, determination or declaration taken or made with respect thereto. 25. COMPLIANCE WITH U.S. SECURITIES LAWS. Notwithstanding anything in the Deposit Agreement or this Receipt to the contrary, the Company and the Depositary each agrees that it will not exercise any rights it has under the Deposit Agreement to permit the withdrawal or delivery of Deposited Securities in a manner which would violate the U.S. securities laws, including, but not limited to, Section I.A.(1) of the General Instructions to the Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933. -17- EX-4.3 8 ex-4_3.txt EXHIBIT 4.3 Exhibit 4.3 FORM OF RIGHTS AGENCY AGREEMENT RIGHTS AGENCY AGREEMENT (the "Agreement"), dated as of August ____, 2000, between Pearson plc (the "Company"), organized under the laws of England and Wales, and THE BANK OF NEW YORK, a New York banking corporation (the "Bank"). WHEREAS, the Company is issuing to holders of its Ordinary Shares transferable Rights to subscribe for New Shares and is extending the Offering to holders of ADRs by issuing to such holders ADS Rights to subscribe for New ADSs on a corresponding basis; and WHEREAS, the Company and the Bank are parties to the Deposit Agreement, which provides in Section 4.04 thereof, INTER ALIA, for the distribution of rights to holders of ADRs at the request of the Company and upon compliance with applicable laws; and WHEREAS, the Company has requested that the ADS Subscription Agent make rights available to holders of ADRs in connection with the Offering and has taken all necessary action to register the offered securities under the Securities Act and to otherwise comply with applicable laws; and WHEREAS the Company has requested that the Bank act as ADS Subscription Agent in connection with the Offering of New ADSs, and the Bank is willing to accept such appointment, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and mutual agreements herein, the Company and the Bank hereby agree as follows: ARTICLE I -- APPOINTMENT OF THE RIGHTS AGENT The Company hereby appoints the Bank as the ADS subscription agent (the "ADS Subscription Agent") in connection with the ADS Offering in accordance with the terms and conditions of this Agreement and the Bank hereby accepts such appointment and agrees to be bound by the terms and conditions of this Agreement upon execution of this Agreement. ARTICLE II -- DEFINITIONS As used herein, the following terms shall have the meanings herein specified and shall include in the singular number the plural and in the plural number the singular: ADRS shall mean American Depositary Receipts evidencing the ADSs. ADS OFFERING shall mean the offer by the Company of the New ADSs to the holders of ADRs on the register of the Depositary on the Record Date. ADS RIGHTS shall have the meaning ascribed thereto in Article 3 hereof. ADSs shall mean American Depositary Shares, each representing one Ordinary Share. AGREEMENT shall mean this Rights Agency Agreement, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. BANK shall have the meaning ascribed thereto in the introductory statement hereof. COMMISSION shall mean the United States Securities and Exchange Commission. COMPANY shall have the meaning ascribed thereto in the introductory statement hereof. DEPOSIT AGREEMENT shall mean the Deposit Agreement dated as of August 7, 2000, among the Company, the Bank, as Depositary, and all owners and holders from time to time of ADRs issued thereunder. DEPOSITARY shall mean the Bank, as Depositary under the Deposit Agreement. DOLLAR SUBSCRIPTION PRICE shall mean $16.50, the U.S. dollar price at which holders of ADRs may subscribe for New ADSs and the UK SDRT pursuant to the ADS Offering, as specified in the Warrants and the Prospectus. EFFECTIVE DATE shall mean the date on which the Registration Statement is declared effective by the Commission. EXPIRATION DATE shall mean the date on or prior to which payment of the Subscription Price for New ADSs must be received by the ADS Subscription Agent, being the date on which the Warrants evidencing the ADS Rights will expire, which will be 12:00 noon (New York City time) on August 30, 2000 or such other date as shall be established by agreement between the Company and the ADS Subscription Agent for the expiration of such ADS Rights and Warrants. A "HOLDER" of ADRs is the person in whose name an ADR is registered on the books of the Depositary maintained for such purposes. NEW ADRS shall mean ADRs to be issued upon the deposit of New Shares pursuant to the Deposit Agreement. 2 NEW ADSs shall have the meaning ascribed thereto in Article 3 hereof. NEW SHARES shall mean 170,528,278 provisionally allotted Ordinary Shares being offered for subscription by the Company pursuant to the Offering. OFFERING shall mean the offer by the Company of New Shares by way of Rights to holders of Ordinary Shares, including the Depositary on behalf of holders of ADRs, on the register of the Company at the close of business in London on July 28, 2000. ORDINARY SHARES shall mean the Company's Ordinary Shares of 25 pence each. PAL shall mean a (transferable) provisional allotment letter evidencing Rights, a specimen of which is annexed hereto as Exhibit A-1. PROSPECTUS shall mean the final prospectus in the form filed with the Commission under the Securities Act of 1933 as it may be amended or supplemented from time to time. RECORD DATE shall mean the date for determination of the holders of ADRs entitled to receive ADS Rights, which will be 5:00 p.m. (New York City time) on July 28, 2000 or such later date as shall be established by agreement between the Company and the ADS Subscription Agent for determination of the holders of ADRs entitled to receive ADS Rights and Warrants in respect thereof. REGISTRATION STATEMENT shall mean the Registration Statement on Form F-1 in respect of the New Shares, the Rights and the ADS Rights, including all exhibits thereto as amended at the time such registration statement becomes effective under the Securities Act of 1933 and as it may be amended or supplemented from time to time. RIGHTS shall mean transferable rights to subscribe for the New Shares, on the basis of 3 New Shares for every 11 Ordinary Shares held of record, which Rights are being offered pursuant to the Offering. STERLING SUBSCRIPTION PRICE shall mean (pound)10, the pounds sterling price at which holders of Ordinary Shares may subscribe for New Shares pursuant to the Offering, as specified in the PAL and the Prospectus. WARRANT shall mean a transferable warrant evidencing ADS Rights, a specimen of which is annexed hereto as Exhibit A-2. ARTICLE III -- ADS OFFERING 1. The Company will offer to the holders of ADRs transferable rights (the "ADS Rights") to subscribe for new ADSs (the "New ADSs") at the Dollar Subscription 3 Price (as it may be adjusted), on the basis of 3 New ADSs for every 11 ADSs held of record on the Depositary's register on the Record Date. The ADS Offering will be made to the holders of ADRs who are on the register of the Depositary on the Record Date by means of the Prospectus to be mailed to such holders, and will expire on the Expiration Date. The ADS Rights will be evidenced by the Warrants. 2. After the establishment of the Record Date, the ADS Subscription Agent will determine the number of ADS Rights to which each holder of record of ADRs on the Record Date is entitled. For every 11 ADSs held of record on the Record Date the holder thereof shall receive 3 ADS Rights. ARTICLE IV -- DELIVERY OF RIGHTS OFFER MATERIAL 1. As soon as practicable following the Effective Date, (i) the Company or its agents will advise the ADS Subscription Agent by telephone (and confirm in writing) that the Registration Statement has been declared effective by the Commission, (ii) the Company will deliver copies of the Prospectus to the ADS Subscription Agent, (iii) U.S. counsel for the Company, will deliver to the ADS Subscription Agent two original copies of its opinion to the effect that (A) the Registration Statement has been declared effective under the Securities Act of 1933 and (B) this Agreement has been duly authorized, executed and delivered and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforceability of creditors' rights generally and by general equitable principles regardless of whether the issue of enforceability is considered in a proceeding in equity or at law, which opinion may rely as to matters of English law on the opinion of the Company's English counsel and (iv) English solicitors to the Company will deliver to the ADS Subscription Agent two original copies of its opinion to the effect that the New Shares, when subscribed and issued, will be fully paid. 2. The Company will deliver to the ADS Subscription Agent sufficient copies of the Prospectus, the Letter of Instruction, and the form of Warrant, (including instructions as to the use thereof and, on the reverse thereof, a substitute Form W-9), Guidelines for Certification of Taxpayer Identification Number of Substitute Form W-9 (the "Guidelines"). 3. The ADS Subscription Agent shall send to each holder (other than holders having an address outside of the U.S.) as of the Record Date (i) a Prospectus, (ii) a Letter of Instruction, (iii) a Warrant evidencing the ADS Rights to which such holder is entitled pursuant to the ADS Offering, and (iv) a return envelope 4 addressed to the ADS Subscription Agent for use by such holder (such material, collectively, the "Rights Offer Material"). 4. In the event that the Rights Offer Material is mailed to the address of a holder on the books of the Depositary and is returned to the ADS Subscription Agent for any reason and a proper delivery thereof cannot be effected to a holder, the ADS Subscription Agent shall hold such Rights Offer Material and the related holder's right to purchase ADSs under the ADS Offering will be treated as unexercised. The ADS Subscription Agent shall supply the Company with such information as the Company may request with respect to any Rights Offer Material that cannot be delivered to a holder. 5. In the event that, prior to the Expiration Date, any holder notifies the ADS Subscription Agent that the Rights Offer Material to which such holder is entitled has not been delivered, or has been lost, stolen or destroyed, the ADS Subscription Agent will furnish to such holder a copy of the Rights Offer Material. The Company agrees to supply the ADS Subscription Agent with sufficient copies of the Rights Offer Materials for such purposes. ARTICLE V -- ACCEPTANCE OF SUBSCRIPTIONS 1. The ADS Subscription Agent is hereby authorized and directed to receive subscriptions for ADSs on behalf of the Company beginning on the Effective Date and ending on the Expiration Date (the "Subscription Period"). Any funds that the ADS Subscription Agent receives during the Subscription Period from holders in respect of payments for ADSs shall be deposited in a non-interest bearing account that the ADS Subscription Agent designates solely for such purpose (the "Deposit Account") and such funds shall remain in the Deposit Account until they are distributed to the Company in accordance with Article IX hereof. 2. The Company hereby authorizes and directs the ADS Subscription Agent to accept subscriptions for New ADSs on behalf of the Company upon the proper completion and execution of Warrants in accordance with the terms thereof and hereof. The Company further authorizes the ADS Subscription Agent to refuse to accept, in its discretion, any improperly completed or unexecuted Warrant. 3. Notwithstanding the foregoing, without further authorization from the Company, except where otherwise specified or as otherwise notified in writing by the Company prior to the Expiration Date, the following Warrants shall be deemed to be properly completed: (a) any subscription with respect to which a holder has failed to execute a Warrant in the manner provided by the terms thereof, provided that (1) the holder has 5 indicated on such Warrant or by written communication, the manner in which the holder wishes to subscribe and (2) proper payment has been made by such holder; (b) any subscription by an individual (and not by a corporation, partnership or fiduciary) which is accompanied by a check drawn by an individual (and not by a corporation, partnership or fiduciary) other than the holder, provided that (1) the Warrant submitted therewith has been duly executed by the holder, (2) the holder is the holder to which such Warrant relates, (3) the check tendered in payment of such subscription is drawn for the proper amount and to the order of The Bank of New York - A/C Pearson plc and is otherwise in order, and (4) there is no evidence actually known to the ADS Subscription Agent indicating that such check was delivered to the holder by the drawer thereof for any purpose other than the payment of the accompanying subscription; (c) any subscription by a custodian on behalf of a minor which is accompanied by a check drawn by an individual (and not by a corporation, partnership or fiduciary) other than the holder, if the provisos set forth in clause (b) above are satisfied; or (d) any subscription by an individual (and not by a corporation, partnership or fiduciary) which is accompanied by a check drawn by a corporation, partnership or fiduciary other than the holder, if the provisos set forth in clause (b) above are satisfied. 4. The ADS Subscription Agent is hereby authorized to accept subscriptions for ADSs on behalf of the Company (i) on the Expiration Date, (ii) after determining the total number of ADSs that an owner is entitled to purchase in the ADS Offering, pursuant to Article 3 hereof, and (iii) upon the proper completion and execution of the Warrant, in accordance with the terms thereof and hereof. 5. The ADS Subscription Agent is hereby authorized to accept subscriptions for ADSs on behalf of the Company if, on or before the Expiration Date (i) the ADS Subscription Agent has received payment in full of the Dollar Subscription Price, plus the UK SDRT and a completed "Notice of Guaranteed Delivery" in the form provided by the ADS Subscription Agent, and (ii) the ADS Subscription Agent has received a properly executed warrant by 12:00 noon (New York City time) on August 30, 2000. 6. The ADS Subscription Agent is authorized to waive proof of authority to sign (including the right to waive signatures of co-fiduciaries and proof of appointment or authority of any fiduciary or other person acting in a representative capacity) in connection with any subscription with respect to which: (a) the ADSs to which the Warrant relates are registered in the name of an executor, administrator, trustee, custodian for a minor or other fiduciary and has been executed by such registered holder provided that the ADSs purchased are to be issued in the name of such holder; (b) the ADSs to which the Warrant relates are registered in the name of a corporation and the Warrant has been executed by an officer of such corporation, provided that the ADSs purchased are to be issued in the name of such corporation; (c) the Warrant has been executed by a bank, trust company or broker as 6 agent for the holder to which such Warrant relates, provided that the ADSs purchased are to be issued in the name of such holder; or (d) the ADSs to which such Warrant relates are registered in the name of a decedent and the Warrant has been executed by a person who purports to act as the executor or administrator of such decedent's estate, provided that (1) the ADSs are to be issued in the name of such person as executor or administrator of such decedent's estate, (2) the check tendered in payment of such subscription is drawn for the proper amount and to the order of The Bank Of New York and is otherwise in order, and (3) there is no evidence actually known to the ADS Subscription Agent indicating that such person is not the duly authorized representative which such person purports to be. 7. The ADS Subscription Agent is hereby authorized to waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any ADS Right. ARTICLE VI -- EXCHANGE PROCEDURES 1. At any time prior to 5:00 p.m. (New York City time) on August 25, 2000, a Warrant representing ADS Rights may be surrendered by the holder thereof to the ADS Subscription Agent at its New York office and the ADS Subscription Agent will, if so requested in writing, cause to be delivered to the holder or its assignee at the London office of The Bank of New York at One Canada Square, London, E14 5AL, a PAL representing Rights to subscribe for the appropriate number of New Shares at the Sterling Subscription Price therefor specified in the Prospectus. 2. At any time prior to 3:00p.m. (London time) on August 25, 2000, a PAL representing Rights to any amount of New Shares may be surrendered by the holder thereof duly renounced to the ADS Subscription Agent at its New York or London office and the ADS Subscription Agent will, if so requested in writing, deliver to such holder (or his assignee) at its New York office, as soon as practicable, a Warrant representing ADS Rights in an amount sufficient to subscribe for the appropriate number of New ADSs covered by such PAL. 3. A holder depositing a Warrant or PAL pursuant to this exchange facility must pay any taxes or levies (including UK SDRT) associated with the deposit of such Warrant or PAL and the New Shares represented thereby and the issuance of an ADR or New Shares in respect thereof. A holder depositing a PAL pursuant to the exchange privilege will be liable for 1.5% of the Issue Price per New Shares so deposited to meet any UK SDRT payable as a result of the exercise of the ADS Right obtained thereby. 7 ARTICLE VII -- SALE OF WARRANTS 1. Holders may surrender their Warrants prior to 5:00 p.m. (New York City time) on August 24, 2000, in connection with instructions from such holders to sell such Warrants, whether or not in connection with a subscription. The ADS Subscription Agent's obligation to execute orders will be subject to its ability to find buyers. The ADS Subscription Agent will not be liable to any holder of Warrants for its failure to obtain the best market price for any Warrants it sells pursuant to such orders. The ADS Subscription Agent may charge a holder in connection with services rendered for any expenses and commissions of such sale. The ADS Subscription Agent will send to a holder making use of this facility a check for the proceeds of any Warrants sold, net of fees, expenses and commissions. ARTICLE VIII -- REPORTS BY THE RIGHTS AGENT 1. The ADS Subscription Agent will advise the Company by facsimile transmission (i) on the Effective Date as to the total number of holders and the total number of ADSs outstanding; and (ii) on a daily basis during the Subscription Period as to (1) the total number of subscriptions for ADSs pursuant to the ADS Offering that the ADS Subscription Agent has received (which have been properly completed and executed and for which the correct payment amount was received), and (2) the aggregate amount of funds received by the ADS Subscription Agent in payment of such subscriptions. 2. Not later than 6:00pm (New York City time) on the Expiration Date, the ADS Subscription Agent will advise the Company by facsimile transmission as to (i) the total number of ADSs subscribed for in the ADS Offering and the total number of Shares represented thereby and (ii) the aggregate amount of funds received by the ADS Subscription Agent in payment of such subscriptions. ARTICLE IX -- PAYMENTS; INTEREST ON SUBSCRIPTION PAYMENTS; REFUNDS 1. Reasonably promptly after the Expiration Date, the Company will deposit the Shares underlying the ADSs with the London office of The Bank of New York, as custodian under the Deposit Agreement and will request that the Depositary confirm such deposit with the ADS Subscription Agent. Once the ADS Subscription Agent receives confirmation that the Shares have been deposited, the ADS Subscription Agent shall tender to the Company the aggregate amount of funds held in the Deposit Account representing the Dollar Subscription Price for the ADSs. The payment shall be made in same day funds by wire transfer, in U.S. dollars to a bank account specified by the Company. 2. The Dollar Subscription Price to be collected by the ADS Subscription Agent from subscribers shall be $16.50 (representing the dollar equivalent of (pound)10 rounded 8 upward to 110% of such rate). In addition to the Dollar Subscription Price, holders must pay the 1.5% UK SDRT. The ADS Subscription Agent, as agent for the Company, will arrange to convert payments made on the basis of the Dollar Subscription Price from U.S. Dollars into pounds sterling for payment to the Company. The ADS Subscription Agent will make the conversion from U.S. Dollars into pounds sterling as soon as practicable after 12:00 noon, New York City time, on August 30, 2000. If the Dollar Subscription Price paid by any subscriber to the ADS Subscription Agent, when so converted into pounds sterling, exceeds the Sterling Subscription Price, the Subscription Agent shall remit the excess in U.S. dollars (without interest) to the subscriber. 3. If a payment of the Dollar Subscription Price made by a holder of ADS Rights in respect of such holder's subscription, when converted into pounds sterling, is less than the Sterling Subscription Price for the number of New ADSs subscribed for upon exercise of such ADS Rights plus the 1.5% UK SDRT, the ADS Subscription Agent will pay the amount of such deficiency to the Company, notwithstanding the terms of Article XIII(2) hereof. The holder will then be required to pay promptly the amount of such deficiency (including interest and expenses) to the ADS Subscription Agent who will not send any New ADRs evidencing New ADSs subscribed for by a holder prior to the receipt by the ADS Subscription Agent of such payment. If payment of the amount of any deficiency is not received from a subscriber by the ADS Subscription Agent by September 20, 2000, the ADS Subscription Agent may sell such New ADSs subscribed for by such subscriber at a public or private sale, at such place or places and upon such terms as it may deem proper (so long as such sale complies with applicable law), and the ADS Subscription Agent may allocate the net proceeds of such sales for the account of the subscriber upon an averaged or other practicable basis without regard to any distinctions among such subscribers because of exchange restrictions, or otherwise in an amount sufficient to cover such deficiency. In such event, the ADS Subscription Agent will then send the New ADR evidencing the remaining New ADSs to such holder together with a check in the amount of the excess proceeds, if any, from such sale. ARTICLE X -- UNEXERCISED RIGHTS 1. The ADS Subscription Agent acknowledges and agrees that following the Expiration Date, New Shares provisionally allotted with respect to unexercised ADS Rights may be sold through arrangements with Goldman Sachs International, Cazenove & Co., Goldman, Sachs & Co, and Cazenove Inc. If a premium can be realized after deduction of expenses and commissions of sale over the Subscription Price, the Company shall pay such amounts to the ADS Subscription Agent in pounds Sterling. The ADS Subscription Agent shall convert those proceeds into U.S. dollars at a commercially reasonable rate and remit the amount so received (less any fees, expenses, commissions, and UK SDRT, if any, in U.S. dollars, without interest, to the holders of record of such unexercised ADS Rights as at the close of business on the Expiration Date. 9 ARTICLE XI -- ISSUANCE OF ADRS 1. Following receipt of the Ordinary Shares issued in respect of the New ADSs properly subscribed for pursuant to the ADS Offering, and in accordance with the terms of the Deposit Agreement, the ADS Subscription Agent will deliver, by mail or by book-entry transfer, such certificates as instructed to each holder of ADSs, an ADR evidencing the number of New ADSs for which such holder has subscribed. Each ADR certificate will be registered in the name specified by the holder on such surrendered Warrant. 2. The ADS Subscription Agent will cause the New ADR certificates to be mailed by first-class mail under a blanket surety bond protecting the ADS Subscription Agent from any loss or liability arising out of the nonreceipt or nondelivery of any such certificate or the replacement thereof. If the market value of securities to be mailed in any one shipment will exceed $1,000,000, such shipment will be sent by registered mail and will be insured separately for the replacement value of its contents. ARTICLE XII -- LIMITATIONS OF DUTIES 1. The ADS Subscription Agent shall have no duties or obligations other than those specifically set forth herein, including any duties or obligations under any other agreement, and no implied duties or obligations shall be read into this Agreement against the ADS Subscription Agent. 2. The ADS Subscription Agent makes no, and will not be deemed to have made, any representations with respect to, and shall have no duties, responsibilities or obligations with respect to determining, the validity, sufficiency, value or genuineness of any New Shares, Letter of Instruction, PALs, Warrants or other documents deposited with or delivered to it or any signature or endorsement set forth on or in connection with such documents. 3. The ADS Subscription Agent shall not be obligated to commence or voluntarily participate in any suit, action or proceeding arising or related to this Agreement. 4. The ADS Subscription Agent shall not be liable or responsible for any of the statements of fact or recitals contained in this Rights Agency Agreement, the Letter of Instruction, any other Rights Offer Materials, or any other document or security delivered 10 to it in connection with this Agreement, and shall not be required to, and shall not, verify or determine the correctness, validity or accurateness of any such statements or recitals contained therein. 5. The ADS Subscription Agent may rely upon and comply with, and shall incur no liability for relying upon and complying with, any Letter of Instruction or other Rights Offer Material, certificate, Warrant, instrument, opinion of counsel, notice, letter, telegram, records, or other document or security delivered to it in connection with this Agreement. 6. The ADS Subscription Agent may consult with legal counsel for the Company or its own counsel (which may be in-house counsel) and rely upon any written opinion of such counsel, and shall have no liability in respect of any action taken, omitted or suffered by the ADS Subscription Agent hereunder in reliance upon, and in accordance with, any such opinion. 7. The ADS Subscription Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company, and to apply to the Company for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the ADS Subscription Agent for written instructions from the Company may, at the option of the ADS Subscription Agent, set forth in writing any action proposed to be taken or omitted by the ADS Subscription Agent under this Agreement and the date on/or after which such action shall be taken or such omission shall be effective. The ADS Subscription Agent shall not be liable for any action taken by, or omission of, the ADS Subscription Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three business days after the date the Company actually receives such application, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the ADS Subscription Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. 8. The ADS Subscription Agent shall escheat any property held by the ADS Subscription Agent in accordance with applicable law. 9. The ADS Subscription Agent may perform any duties hereunder either directly or by or through its nominees, correspondents, designees, agents, subagents or subcustodians and the ADS Subscription Agent shall not be responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, agent, subagent or subcustodian appointed with due care by it hereunder. In no event shall the ADS 11 Subscription Agent be liable for the acts or omissions of such other nominees, correspondents, designees, agents, subagents or subcustodians. ARTICLE XIII -- COMPENSATION; PAYMENT OF EXPENSES 1. In consideration for the services to be rendered herein, the Company shall compensate the ADS Subscription Agent in accordance with and pursuant to a written Fee Schedule as may be agreed upon by the Company and the ADS Subscription Agent from time to time, plus the ADS Subscription Agent's reasonable disbursements, charges and out-of-pocket expenses and counsel fees and expenses incurred in connection with the preparation and execution of this Agreement and the services rendered by the ADS Subscription Agent hereunder. 2. Except as expressly provided otherwise herein, no provision of this Agreement shall require the ADS Subscription Agent to expend or risk the ADS Subscription Agent's own funds or otherwise incur any financial liability in the performance of any of the ADS Subscription Agent's duties hereunder or in the exercise of the ADS Subscription Agent's rights. ARTICLE XIV -- TERMINATION OF AGENCY 1. Unless terminated earlier by the parties hereto, this Agreement shall terminate thirty (30) days after the Expiration Date (the "Termination Date"). On the business day following the Termination Date, the ADS Subscription Agent shall deliver to the Company any Offering entitlements, if any, held by the ADS Subscription Agent under this Agreement. The ADS Subscription Agent's right to be reimbursed for fees, charges and out-of-pocket expenses as provided in Article XIII above and the indemnification provisions of Article XV below shall survive the termination of this Agreement. ARTICLE XV - LIMITATION OF LIABILITY; INDEMNIFICATION 1. The ADS Subscription Agent shall not be liable for any Losses (as defined below) or action taken or omitted or for any loss or injury resulting from its actions or performance or lack of performance of its duties hereunder in the absence of gross negligence or willful misconduct on its part, in which case it shall be liable for only those Losses caused by such gross negligence or willful misconduct. In no event shall the ADS Subscription Agent be liable for (I) acting in accordance with the instructions from the Company or its counsel or any agent appointed by the Company to act on behalf of the Company, (II) special, consequential or punitive damages, for lost profits or for loss of business, or (III) any Losses due to forces beyond the control of the ADS Subscription Agent, including without limitation, strikes, work stoppages, acts of war or terrorism, insurrection, 12 revolution, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services. 2. The Company shall be liable for and shall indemnify hold harmless the ADS Subscription Agent from and against any and all claims, losses, liabilities, damages, expenses or judgments (including reasonable attorneys' fees and expenses) (collectively referred to herein as "LOSSES") howsoever arising from or in connection with this Agreement or the performance of the ADS Subscription Agent's duties hereunder, the enforcement of this Agreement and disputes between the parties hereto; PROVIDED, HOWEVER, that nothing contained herein shall require that the ADS Subscription Agent be indemnified for the liability it has accepted under the preceding paragraph. ARTICLE XVI -- MISCELLANEOUS 1. NOTICES. All reports, notices and other communications required or permitted to be given hereunder shall be addressed to the following on behalf of the respective parties hereto and delivered by hand, by courier or by first-class mail, postage prepaid, or by telecopy promptly confirmed in writing, as follows or to such other address as may be specified in writing form time to time: To the Company: Pearson plc 3 Burlington Gardens London, England W1X 1LE Attn: General Counsel With a copy to: Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Attn: Charles Engros, Esq. To the ADS Subscription Agent: The Bank of New York Reorganization Administration 101 Barclay Street - 12W New York, NY 10286 Attn: Kelly Gallagher 13 Facsimile: (212) 815-6411 2. CONFIDENTIALITY. All information as to the Offering shall be held by the ADS Subscription Agent and its officers, employees, representatives and agents in strict confidence and shall be disclosed only as required by law, regulation or any judicial, regulatory or administrative authority, including, for the avoidance of doubt, any banking or regulatory agency with jurisdiction over the ADS Subscription Agent. 3. ASSIGNMENT. Neither the ADS Subscription Agent nor the Company shall assign this Agreement without first obtaining the written consent of the other party hereto. 4. HEADINGS. The Article and Paragraph headings contained herein are for convenience and reference only and are not intended to define or limit the scope of any provision of this Agreement. 5. ENTIRE AGREEMENT; AMENDMENT. This Agreement shall constitute the entire agreement of the parties with respect to the subject matter and supersedes all prior oral or written agreements in regard thereto. References to any other document or agreement shall not incorporate by reference such other document or agreement into this Agreement and shall not impose any duties or responsibilities, obligations or liabilities on the ADS Subscription Agent under such other document or agreement. Except as otherwise specifically provided herein, this Agreement may be amended only by an instrument in writing duly executed by both parties hereto. 6. GOVERNING LAW; JURISDICTION; CERTAIN WAIVERS.(a) This Agreement shall be interpreted and construed in accordance with the internal substantive laws (and not the choice of law rules) of the State of New York. All actions and proceedings brought by the ADS Subscription Agent relating to or arising from, directly or indirectly, this Agreement may be litigated in courts located within the State of New York. Company hereby submits to the personal jurisdiction of such courts; hereby waives personal service of process and consents that any such service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder; and hereby waives the right to a trial by jury in any action or proceeding with the ADS Subscription Agent. All actions and proceedings brought by the Company against the ADS Subscription Agent relating to or arising from, directly or indirectly, this Agreement shall be litigated only in courts located within the State of New York. (b) The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision; and if any provision is held to be unenforceable as a matter of law, the other provisions shall not be affected thereby and shall remain in full force and effect. 14 7. RIGHTS AND REMEDIES. The rights and remedies conferred upon the parties hereto shall be cumulative, and the exercise or waiver of any such right or remedy shall not preclude or inhibit the exercise of any additional rights or remedies. The waiver of any right or remedy hereunder shall not preclude or inhibit the subsequent exercise of such right or remedy. 8. REPRESENTATIONS AND WARRANTIES. The Company hereby represents, warrants and covenants that: (a) The Company is a company duly organized and validly existing under the laws of England and Wales. (b) This Agreement has been duly authorized, executed and delivered on its behalf and constitutes the legal, valid and binding obligation of the Company. The execution, delivery and performance of this Agreement by the Company does not and will not violate any applicable law or regulation and does not require the consent of any governmental or other regulatory body except for such consents and approvals as have been obtained and are in full force and effect. For the avoidance of doubt, all New Shares and New ADSs to be issued and delivered hereunder have been registered with the Securities and Exchange Commission and all transactions contemplated by this Agreement are in compliance with, and not in violation of, the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. 9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10. NO THIRD PARTY BENEFICIARIES. This Agreement is for the exclusive benefit of the parties hereto and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person. 15 IN WITNESS WHEREOF, PEARSON PLC and THE BANK OF NEW YORK have duly executed this agreement as of the day and year first set forth above. PEARSON PLC By: -------------------------------- THE BANK OF NEW YORK, as the ADS Subscription Agent By: -------------------------------- 16 EX-4.4 9 ex-4_4.txt EXHIBIT 4.4 Account No. Allotment No. HOLDERS OF PEARSON/RIGHTS ISSUE ORDINARY SHARES SHOULD CAREFULLY READ THE PROSPECTUS RELATING TO PEARSON PLC DATED 9 AUGUST 2000 (THE "PROSPECTUS") BEFORE DECIDING WHETHER TO TAKE UP THEIR RIGHTS IMPORTANT--THIS DOCUMENT IS OF VALUE, AND IS NEGOTIABLE. IF YOU ARE IN ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED TO SEEK YOUR OWN FINANCIAL ADVICE IMMEDIATELY FROM YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER INDEPENDENT PROFESSIONAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES ACT 1986. SAVE WHERE THE CONTEXT OTHERWISE REQUIRES, TERMS DEFINED IN THE PROSPECTUS HAVE THE SAME MEANING IN THIS LETTER. If you have sold or transferred all your Pearson Shares (other than ex-rights), you should forward this document, having completed the Form of Renunciation (Form X) overleaf, together with the Prospectus, at once to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee (subject to the restrictions set out in paragraph 4 below). If you have sold or transferred only part of your holding of Ordinary Shares (other than ex-rights), please contact immediately the stockbroker, bank or agent through whom the sale or transfer was effected immediately. Application has been made to the UK Listing Authority and to the London Stock Exchange for the Pearson Shares to be admitted to the Official List and to trading on the London Stock Exchange ("Admission"). It is expected that Pearson Admission will become effective and that dealings in the Pearson Shares, nil paid, will commence on 10 August 2000. If admission has not become effective by 8:30 a.m. on 10 August 2000 or such later time and/or date as Pearson may decide, this document shall cease to be of any value and thereafter shall have no effect. Copies of the Prospectus prepared in accordance with the Listing Rules made under section 142 of the Financial Services Act 1986 as amended have been delivered to the Registrar of Companies in England and Wales for registration as required by section 149 of the Financial Services Act 1986 (as amended). Further copies of the Prospectus can be obtained from or inspected at the registered office of Pearson, 3 Burlington Gardens, London W1X 1LE and at the offices of Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. The new Pearson Shares and the Provisional Allotment Letters do not qualify for distribution under any of the relevant securities laws of Canada, France, the Netherlands, South Africa or the Republic of Ireland. Subject to certain exceptions, neither the Pearson Shares nor the Provisional Allotment Letters may be directly or indirectly taken up, offered for subscription or purchased, sold, renounced, transferred or delivered, in or into Canada, France, the Netherlands, South Africa or the Republic of Ireland. PROVISIONAL ALLOTMENT LETTER PEARSON PLC (Registered in England and Wales with registered number 53723) 3 for 11 Rights Issue of up to 170,528,278 Pearson Shares at L10.00 per Pearson Share payable in full on acceptance not later than 3.00 pm on 1 September 2000 THIS ENTIRE DOCUMENT MUST BE PRESENTED WHEN PAYMENT IS MADE By post or by hand to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA Telephone: (0870) 6000632 ---------------------------- Latest time and date for: Acceptance and payment in full (see Box 3) 3.00 pm on 1 September 2000 Registration of renunciation 3.00 pm on 1 September 2000 Expected despatch of share certificates by 2 October 2000 By hand only (other than for splitting which may be by post or by hand) to Lloyds TSB Registrars, Antholin House, 71 Queen Street, London EC4N 1SL Telephone: (020)7 248 9822 ---------------------------- Latest time and date for: Splitting, nil paid, by post or by hand 3:00 pm on 30 August 2000 Acceptance and payment in full by hand only (see Box 3) 3:00 pm on 1 September 2000 Splitting, fully paid, by post or by hand 3:00 pm on 14 September 2000
Box 1 Box 2 Box 3 Holding of Pearson Shares Number of new Pearson Shares Amount payable (on the basis of L10.00 per at close of business on 28 July 2000 provisionally allotted to you new Pearson Share) on acceptance of the new
DEAR SIR OR MADAM, 1. PROVISIONAL ALLOTMENT--Subject to and in accordance with the terms of the Prospectus and this Provisional Allotment Letter, subject to the memorandum and articles of association of the Company and Admission becoming effective by 8.30 a.m. on 10 August 2000 (or such later time and/or date as Pearson may decide), you have been provisionally allotted the number of new Pearson Shares (comprising your entitlement under the Rights Issue) set out in Box 2 above. You have the right to subscribe for those new Pearson Shares at a price of L10.00 per share payable in full on acceptance not later than 3.00 pm on 1 September 2000. New Pearson Shares have been provisionally allotted to holders of Pearson Shares on the basis of 3 new Pearson Shares for every 11 Pearson Shares held at the close of business on 28 July 2000 and so in proportion for any other number of Pearson Shares then held. Entitlements to new Pearson Shares have been rounded down to the nearest whole number. Fractional entitlements have not been allotted but will be aggregated and sold in the market for the benefit of the relevant Qualifying Shareholders if a premium over the expenses of sale can be obtained. 2. DIVIDEND RIGHTS--The new Pearson Shares will, when issued and fully paid, rank PARI PASSU in all respects with the existing issued Pearson Shares, including the right to receive in full all dividends and other distributions thereafter declared, paid or made on the Pearson Shares other than the interim dividend of 9.2p per Pearson Share in respect of the year ending 31 December 2000. 3. ACCEPTANCE AND PAYMENT--If you wish to take up the new Pearson Shares provisionally allotted to you in full, you should send this Provisional Allotment Letter, accompanied by a remittance in pounds sterling for the full amount payable on acceptance as shown in Box 3 above, either by post or by hand (if delivered by hand it must be delivered during normal business hours being Monday to Friday inclusive, between 9.00 a.m. and 5.00 p.m.) so as to reach Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA, or by hand ONLY to Lloyds TSB Registrars, Antholin House, 71 Queen Street, London EC4N 1SL (during normal business hours) not later than 3.00 p.m. on 1 September 2000. A first class reply-paid envelope is enclosed for the purpose of sending this Provisional Allotment Letter by post in the United Kingdom. This Provisional Allotment Letter will then be returned to the person lodging it duly receipted. Payment of the amount set out in Box 3 above will constitute acceptance of the provisional allotment upon the terms of the Prospectus and this Provisional Allotment Letter and subject to the memorandum and articles of association of the Company. Cheques and banker's drafts must be drawn on a bank or a building society in the United Kingdom which is either a settlement member of the Cheque and Credit Clearing Company Limited, or the CHAPS Clearing Company Limited or a member of either of the committees of the Scottish or Belfast Clearing Houses or which has arranged for its cheques and banker's drafts to be cleared through the facilities provided by either of those companies or committees, and must bear the appropriate sorting code in the top right hand corner. Cheques and banker's drafts for the full amount payable should be made payable to "Lloyds TSB Bank plc-A/C Pearson plc" and crossed "A/C Payee Only". No interest will be paid on payments made before they are due. Return of the Provisional Allotment Letter with the appropriate remittance in the form of a cheque will constitute a warranty that the cheque (which the Company reserves the right to have presented on receipt) will be honoured on first presentation. The Company may elect to treat as invalid any acceptance in respect of which a remittance is notified to it or its agent as not having been so honoured. The Company also reserves the right to have cheques and banker's drafts presented for payment on receipt and to instruct Lloyds TSB Registrars to seek special clearance of cheques to allow the Company to obtain full value for all remittances at the earliest opportunity. The Company may, at its sole discretion, treat a Provisional Allotment Letter as valid and binding on the person(s) by whom, or on whose behalf, it is lodged even if it is not completed or lodged in accordance with the relevant instructions or not accompanied by a valid power of attorney, where required. The Company reserves the right (but shall not be obliged) to treat as valid acceptances in respect of which remittances are received prior to 3.00 p.m. on 1 September 2000 from an authorised person (as defined in the Financial Service Act 1986) specifying the Pearson Shares concerned and undertaking to lodge the relevant Provisional Allotment Letters duly completed in due course. Subject to the provisions of this letter and the Prospectus, if payment in full is not received (whether from the original allottee or any person in whose favour the rights have been renounced) by 3.00 p.m. on 1 September 2000, the provisional allotment will be deemed to have been declined and will lapse. You may accept all or any of the new Pearson Shares offered to you or dispose of your rights to all or any of them, nil paid. If you wish to accept only part of your allotment, you should apply for split Provisional Allotment Letters in accordance with the instructions overleaf. If the amount payable on acceptance of the new Pearson Shares taken by an allottee or any person in whose favour the rights have been renounced, nil paid, exceeds L9,590 (the equivalent of (15,000)) the verification of identity requirements of the Money Laundering Regulations 1993, as amended (the "Regulations") may apply and verification of the identity of such person may be required. A failure to provide the necessary evidence of your identity within a reasonable time may result in an acceptance being treated as invalid or delay the despatch of a receipted Provisional Allotment Letter or definitive share certificate. Your attention is drawn to paragraph 2(b) of Part 3 of the Prospectus. Submission of a Provisional Allotment Letter constitutes a warranty by you that the Regulations will not be breached by the acceptance of the remittance and an undertaking to the Company from you to provide verification of identity reasonably satisfactory to Lloyds TSB Registrars, if so requested. If satisfactory evidence has not been obtained within a reasonable time, but in any event by not later than 3.00 p.m. on 1 September 2000, then the Company may (at its absolute discretion) elect to treat the Provisional Allotment Letter as invalid, in which event the Provisional Allotment Letter will be deemed to have been declined and will lapse. Such termination will be without prejudice to the right of the Company to take proceedings to recover any loss suffered by it as a result of the failure to provide satisfactory evidence. In such event the application monies (without interest) will be returned to the drawee bank from which payment was made. 4. OVERSEAS SHAREHOLDERS--The attention of Qualifying Shareholders who are residents in or who are citizens of countries other than the United Kingdom is drawn to paragraph 13 of Part 3 of the Prospectus. Any such person (including, without limitation, nominees and trustees) wishing to accept the offer of new Pearson Shares must satisfy himself as to the full observance of the laws of any relevant territory in connection therewith including obtaining any requisite governmental or other consents, observing any other requisite formalities and paying any issue, transfer or other taxes due in such territories. Receipt of the Provisional Allotment Letter will not constitute an offer in those jurisdictions in which it would be illegal to make such an offer and in such circumstances a Provisional Allotment Letter will be sent for information only and should not be copied or redistributed. No person receiving a Provisional Allotment Letter in any territory other than the United Kingdom or the United States may treat the same as constituting an invitation or offer to him, nor should he in any event use such Provisional Allotment Letter unless, in the relevant territory, such an invitation or offer could lawfully be made to him or such Provisional Allotment Letter could lawfully be used without contravention of any unfulfilled registration or other legal requirements. Unless otherwise agreed with the Company, by accepting and/or renouncing (where permitted) this Provisional Allotment Letter or by requesting registration of the new Pearson Shares comprised herein, you hereby represent and warrant to the Company that you: (i) have not received or sent copies of this Provisional Allotment Letter, the Prospectus or any related offering documents in, into or from Canada, France, the Netherlands, South Africa or the Republic of Ireland; (ii) do not have a registered address (and are not otherwise located) in Canada, France, the Netherlands, South Africa or the Republic of Ireland and are not acting for the account or benefit of a person in Canada, France, the Netherlands, South Africa or the Republic of Ireland; (iii) are not acquiring rights to new Pearson Shares with a view to the offer, sale, resale, transfer, delivery or distribution, directly or indirectly, of any such rights to new Pearson Shares into Canada, France, the Netherlands, South Africa or the Republic of Ireland; and (iv) are not in any other territory in which it is unlawful to make an offer to subscribe for the new Pearson Shares or to use this Provisional Allotment Letter. The Company reserves the right to treat as invalid any acceptance or purported acceptance of a provisional allotment represented by this Provisional Allotment Letter or a renunciation or purported renunciation thereof where it appears to the Company or its agents to have been executed or despatched or requires delivery in a manner which may involve a breach of the legal or regulatory requirements of any jurisdiction or if it believes that acceptance of such allotment may violate applicable legal or regulatory requirements or if the warranties set out in this paragraph are not given or an address for the delivery of definitive share certificates for any new Pearson Shares is provided in a territory in which it is unlawful to deliver such certificates. Any offer to persons in the United States will be made by means of a separate prospectus contained in an effective registration statement under the Securities Act of 1933, as amended. Qualifying Shareholders in the United States should refer to the US prospectus. 5. REGISTRATION UNDER RENOUNCED OR SPLIT ALLOTMENT LETTERS--If this Provisional Allotment Letter has been renounced or is a split Provisional Allotment Letter and your name(s) does not/do not appear above, to apply for registration, Form Y must be completed and this Provisional Allotment Letter must be lodged by post or by hand not later than 3.00 p.m. on 18 September 2000, with Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA who, provided payment has been made by 3.00 p.m. on 1 September 2000, will acknowledge receipt to the persons so lodging this Provisional Allotment Letter. After 3.00 p.m. on 18 September 2000, the new Pearson Shares will be transferable only by transfer in the usual form, such transfer attracting stamp duty (if applicable). 6. POSTING--All documents and remittances sent by post to or by provisional allottees or renouncees (or their agents as appropriate) will be sent at their risk. 7. SHARES CERTIFICATES--Share certificates (being the definitive documents of title) are expected to be despatched by first class post not later than 2 October 2000, at the risk of the person(s) entitled thereto (subject to the conditions of the Rights issue). In the case of original allottees who accept their provisional allotment, share certificates will be despatched to the registered holder or, in the case of joint holders, to the first-named registered holder, at his/her or its registered address. If, on or before 3.00 p.m. on 26 September 2000, this Provisional Allotment Letter is lodged with Lloyds TSB Registrars at the relevant address set out above, the share certificate(s) will be despatched to the lodging agent. In the case of renunciation, share certificates will be despatched to the person(s) lodging this Provisional Allotment Letter for registration. After the despatch of share certificates this Provisional Allotment Letter will cease to be valid for any purpose. No other temporary documents of title will be issued pending the issue of definitive share certificates. By Order of the Board, Julia Casson, Secretary Registered Office: 3 Burlington Gardens, London, WIX 1LE
Lodged for payment by: Received the amount payable on acceptance Stamp for Lloyds TSB Registrars and date Lodged for payment by: ACCOUNT NO. ALLOTMENT NO. Pearson plc 3 for 11 Rights Issue of up to 170,528,278 new Pearson Shares at L10.00 per share payable in full on acceptance not later than 3.00 p.m. on 1 September 2000
PEARSON PLC INSTRUCTIONS FOR RENUNCIATION, SPLITTING AND CONSOLIDATION 1. RENUNCIATION IN WHOLE--(Latest time and date, 3.00 p.m. on 18 September 2000) If you wish to dispose of all the new Pearson Shares comprised in this Provisional Allotment Letter to one person, or to persons who will be joint holders, you must sign the Form of Renunciation (Form X below), in accordance with the instructions set out therein and deliver the Provisional Allotment Letter to the person(s) to be registered, or to the broker or other agent who has acted for you in the transaction. Form Y must then be completed, in accordance with the instructions set out therein, by or on behalf of the person(s) in whose favour this Provisional Allotment Letter is renounced. 2. SPLITTING--(Latest time and date, nil paid, 3.00 p.m. on 30 August 2000; fully paid, 3.00 p.m. on 14 September 2000) This provisional Allotment Letter cannot be renounced in part but, if you wish to have only some of the new Pearson Shares comprised in this Provisional Allotment Letter registered in your name(s) and to transfer the remainder, or if you wish to transfer all of the new Pearson Shares to which you are entitled, nil paid or fully paid, but not all to the same person, you may have this Provisional Allotment Letter split. For this purpose you must sign the Form of Renunciation (Form X below) and forward this Provisional Allotment Letter by post or by hand to Lloyds TSB Registrars, Antholin House, 71 Queen Street, London EC4N 1SL, to reach there not later than 3.00 p.m. on 30 August 2000, if nil paid, or 3.00 p.m. on 14 September 2000, if fully paid. The number of split Provisional Allotment Letters ("Split Letters") required and the number of Rights Shares to be comprised in each should be stated when this Provisional Allotment Letter is sent for splitting and the aggregate of the Rights Shares stated therein must equal the number of Rights Shares stated in Box 2 on page 1 of this document. On receipt of the Split Letters you should keep the one representing any new Pearson Shares which you wish to retain (paragraph 3 on page 1 applies) and send the other(s) to the person(s) to be registered or to the broker or other agent who has acted for you in the transaction to be dealt with in accordance with the instructions set out below. 3. CONSOLIDATION The new Pearson Shares comprised in several fully paid Provisional Allotment Letters duly renounced (where applicable) may be registered in the name(s) of one holder (or joint holders) if Form Y and the Consolidation Listing Form are completed on one Provisional Allotment Letter only (referred to in the Consolidation Listing Form as the "Principal Letter") and all the Provisional Allotment Letters are lodged together. Each Provisional Allotment Letter so lodged must bear the number of the Principal Letter in the space provided on the Consolidation Listing Form. 4. STAMP DUTY RESERVE TAX/STAMP DUTY--Your attention is drawn to paragraph 8 of part 7 of the Prospectus. If you are in any doubt as to your tax position, you should seek professional advice without delay. FORM X FORM OF RENUNCIATION FOR (NOT AVAILABLE AFTER 3:00 P.M. ON 18 SEPTEMBER 2000 SEE 3 To be completed, if the original allottee(s) desire(s) to renounce all the new Pearson Shares comprised herein, by 3.00 p.m. on 18 September 2000, or, if the original allottee(s) desire(s) to obtain Split Letters, by 3.00 p.m. on 30 August 2000, if nil paid, or 3.00 p.m. on 14 September 2000, if fully paid. To the Directors of Pearson plc I/We hereby renounce my/our rights to the new Pearson Shares comprised in this letter in favour of the person(s) named in the Registration Application Form (Form Y) in relation to or including such new Pearson Shares. ALL JOINT HOLDERS MUST SIGN. A CORPORATION MUST EXECUTE UNDER ITS COMMON SEAL WHICH SHOULD BE AFFIXED IN ACCORDANCE WITH _______________________ ITS ARTICLES OF ASSOCIATION OR OTHER REGULATIONS. ALTERNATIVELY, A COMPANY TO SIGNATURE(S) _______________________ WHICH SECTION 36A OF THE COMPANIES ACT 1985 OF PERSON(S) APPLIES MAY EXECUTE THIS LETTER BY A DIRECTOR NAMED ON PAGE 1 _______________________ AND THE COMPANY SECRETARY OR BY TWO DIRECTORS OF THE COMPANY SIGNING THE LETTER AND INSERTING _______________________ THE NAME OF THE COMPANY ABOVE THEIR SIGNATURES. EACH OF THE OFFICERS SIGNING THE LETTER SHOULD STATE THE OFFICE WHICH HE HOLDS UNDER ITS SIGNATURE.
Dated this______________________ day ______________ of __________________ 2000 In the case of Split Letters this Form will be endorsed "Original Duly Renounced". FORM Y MUST BE COMPLETED BY OR ON BEHALF OF THE PERSONS IN WHOSE NAMES THE RIGHTS SHARES ARE TO BE REGISTERED FORM Y REGISTRATION APPLICATION FORM THIS FORM SHOULD ONLY BE COMPLETED WHERE THERE HAS BEEN A RENUNCIATION. The entire Provisional Allotment Letter must be lodged with Lloyds TSB Registrars, NOT LATER THAN 3.00 p.m. on 18 September 2000, providing payment has been made by 3.00 p.m. on 1 September 2000. The Company reserves the right to refuse to register any renunciation in the name of any Overseas Shareholder (including any person whose address is in Canada, France, the Netherlands, South Africa, or the Republic of Ireland). To the Directors of Pearson plc I/We warrant that I/we am/are not applying as nominee or agent for a person who is or may be liable to stamp duty or stamp duty reserve tax under any of sections 67, 70, 93 or 96 of the Finance Act 1986 (depositary receipts or clearance services). PLEASE USE BLOCK CAPITALS (1) Forename(s) (in full) __________________________ Surname ________________ (State Mr., Mrs., Miss or title) ________________________________________ Address (in full) _______________________________________________________ (2) Forename(s) (in full) __________________________ Surname ________________ (State Mr., Mrs., Miss or title) ________________________________________ Address (in full) _______________________________________________________ (3) Forename(s) (in full) __________________________ Surname ________________ (State Mr., Mrs., Miss or title) ________________________________________ Address (in full) _______________________________________________________ (4) Forename(s) (in full) __________________________ Surname ________________ (State Mr., Mrs., Miss or title) ________________________________________ Address (in full) _______________________________________________________
CONSOLIDATION LISTING FORM FOR INSTRUCTIONS SEE 3 ABOVE ALLOTMENT NUMBER OF NUMBER SHARES - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- - ----------------------------------------------------------- TOTAL NUMBER TOTAL NUMBER OF LETTERS OF SHARES - ----------------------------------------------------------- ALLOCATION NUMBER OF PRINCIPAL LETTER - ----------------------------------------------------------- - -----------------------------------------------------------
Registration is requested in the above name(s) of the new For use between 18 September 2000 and 26 September 2000 Pearson Shares specified in this Provisional Allotment Lodged in exchange for share certificate(s) by: Letter and in the several Provisional Allotment Letters (if any) detailed in the Consolidation Listing Form above totaling. - -------------------- * new Pearson Shares
*Insert the number of Rights Shares Name:_______________________________ which must be the number of new Pearson Address:____________________________ Shares comprised in this Provisional ____________________________________ Allotment Letter, or if the Consolidation Listing Form is used, the total entered on this form. Stamp or name and address of Agent (if any) lodging this form
EX-4.5 10 ex-4_5.txt EXHIBIT 4.5 Exhibit 4.5 (FACE OF WARRANT) Rights Certificate No.: _______________ No.of Rights:_____________ Cusip No. ________________ ALL RIGHTS WILL EXPIRE AT 12:00 NOON NEW YORK TIME ON AUGUST 30, 2000. WARRANT REPRESENTING THE RIGHT TO PURCHASE AMERICAN DEPOSITARY SHARES OF PEARSON PLC Pursuant to the Rights Agency Agreement, dated _________, 2000, between Pearson plc and The Bank of New York, as ADS Subscription Agent (the "Agreement"), Pearson is offering to the holders of its American Depositary Shares (ADSs) (representing one Ordinary Share of the Company, 25 pence each), for every eleven ADSs owned by each such holder as of the close of business (New York City time) July 28, 2000, three rights ("ADS Rights"), each entitling the holder thereof to purchase one additional ADS (the "ADS Rights Offer"), at the dollar subscription price of $16.50 (currently equivalent to 110% of the Sterling Subscription Price of (pound)10 per share) which includes a 1.5% UK stamp duty reserve tax, which you must pay with your subscription, as described below (the "Dollar Subscription Price") until 12:00 noon (New York City time) on August 30, 2000 (the "Expiration Date"). No fractional ADS Rights will be issued. ONE ADS RIGHT AND THE DOLLAR SUBSCRIPTION PRICE OF $16.50 ARE NEEDED TO SUBSCRIBE FOR EACH NEW ADS THIS WARRANT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED AT THE OFFICE OF THE ADS SUBSCRIPTION AGENT. This Warrant is subject to all of the terms, provisions and conditions for the ADS Rights Offer set forth in the Prospectus dated _________, 2000 (the "Prospectus") delivered concurrently herewith and of the Agreement, which terms, provisions and conditions are incorporated herein by reference and made a part hereof and to which Prospectus and Agreement reference is hereby made for a full description of the ADS Rights, limitations of rights, obligations, duties and immunities hereunder of the ADS Subscription Agent, the Company and the holder of the Warrant. Copies of the Agreement are on file at the office of the ADS Subscription Agent at 101 Barclay Street, 12th Floor, New York, New York 10286. The Bank of New York, as agent for Pearson, has agreed to arrange to convert U.S. dollars into pounds sterling and pay the appropriate subscription amounts in pounds sterling to the Company. Holders of ADSs are required to tender to The Bank of New York US$16.50 per ADS in order to make it likely that the ADS Subscription Agent will have sufficient funds to pay the Subscription Price plus the 1.5% UK stamp duty reserve tax in light of possible exchange rate fluctuations. The ADS Subscription Agent will make the conversion from U.S. dollars into pounds sterling at a commercially reasonable rate as soon as practicable after 12:00 noon (New York City time) on August 30, 2000. If US$16.50, when converted to pounds sterling on or about August 30, 2000, is less than the Sterling Subscription Price and the 1.5% UK stamp duty reserve tax, The Bank of New York will pay such shortfall to the Company on behalf of the subscriber, who will then be required promptly to pay such shortfall (including interest and expenses) to the ADS Subscription Agent. The ADS Subscription Agent will not send any New ADSs subscribed for by a holder prior to the receipt by the ADS Subscription Agent of such payment. If payment of the amount of any deficiency is not received from a subscriber by the ADS Subscription Agent by September 20, 2000, the ADS Subscription Agent may sell the new ADSs subscribed for by such subscriber at a public or private sale, at such place or places and upon such terms as it may deem proper, and the ADS Subscription Agent may allocate the net proceeds of such sales for the account of the subscriber upon an averaged or other practicable basis without regard to any distinctions among such subscribers because of exchange restrictions, or otherwise in an amount sufficient to cover such deficiency. In such event, the ADS Subscription Agent will then send the remaining new ADSs to such holder together with a check in the amount of the excess proceeds, if any, from such sale; PROVIDED THAT, if the amount of such excess proceeds realized upon the sale of such holder's new ADSs is less than $5.00, such excess proceeds will not be distributed but will be aggregated and remitted to the Company and retained for its benefit. Subject to the preceding sentence, any excess will be refunded promptly without interest. In order to subscribe for the ADSs provided above, the appropriate form on the reverse side of this Warrant must be completed and signed. Please read the instructions contained in the Letter of Transmittal accompanying this Warrant before completing any form. This Warrant and ADS Rights represented hereby will become void immediately at the expiration date, unless properly tendered for exercise on or prior to such time; however, you may receive proceeds from the sale of the new Ordinary Shares attributable to your unexercised ADS Rights, as described in the Prospectus under "The US Rights Offering - Unexercised ADS Rights." As soon as practicable after October 2, 2000, the depositary for the ADS will distribute ADRs to subscribers who have properly exercised ADS Rights. This Warrant is only evidence of the existence of ADS Rights and does not grant any rights or impose any obligations not granted or imposed pursuant to the express terms of the Agreement. This Warrant will not be valid or obligatory for any purpose until it has been countersigned by the ADS Subscription Agent. - -------------------------------------------------------------------------------- Name(s) and Address(es) of Registered Holders of ADS Rights (label to be affixed) - -------------------------------------------------------------------------------- WITNESS the facsimile signatures of the proper authorized signatories of Pearson and the ADS Subscription Agent. PEARSON plc By:___________________________ Authorized Signatory THE BANK OF NEW YORK, as ADS Subscription Agent By:___________________________ Authorized Signatory (REVERSE OF WARRANT) READ INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL AND INSTRUCTIONS BOOKLET AND ACCOMPANYING THIS WARRANT BEFORE COMPLETING RETURN TO ADS SUBSCRIPTION AGENT YOUR EXERCISE OF ADS RIGHT IS IRREVOCABLE AND MAY NOT BE CANCELLED OR MODIFIED. - -------------------------------------------------- PLEASE FILL IN APPROPRIATE INFORMATION - -------------------------------------------------- No. of Amount |_| Sell ADSs Paid excess Subscribed ADS for Rights and send check for amount of proceeds less fees. - -------------------------------------------------- ADSs $ - -------------------------------------------------- ADS Rights Warrant Number - -------------------------------------------------- Expiration Date: One ADS Right August 30, 2000 required to Pearson plc subscribe for each ADS FORM 1 - TO SUBSCRIBE: I hereby irrevocably subscribe for the number of New ADSs indicated above, pursuant to the Prospectus, dated August __, 2000, receipt of which is acknowledged. Signature of Purchaser _______________________________________ Telephone Number (include area code)___________________________ - -------------------------------------------------------------------------------- (Print full address) ADDRESS FOR DELIVERY OF AMERICAN DEPOSITARY RECEIPTS EVIDENCING AMERICAN DEPOSITARY SHARES IF OTHER THAN AS SHOWN HEREON: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 2- TO SELL ADS RIGHTS THROUGH AGENT: As my Agent, you are authorized to sell the ADS Rights represented by this Warrant and remit the net proceeds to me. Under the penalty of perjury, I certify that the Taxpayer Identification Number provided in the box is true, correct and complete. Signature:____________________________________________ FORM 3- TO SELL ADS RIGHTS THROUGH HOLDER'S COMMERCIAL BANK OR BROKER OR TO TRANSFER WARRANT: For value received, the ADS Rights represented by this Warrant are assigned to: - ----------------------------------------------------- (Print full name of assignee) - ----------------------------------------------------- (Print full address) Signature_____________________________________________ (Signature must correspond with name as shown hereon) Signature guaranteed by______________________________ SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- PLEASE PROVIDE YOUR SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. ALSO INDICATE "EXEMPT" IF AN EXEMPT RECIPIENT. - -------------------------------------------------------------------------------- W-9 CERTIFICATION - Under penalty of perjury, I certify that (i) the Social Security Number or Taxpayer Identification Number is current and (ii) I am NOT (delete "NOT" if inapplicable) subject to backup withholding either because I have not been notified that I am subject to backup withholding as a result of the failure to report all interest or dividends, or because the IRS has notified me that I am no longer subject to backup withholding. SIGNATURE: DATE: - -------------------------------------------------------------------------------- Note: Failure to complete and return the information will result in backup withholding of payments due to you. See the accompanying instructions for further information. THIS WARRANT MAY BE USED TO PURCHASE NEW ADSs OR MAY BE ASSIGNED OR SOLD. FULL INSTRUCTIONS APPEAR IN THE LETTER ACCOMPANYING THIS WARRANT. FOR PRICE PER ADS - SEE PROSPECTUS DELIVERED HEREWITH. EX-5 11 ex-5.txt EXHIBIT 5 Exhibit 5 7 August 2000 Pearson plc 3 Burlington Gardens London W1X 1LE Dear Sirs PEARSON PLC - OFFERING OF ORDINARY SHARES INTRODUCTION 1. We are acting as English legal advisers to Pearson plc, a public company limited by shares incorporated under the laws of England and Wales (the COMPANY), in connection with a rights offering (the OFFERING) by the Company of 170,528,278 new ordinary shares of 25p each of the Company (NEW ORDINARY SHARES), some of which will be represented by American Depositary Shares (ADSs). 22,100,000 of the New Ordinary Shares have been registered under the US Securities Act of 1933, as amended, pursuant to a registration statement on Form F-1 of the Company filed with the Securities and Exchange Commission on 7 August 2000, as amended (the REGISTRATION STATEMENT). 2. For the purposes of giving this opinion we have examined the following: (a) a copy of the Company's Certificate of Incorporation dated 12 August 1897, a copy of the Certificate of Incorporation on Re-registration as a public limited company dated 26 June 1981 and a copy of the Certificate of Incorporation on Change of Name dated 1 June 1984; (b) copies of the Memorandum and Articles of Association of the Company in force as at 3 August 2000 (the MEMORANDUM and the ARTICLES respectively); (c) copies of the minutes of the meetings of the Board of Directors of the Company or a committee thereof held on 27 July 2000, 30 July 2000 and 4 August 2000 evidencing, INTER ALIA, the Board of Directors' approval of the Company entering into the Offering and the transactions contemplated thereby; (d) a draft dated 7 August 2000 of the circular comprising a prospectus in the United Kingdom to be issued by the Company to its shareholders in connection with the Offering (the CIRCULAR); (e) a draft dated 7 August 2000 of the provisional allotment letter to be issued by the Company to certain of its shareholders in connection with the Offering (the PROVISIONAL ALLOTMENT LETTER); and (f) those parts of the Registration Statement deemed relevant for the purposes of giving this opinion. 3. This opinion is confined to matters of English law. Accordingly, we express no opinion herein with regard to any system of law other than the laws of England as currently applied by the English courts. In particular, we express no opinion on European Community law as it affects any jurisdiction other than England. This opinion is to be governed by and construed in accordance with English law as at the date of this opinion. To the extent that the laws of the United States or the State of New York may be relevant, we have made no independent investigation thereof and our opinion is subject to the effects of such laws including the matters contained in the opinion of Morgan Lewis & Bockius LLP, United States counsel for the Company. ASSUMPTIONS 4. In considering the documents listed above and in rendering this opinion, we have without further enquiry assumed: (a) the genuineness of all signatures on, and the authenticity and completeness of, all documents submitted to us whether as originals or copies; (b) the conformity to originals of all documents supplied to us as photocopies or facsimile copies; (c) that, where a document has been examined by us in draft or specimen form, it will be or has been executed in the form of that draft or specimen; (d) that the Certificate of Incorporation on Re-registration as a public limited company dated 26 June 1981 and the Certificate of Incorporation on Change of Name dated 1 June 1984 and the Memorandum and the Articles are currently in force; (e) that the information revealed by our search on 4 August 2000 (carried out by us or by ICC Information Ltd. on our behalf) of the public documents of the Company kept at Companies House in Cardiff (the COMPANY SEARCH) and our oral enquiry on 4 August 2000 of the Central Registry of Winding-up Petitions (the WINDING UP ENQUIRY) below was accurate in all respects and has not, since the time of such search or enquiry, been altered; (f) that the meetings of the Board of Directors of the Company or a committee thereof were duly convened and held on 27 July 2000, 30 July 2000 and 4 August 2000 as evidenced by the minutes referred to in paragraph 2(c); at each of such meetings a quorum of directors was present and acting throughout; the resolutions referred to in such minutes were duly passed and have not been amended, modified or revoked and are in full force and effect; and each of the directors of the Company having any interest in any of the matters discussed at each of such meetings duly disclosed his interest therein and was entitled to count in the quorum of such meetings and to vote on the resolutions proposed thereat, and such minutes are a true and correct record of the proceedings described therein; (g) that the directors of the Company, in authorising the provisional allotment of New Ordinary Shares, have exercised their powers in accordance with their duties under all applicable laws and the memorandum and articles of association of the Company in force at the relevant time; (h) that all such further meetings of the Board of Directors of the Company or of any committee thereof which may be required in order validly to allot (whether provisionally or otherwise) and issue the New Ordinary Shares will be duly convened and held and the requisite resolutions to give effect to such allotment and issue will be duly passed and that, without prejudice to the generality of the foregoing, the directors of the Company will exercise their powers in accordance with their duties under all applicable laws and the memorandum and articles of association of the Company in force at the relevant time; (i) full compliance by the Company with the provisions of the Circular and the Provisional Allotment Letter; (j) that all the New Ordinary Shares to be offered pursuant to the Offering are subscribed in full by those persons who were holders of Ordinary Shares at close of business on 28 July 2000 or by persons in whose favour the rights thereto were duly renounced; (k) that all conditions precedent to the allotment and issue of the New Ordinary Shares have been or will be duly and properly satisfied; (l) that there are no agreements or arrangements in existence, made prior to the Offering, which affect the enforceability of the Offering or the New Ordinary Shares in accordance with their terms; and (m) that you have relied and will continue to rely as to matters governed by the laws of the state of New York and of the United States upon the opinion or opinions of Morgan, Lewis & Bockius LLP, United States counsel for the Company. OPINION 5. On the basis of, and subject to, the foregoing and the matters set out in paragraph 6 below and subject to any matters not disclosed to us, and having regard to such considerations of English law applying at the date of this letter as we consider relevant, we are of the opinion that, save as disclosed in the Registration Statement, when issued and delivered against payment in full therefor in accordance with and as contemplated by the provisions of the Circular and the Provisional Allotment Letter, the New Ordinary Shares will be validly issued and fully paid and no further contributions in respect of the New Ordinary Shares will be required to be made to the Company by the holders thereof only by virtue of their being such holders. QUALIFICATIONS 6. Our opinion is subject to the following qualifications: (a) the Company Search is not conclusively capable of revealing whether or not: (i) a winding up order has been made or a resolution passed for the winding up of a company; or (ii) an administration order has been made; or (iii) a receiver, administrative receiver, administrator or liquidator has been appointed, as notice of these matters may not be filed with the Registrar of Companies immediately and, when filed, may not be entered on the public microfiche of the relevant company immediately. In addition, that search is not capable of revealing, prior to the making of the relevant order, whether or not a winding up petition or a petition for an administration order has been presented; (b) the Winding Up Enquiry relates only to a compulsory winding up and is not conclusively capable of revealing whether or not a winding up petition in respect of a compulsory winding up has been presented since details of the petition may not have been entered on the records of the Central Registry of Winding-up Petitions immediately or, in the case of a petition presented to a County Court, may not have been notified to the Central Registry and entered on such records at all, and the response to an enquiry only relates to the period of approximately four years prior to the date when the enquiry was made; and (c) this opinion is subject to all applicable laws relating to insolvency, bankruptcy, administration, reorganisation, liquidation or analogous circumstances. BENEFIT OF OPINION 7. This opinion is addressed to the Addressee solely for its own benefit in relation to the Offering and, except as provided in this paragraph and in paragraph 8 or with our prior written consent, is not to be transmitted or disclosed to or used or relied upon by any other person or used or relied upon by the Addressee for any other purpose. This opinion may be relied upon in relation to the Offering by Goldman Sachs International and Cazenove & Co., and by The Bank of New York as Depositary Bank. 8. We consent to the filing of this opinion as an exhibit to the Registration Statement relating to the New Ordinary Shares or part thereof and to references to us under the headings "Service of Process and Enforcement of Liabilities" and "Validity of Securities" in the Registration Statement relating to the New Ordinary Shares or part thereof. Yours faithfully, /s/ Freshfields Bruckhaus Deringer - ---------------------------------- EX-10.1 12 ex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 EXECUTION COPY STOCK PURCHASE AGREEMENT dated as of May 17, 1998 among VIACOM INTERNATIONAL INC., PEARSON plc and PEARSON INC. TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Defined Terms . . . . . . . . . . . . . . . . . . . . . 9 SECTION 1.03. Terms Generally . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE II PURCHASE AND SALE SECTION 2.01. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.02. Purchase Price; Allocation of Purchase Price. . . . . . . . . 11 SECTION 2.03. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.04. Closing Deliveries by the Seller. . . . . . . . . . . . . . . 12 SECTION 2.05. Closing Deliveries by the Purchaser . . . . . . . . . . . . . 12 SECTION 2.06. Purchase Price Adjustment . . . . . . . . . . . . . . . . . . 13 SECTION 2.07. Payments and Computations . . . . . . . . . . . . . . . . . . 14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER SECTION 3.01. Incorporation and Authority of the Seller . . . . . . . . . . 15 SECTION 3.02. Incorporation and Qualification of the Publishing Subsidiaries 16 SECTION 3.03. Capital Stock of the Publishing Subsidiaries. . . . . . . . . 16 SECTION 3.04. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 3.05. Consents and Approvals. . . . . . . . . . . . . . . . . . . . 17 SECTION 3.06. Financial Information . . . . . . . . . . . . . . . . . . . . 17 SECTION 3.07. Absence of Certain Changes or Events. . . . . . . . . . . . . 18 SECTION 3.08. Absence of Litigation . . . . . . . . . . . . . . . . . . . . 18 SECTION 3.09. Compliance with Laws. . . . . . . . . . . . . . . . . . . . . 18 SECTION 3.10. Governmental Licenses and Permits . . . . . . . . . . . . . . 18 SECTION 3.11. The Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.12. Intellectual Property . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.13. Employee Benefits Matters . . . . . . . . . . . . . . . . . . 20 SECTION 3.14. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.15. Environmental Matters . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.16. Material Contracts. . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.17. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.18. EXCLUSIVITY OF REPRESENTATIONS. . . . . . . . . . . . . . . . 25 SECTION 3.19. Real Property . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 3.20. No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . 27 SECTION 3.21. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND THE PARENT SECTION 4.01. Incorporation and Authority of the Purchaser. . . . . . . . . 27
i SECTION 4.02. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.03. Consents and Approvals. . . . . . . . . . . . . . . . . . . . 29 SECTION 4.04. Absence of Litigation . . . . . . . . . . . . . . . . . . . . 29 SECTION 4.05. Securities Matters. . . . . . . . . . . . . . . . . . . . . . 29 SECTION 4.06. Financial Ability . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 4.07. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.08. Shareholder Approval. . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.09. EXCLUSIVITY OF REPRESENTATIONS. . . . . . . . . . . . . . . . 30 ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. Conduct of Business Prior to the Closing. . . . . . . . . . . 30 SECTION 5.02. Access to Information . . . . . . . . . . . . . . . . . . . . 32 SECTION 5.03. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.04. Regulatory and Other Authorizations; Consents . . . . . . . . 34 SECTION 5.05. Intercompany Accounts . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.06. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.07. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.08. Permitted Reorganization. . . . . . . . . . . . . . . . . . . 37 SECTION 5.09. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.10. Further Action. . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.11. Additional Financial Statements and Information . . . . . . . 38 SECTION 5.12. Non-Competition . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 5.13. Non-Solicitation. . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE VI EMPLOYEE MATTERS SECTION 6.01. Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.02. Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.03. Retiree Medical and Dental Benefits . . . . . . . . . . . . . 43 SECTION 6.04. Foreign Plans . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.05. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 6.06. No Third-Party Beneficiaries, Etc.. . . . . . . . . . . . . . 45 SECTION 6.07. Cooperation and Exchange of Information . . . . . . . . . . . 45 ARTICLE VII TAX MATTERS SECTION 7.01. Tax Indemnities . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 7.02. Refunds and Tax Benefits. . . . . . . . . . . . . . . . . . . 47 SECTION 7.03. Contests. . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 7.04. Preparation of Tax Returns. . . . . . . . . . . . . . . . . . 50 SECTION 7.05. Section 338(h)(10) Election and Allocations . . . . . . . . . 51 SECTION 7.06. Cooperation and Exchange of Information . . . . . . . . . . . 52 SECTION 7.07. Conveyance Taxes. . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.08. Termination of Tax Sharing Agreements . . . . . . . . . . . . 53
ii SECTION 7.09. FIRPTA Certificates . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 53 ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.01. Conditions to Obligations of the Seller . . . . . . . . . . . 54 SECTION 8.02. Conditions to Obligations of the Parent and the Purchaser . . 55 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER SECTION 9.01. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 9.02. Effect of Termination . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.03. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ARTICLE X INDEMNIFICATION SECTION 10.01. Indemnification by the Parent and the Purchaser. . . . . . . 58 SECTION 10.02. Indemnification by the Seller. . . . . . . . . . . . . . . . 58 SECTION 10.03. Notification of Claims . . . . . . . . . . . . . . . . . . . 59 SECTION 10.04. Exclusive Remedies . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XI GENERAL PROVISIONS SECTION 11.01. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 11.02. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 11.03. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 11.04. Public Announcements . . . . . . . . . . . . . . . . . . . . 63 SECTION 11.05. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 11.06. Severability . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 11.07. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 11.08. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 11.09. No Third-Party Beneficiaries . . . . . . . . . . . . . . . . 64 SECTION 11.10. Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 11.11. Sections and Schedules . . . . . . . . . . . . . . . . . . . 64 SECTION 11.12. Governing Law; Submission to Jurisdiction; Waivers . . . . . 64 SECTION 11.13. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 11.14. No Presumption . . . . . . . . . . . . . . . . . . . . . . . 65
iii SCHEDULES Schedule 1 Excluded Assets Schedule 2 Directly Acquired Publishing Subsidiaries Schedule 2A Directly Acquired Foreign Subsidiaries Schedule 3 Publishing Subsidiaries Schedule 4 Minority Interests EXHIBITS Exhibit 1.01(a) Forms of License Agreements Exhibit 1.01(b) Form of Services Agreements Exhibit 1.01(c) Form of Sublease Agreement iv STOCK PURCHASE AGREEMENT, dated as of May 17, 1998, among VIACOM INTERNATIONAL INC., a Delaware corporation (the "SELLER"), PEARSON INC., a Delaware corporation (the "PURCHASER"), and PEARSON plc, a corporation organized under the laws of the United Kingdom that is the indirect holder of all of the outstanding capital stock of the Purchaser ("PARENT"). W I T N E S S E T H : WHEREAS, the Seller wishes to sell, or cause its Affiliates to sell, to the Purchaser and Parent (or one or more of their Affiliates pursuant to an assignment permitted by Section 11.08 hereof), and the Purchaser and Parent wish to purchase (or cause one or more of their Affiliates to purchase, as the case may be) from the Seller or its Affiliates, all of the issued and outstanding shares of capital stock (the "SHARES") of the Publishing Subsidiaries (as such term is hereinafter defined), upon the terms and subject to the conditions set forth herein; and WHEREAS, in connection with such sale, the Seller and the Purchaser are willing to license, or cause their Affiliates to license, certain intellectual property to each other and their respective Affiliates, upon the terms of the License Agreements referred to herein, and the Purchaser and the Seller are willing to provide, or cause their Affiliates to provide, certain services to each other and their respective Affiliates upon the terms of the Services Agreements referred to herein. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ACTION" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority. "AFFILIATE" means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, Controls, is Controlled by or is under common Control with such specified Person. 2 "AGREEMENT" means this Agreement, including the Disclosure Schedule and all amendments hereto made in accordance with Section 11.10. "ANCILLARY AGREEMENTS" means the Services Agreements, the License Agreements and the Sublease Agreement. "ASSETS" means the assets of every type and description (including, without limitation, rights under Contracts) that are owned, leased or licensed by any Affiliate of Seller in connection with the Businesses, including, without limitation, Prentice-Hall, Inc., Simon & Schuster or International Book Distribution Limited or any of their direct or indirect Subsidiaries, other than (a) such assets that are used or held for use exclusively in the operation of the Consumer Business and (b) the assets set forth on Schedule 1. "BASE PRICE" means $4.6 billion. "BUSINESS DAY" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in the City of New York. "BUSINESSES" means, collectively, on the date hereof, the children's learning, higher education, business and professional, and reference publishing businesses comprising the publishing segment of Viacom as reported in the Annual Report on Form 10-K of Viacom for the year ended December 31, 1997, and specifically excluding the Consumer Business. For the purposes of this Agreement, "consumer", "trade", "K-12", "education technology", "supplementary", "children's learning", "higher education", "business and professional" and "reference" shall have the meanings commonly employed by the management of Simon & Schuster on the date of this Agreement, "reference" specifically includes "reference", "library reference", "Macmillan Computer Publishing" and "Macmillan Publishing" (and any other variation on the term "Macmillan") and "business" refers to businesses managed as a unit, without regard to the specific legal entity that conducts such business. "CLOSING NET ASSETS" means, for the Businesses on a combined basis as of the close of business on the Closing Date, total assets minus total liabilities, in each case as of such date, calculated in the same manner and using the same policies and methods consistently applied (without giving effect to costs of replacing the assets set forth on Schedule 1 or items related thereto) as used in preparation of the December 31, 1997 Audited Balance Sheet; PROVIDED that any reversal of reserves commencing on January 1, 1998, through the close of business on the Closing Date that is required by GAAP but is not the result of "payment of the full amount" (as defined in Section 3.07 of this Agreement) shall not be given effect for purposes of calculating Closing Net Assets. 3 "CLOSING NET ASSETS ADJUSTMENT AMOUNT" means the Estimated Closing Net Assets less the amount of total assets minus total liabilities reflected on the December 31, 1997 Audited Balance Sheet. "CODE" means the Internal Revenue Code of 1986, as amended. "CONSUMER BUSINESS" means the consumer/trade publishing business that is included within the publishing segment of Viacom as reported in the Annual Report on Form 10-K of Viacom for the year ended December 31, 1997. "CONTRACT" means any agreement, lease, evidence of indebtedness, mortgage, indenture, security agreement, deed of trust or other contract, obligation or commitment. "CONTROL" means, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. The term "Controlled" shall have a correlative meaning. "DECEMBER 31, 1997 AUDITED BALANCE SHEET" means the audited consolidated balance sheet as at December 31, 1997 for the Businesses to be provided to Purchaser pursuant to Section 5.11. "DIRECTLY ACQUIRED FOREIGN SUBSIDIARIES" means the entities set forth on Schedule 2A. "DIRECTLY ACQUIRED PUBLISHING SUBSIDIARIES" means the entities set forth on Schedule 2. "DISCLOSURE SCHEDULE" means the Disclosure Schedule delivered by the Seller to the Parent and the Purchaser on the date hereof. "ELECTION SHARES" means all of the issued and outstanding shares of capital stock of Ahsuog Inc., a California corporation; Silver Burdett Ginn Inc., a Delaware corporation; Modern Curriculum, Inc., a California corporation; Regents Publishing Co., Inc., a New York corporation; and Globe Fearon Inc., a California corporation. "ENVIRONMENTAL LAW" means any Law relating to pollution or protection of the environment, including to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. 4 "ENVIRONMENTAL LIABILITY" means any written claim or demand, order, suit, obligation, liability, cost (including the cost of any investigation, testing, compliance or remedial action), damages (consequential or direct), loss or expense (including reasonable attorneys' and consultants' fees and expenses) arising out of, relating to or resulting from any environmental matter or condition and related in any way to the Assets, the Businesses, the Publishing Subsidiaries or to this Agreement or its subject matter, in each case whether arising or incurred before, on or after the Closing Date. "ENVIRONMENTAL PERMIT" means any permit, approval, identification number, license and other authorization required under or issued pursuant to any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FINAL NA STATEMENT" means the determination of the Closing Net Assets that is final and binding on the parties, either through agreement by the parties or through the action of the Independent Accounting Firm in the manner set forth in Section 2.06. "FINAL NET ASSETS ADJUSTMENT AMOUNT" means the Closing Net Assets reflected on the Final NA Statement less the amount of total assets minus total liabilities reflected on the December 31, 1997 Audited Balance Sheet. "GOVERNMENTAL AUTHORITY" means any United States federal, state or local or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body. "GOVERNMENTAL ORDER" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "HAZARDOUS MATERIALS" means (a) petroleum, petroleum products, by products or breakdown products, radioactive materials, friable asbestos or polychlorinated biphenyls, and (b) any chemical, material or substance defined or regulated as toxic or as a pollutant, contaminant or waste under any Environmental Law. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "INDEPENDENT ACCOUNTING FIRM" means (a) an independent certified public accounting firm in the United States of national recognition mutually acceptable to the 5 Seller and the Purchaser or (b) if the Seller and the Purchaser are unable to agree upon such a firm, then each party shall select one such firm and those two firms shall select a third firm, in which event "Independent Accounting Firm" shall mean such third firm. "INTELLECTUAL PROPERTY" means: (a) United States, international, and foreign patents, patent applications and statutory invention registrations, including reissues, divisions, continuations, continuations in part, extensions and reexaminations thereof, all inventions, all rights therein including rights provided by international treaties or conventions, and all improvements thereto, (b) trademarks, service marks, trade dress, logos, trade names, corporate names, domain names and other source identifiers, whether or not registered, including all common law rights and all goodwill associated therewith, and registrations and applications for registration thereof, all rights therein including rights provided by international treaties or conventions, and all reissues, extensions and renewals of any of the foregoing, (c) copyrightable works, copyrights, whether or not registered, and registrations and applications for registration thereof, and all rights therein including rights provided by international treaties or conventions, (d) confidential and proprietary information, including technology, trade secrets, ideas, know-how, formulas, customer and supplier lists, pricing and cost information and business and marketing plans and proposals, (e) computer software (including source code, data and related documentation) and (f) all other proprietary rights. "INTEREST RATE" means the rate of interest per annum equal to the average of the rate per annum publicly announced by Citibank, N.A. or any successor thereto in New York, New York from time to time as its "base" rate on each day during the period for which interest is paid. "IRS" means the Internal Revenue Service. "KNOWLEDGE OF THE SELLER" or "SELLER'S KNOWLEDGE" means the actual knowledge of any of the following individuals: the Chairman, any Deputy Chairman or any Senior Vice President of Viacom, Jonathan Newcomb, the President and Chief Executive Officer of Simon & Schuster, Andrew Evans, the Executive Vice President and Chief Financial Officer of Simon & Schuster, Mark C. Morril, the Senior Vice President and General Counsel of Simon & Schuster, Andrea Hirsch, Michael Packer, David Berger, William Roskin (solely in respect of human resources and employee benefits matters), John Berna (solely in respect of Tax matters), David Williamson (solely in respect of real property matters), Henry Hirschberg (solely in respect of the higher education business and the Canadian operations of the Businesses), George Werner (solely 6 in respect of the higher education business), Scott Flanders and David Seligman (solely in respect of the reference publishing business), Martin Maleska (solely in respect of the business and professional publishing business and the international business, excluding Canada), Vincent Loncto (solely in respect of the business and professional publishing business), and David Wan and George McGuirk (solely in respect of the children's learning publishing business), in each case without specific investigation or inquiry by such person. "LAW" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "LICENSE AGREEMENTS" means the License Agreements between the Purchaser or an Affiliate of the Purchaser and the Seller or an Affiliate of the Seller in the forms attached hereto as Exhibit 1.01(a). "LICENSES" means all licenses, permits, certificates of authority, authorizations, approvals, registrations, filings, qualifications, privileges, franchises and similar consents granted or issued by any Governmental Authority. "LIEN" means any mortgage, deed or trust, pledge, hypothecation, security interest, encumbrance, claim, lien or charge of any kind, or any conditional sale Contract, title retention Contract or other Contract to create any of the foregoing. "MATERIAL ADVERSE EFFECT" means any event, change, effect, occurrence or state of facts that has had or is reasonably expected to have a material adverse effect on the business, results of operations or the financial condition of the Businesses, taken as a whole; PROVIDED, HOWEVER, that any adverse effect arising out of or resulting from (a) an event or series of events or circumstances affecting (i) the publishing industry generally in any country in which any of the Businesses operate or (ii) the United States economy generally or the economy generally of any other country in which the Businesses operate or (b) the entering into of this Agreement or the consummation of the transactions contemplated hereby or the announcement thereof, shall not, in and of itself, constitute a Material Adverse Effect. "MINORITY INTERESTS" means any corporation, partnership, joint venture, limited liability company, trust or estate or other Person (other than a Subsidiary) in which a Publishing Subsidiary holds, as of the date of this Agreement, a beneficial interest in less than 50% of (a) the issued and outstanding capital stock of such corporation, (b) the profits or capital of such partnership, joint venture or limited liability company or (c) such trust or estate or other Person, each as set forth on Schedule 4. "PERMITTED LIENS" means the following Liens: (a) Liens for Taxes, assessments or other governmental charges or levies that are not yet due or payable or that are 7 being contested in good faith by appropriate proceedings; (b) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen, repairmen and other Liens imposed by Law and on a basis consistent with past practice for amounts not yet due; (c) Liens incurred or deposits made in the ordinary course of the Businesses and on a basis consistent with past practice in connection with worker's compensation, unemployment insurance or other types of social security; (d) minor defects of title, easements, rights-of-way, restrictions and other similar charges or encumbrances not materially detracting from the value of any of the Owned Real Property or interfering with the ordinary conduct of the Businesses; (e) Liens not created by or through the Seller or any Publishing Subsidiary which affect the underlying fee interest of any Leased Real Property that do not materially interfere with the conduct of the Businesses as currently conducted; and (f) Liens incurred in the ordinary course of the Businesses and on a basis consistent with past practice securing obligations or liabilities which are not individually or in the aggregate material to the relevant Owned Real Property or Leased Real Property, respectively. "PERMITTED REORGANIZATION" means an internal reorganization of assets owned by the Seller or its Subsidiaries to be completed on or prior to the Closing Date (1) to effect any transfer (a) of Assets to the Publishing Subsidiaries (or otherwise in connection with an assignment permitted pursuant to Section 11.08 hereof), (b) of assets from the Publishing Subsidiaries to the Seller or an Affiliate of the Seller (other than a Publishing Subsidiary) and (c) of assets from any Publishing Subsidiary to any other Publishing Subsidiary or (2) to transfer any inactive Subsidiary to the Seller or one of its Affiliates that is not a Publishing Subsidiary. "PERSON" means any natural person, general or limited partnership, corporation, limited liability company, firm, association, Governmental Authority or other legal entity. "PUBLISHING SUBSIDIARIES" means the entities set forth on Schedule 3. "PURCHASE PRICE" means (a) the Base Price, (b) increased by, if positive, or decreased by, if negative, 75% of the Closing Net Assets Adjustment Amount, (c) increased by the amount, if any, payable by the Parent and the Purchaser pursuant to Section 2.06(e) hereof and (d) decreased by the amount, if any, payable by the Seller pursuant to Section 2.06(e) hereof. "SECTION 338 TAX" means a Tax that is attributable to, or arises or results from, any Election other than Taxes subject to Section 7.07. "SECURITIES ACT" means the Securities Act of 1933, as amended. 8 "SERVICES AGREEMENTS" means the Services Agreements between the Purchaser and the Seller or Affiliates thereof in the forms attached hereto as Exhibit 1.01(b). "SIMON & SCHUSTER" means Simon & Schuster, Inc., a New York corporation. "SITE" means any of the real properties currently owned or leased by the Seller or any Affiliate of the Seller in connection with the Businesses or by any of the Publishing Subsidiaries, including all soil, subsoil, surface waters and groundwater thereat. "SUBLEASE AGREEMENT" means the Sublease Agreement between the Purchaser (or an assignee reasonably acceptable to the Seller and acceptable to the landlord for such property) and the Seller with respect to 1633 Broadway substantially in the form attached hereto as Exhibit 1.01(c) and containing representations and warranties with respect to subleased property comparable to those contained in Section 3.19 of this Agreement. "SUBSIDIARY" of any Person means any corporation, partnership, joint venture, limited liability company, trust, estate or other Person of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or other Person or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such first Person, or by such first Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "TAX" or "TAXES" means all income, excise, gross receipts, ad valorem, sales, use, employment, franchise, profits, gains, property, transfer, use, payroll, intangibles or other taxes, fees, stamp taxes, duties, charges, levies or assessments of any kind whatsoever (whether payable directly or by withholding), together with any interest and any penalties, additions to tax or additional amounts imposed by any Tax authority with respect thereto. "TAX RETURNS" means all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. "VIACOM" means Viacom Inc., a Delaware corporation. 9 SECTION 1.02. OTHER DEFINED TERMS. The following terms have the meanings defined for such terms in the Sections set forth below:
TERM SECTION ---- ------- Assumed Pension Benefits 6.02(d) Audited Financial Statements 5.11(a) Business Employees 3.13(a) Closing 2.03 Closing Date 2.03 COBRA 6.02(c) Competing Business 5.12 Confidentiality Agreement 5.03 Contest 7.03(b) Draft Allocation Statement 2.02(b) Election 7.05(a) Election Allocations 7.05(b) Estimated Closing Net Assets 2.06(a) Extraordinary Meeting of Shareholders 5.04(c) Financial Statements 3.06(a) Financing 4.06 Foreign Government Scheme or Arrangement 3.13(d) Foreign Plan 3.13(d) Former Business Employees 3.13(a) Forms 7.05(a) GAAP 3.06(b) Indemnified Party 10.03(a) Indemnifying Party 10.03(a) Initial NA Statement 2.06(b) Leased Real Property 3.19(b) Leased Real Property Permitted Exceptions 3.19(b) Licensed Intellectual Property 3.12(a) Losses 10.01(a) MADSP 7.05(b) Material Contracts 3.16(a) Material Licenses 3.10 Notice of Disagreement 2.06(c) Offering Circular 5.02(b) Owned Intellectual Property 3.12(a) Owned Real Property 3.19(a) Owned Real Property Permitted Exceptions 3.19(a) Paramount DCP 6.02(e) Parent Preamble Parent Board Recommendation 4.01 Post-Closing Date Tax Benefit 7.02(c)
10 Pre-Closing Date NOL 7.02(a) Prentice-Hall Canada Pension Plan 6.02(d) Purchase Price Notice 2.06(a) Purchaser Preamble Purchaser Indemnified Parties 10.02(a) Purchaser's DC Plan 6.02(b) PW 5.11(b) Real Property 3.19(b) Real Property Leases 3.19(b) Recipients 5.03(b) Reference Statement of Net Assets 3.06 Retirees 6.03 S&S DCP 6.02(e) S&S EIP 6.02(b) SEC 5.11 Seller Preamble Seller Indemnified Parties 10.01(a) Seller LOCs 5.07 Shares Recitals Stock Allocations 2.02(b) UK Pension Plan 6.02(f) Unaudited Interim Period Financial Statements 5.11 VEIP 6.02(b) VEPP 6.02(a) Viacom ERISA Plans 3.13(a) Viacom Plans 3.13(a) VICL Pension Plan 6.02(d) VIP 3.13(a) VPP 3.13(a)
SECTION 1.03. TERMS GENERALLY. (a) Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (b) the terms "hereof", "herein", and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified, (c) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation", unless otherwise specified and (d) provisions shall apply, when appropriate, to successive events and transactions. ARTICLE II 11 PURCHASE AND SALE SECTION 2.01. PURCHASE AND SALE. On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Seller shall sell, convey, assign, transfer and deliver to the Parent and the Purchaser (and/or cause one or more of its Subsidiaries to sell, convey, assign, transfer and deliver to the Parent and the Purchaser), and the Parent and the Purchaser shall purchase, acquire and accept from the Seller or such Subsidiaries (i) first, all right, title and interest in and to all the outstanding capital stock of the Directly Acquired Foreign Subsidiaries and (ii) immediately thereafter (but subsequent to the distribution of all proceeds received by a Publishing Subsidiary from the sale of any Directly Acquired Foreign Subsidiary), all right, title and interest in and to all the outstanding capital stock of the Directly Acquired Publishing Subsidiaries. SECTION 2.02. PURCHASE PRICE; ALLOCATION OF PURCHASE PRICE. (a) The Parent and the Purchaser shall pay that portion of the Purchase Price as is specified in the Purchase Price Notice in cash to the Seller at the Closing, as provided in Section 2.05(a), with the remainder payable as provided in Section 2.06(e). The Purchase Price shall be subject to adjustment after the Closing as set forth in Section 2.06 hereof. (b) Within 130 days after the Closing Date, the Purchaser shall prepare and submit to the Seller a draft statement (the "DRAFT ALLOCATION STATEMENT") of the allocation of the Purchase Price among (i) the Directly Acquired Publishing Subsidiaries and among the Directly Acquired Foreign Subsidiaries (the "STOCK ALLOCATIONS") and (ii) the covenant not to compete contained in Section 5.12. Purchaser and Parent agree to allocate at least $200 million to the acquisition of Viacom Holdings [name to be changed], and at least $300 million to the acquisition of the other Directly Acquired Foreign Subsidiaries. Purchaser and Parent further agree to allocate no more than 5% of the Purchase Price to such covenant not to compete. Seller shall not dispute any of the foregoing three allocations to such extent. On or prior to the 30th day after the Seller's receipt of the Draft Allocation Statement, the Seller shall either (i) consent to such Stock Allocations as set forth on the Draft Allocation Statement or (ii) notify the Purchaser that it disagrees with the Draft Allocation Statement. If the Seller and the Purchaser are unable to resolve their differences within 30 days after the Purchaser has been notified with respect to the Seller's disagreement with the Draft Allocation Statement, then any unresolved issues shall be submitted to an Independent Accounting Firm to resolve in a final binding manner after hearing the views of the Seller and the Purchaser. The fees and expenses of the Independent Accounting Firm shall be shared equally between the Seller and the Purchaser. (c) The Seller, the Parent and the Purchaser shall report the federal, state, local and foreign Tax consequences of the transaction contemplated by this Agreement in a manner consistent with the Stock Allocations as agreed by the Seller and the Purchaser or as 12 determined by the Independent Accounting Firm, as the case may be. The Seller, the Parent and the Purchaser further covenant and agree not to take a position with respect to Taxes that is inconsistent with the Stock Allocations on any Tax Return or otherwise, except as may be required by Law. SECTION 2.03. CLOSING. Subject to the terms and conditions of this Agreement, the sale and purchase of the Shares contemplated hereby shall take place at a closing (the "CLOSING") to be held at 10:00 a.m., New York City time, on or before the fifth Business Day following the later to occur of the satisfaction or waiver of the conditions to the obligations of the parties set forth in Sections 8.01(b) and (c) and 8.02(b), (c) and (f), at the offices of the Seller, 1515 Broadway, New York, New York, or at such other time or on such other date or at such other place as the Seller and the Purchaser may mutually agree upon in writing (the day on which the Closing takes place being the "CLOSING DATE"). The Closing shall be deemed effective as of the close of business on the Closing Date. SECTION 2.04. CLOSING DELIVERIES BY THE SELLER. At the Closing, the Seller shall deliver or cause to be delivered to the Parent and the Purchaser: (a) stock certificates evidencing all of the Shares, duly endorsed in blank or accompanied by stock powers and transfer forms duly executed in blank; (b) a receipt for the portion of the Purchase Price as is specified in the Purchase Price Notice; (c) the Ancillary Agreements required to be delivered pursuant to Section 8.02; and (d) any required stock transfer tax stamps. SECTION 2.05. CLOSING DELIVERIES BY THE PURCHASER. At the Closing, Parent and the Purchaser shall deliver to the Seller: (a) the portion of the Purchase Price equal to the Base Price increased by, if positive, or decreased by, if negative, 75% of the Closing Net Assets Adjustments Amount by wire transfer in immediately available funds, to an account or accounts designated at least four Business Days prior to the Closing Date by the Seller in a written notice to the Purchaser; and (b) the Ancillary Agreements required to be delivered pursuant to Section 8.01. 13 SECTION 2.06. PURCHASE PRICE ADJUSTMENT. (a) Not less than 15 days prior to the Closing Date, the Seller shall provide the Purchaser with a preliminary good faith estimate of the anticipated Estimated Closing Net Assets (as defined below). Not less than three Business Days prior to the Closing Date, the Seller shall deliver a notice (the "PURCHASE PRICE NOTICE") to the Purchaser that sets forth (i) the Seller's good faith estimate of the Closing Net Assets (the "ESTIMATED CLOSING NET ASSETS") and (ii) the calculation of the Closing Net Assets Adjustment Amount and the portion of the Purchase Price payable at Closing pursuant to Section 2.05(a). The calculation of the Closing Net Assets Adjustment Amount set forth in the Purchase Price Notice shall be binding on the Parent, the Purchaser and the Seller absent manifest error. (b) As promptly as practicable, but no later than 120 days after the Closing Date, the Purchaser shall prepare and deliver to the Seller an audited consolidated balance sheet (including the related notes and schedules thereto) which shall set forth the Purchaser's determination of the Closing Net Assets (the "INITIAL NA STATEMENT"). During the 20 Business Days immediately following the Seller's receipt of the Initial NA Statement, the Seller and its representatives will be permitted to review at the Seller's offices the Purchaser's working papers relating to the Initial NA Statement as well as all of the books and records relating to the operations and finances of the Businesses with respect to the period up to and including the Closing Date, and the Purchaser shall make reasonably available at the Seller's offices the individuals responsible for the preparation of the Initial NA Statement in order to respond to the reasonable inquiries of the Seller. (c) The Seller shall notify the Purchaser in writing (the "NOTICE OF DISAGREEMENT") within 20 Business Days after receiving the Initial NA Statement if the Seller disagrees with the Purchaser's calculation of the Closing Net Assets, which Notice of Disagreement shall set forth in reasonable detail the basis for such dispute and the U.S. Dollar amounts involved and the Seller's good faith estimate of the Closing Net Assets. If no Notice of Disagreement is received by the Purchaser within such 20 Business Day period, then the Initial NA Statement shall be deemed to have been accepted by the Seller, shall become final and binding upon the parties and shall be the Final NA Statement. (d) During the 20 Business Days immediately following the delivery of a Notice of Disagreement, the Seller and the Purchaser shall seek in good faith to resolve any differences that they may have with respect to any matter specified in the Notice of Disagreement. If at the end of such 20 Business Day period the Seller and the Purchaser have been unable to agree upon a Final NA Statement, the Seller and the Purchaser shall submit to the Independent Accounting Firm for review and resolution any and all matters that remain in dispute with respect to the Notice of Disagreement. The Independent Accounting Firm shall use commercially practicable efforts to make a final determination, binding on the parties hereto, of the Closing Net Assets within 20 Business Days, and such final determination shall be the Final NA Statement. The cost of the Independent Accounting Firm's review and 14 determination shall be paid by the party that has determined an amount of Closing Net Assets that is the greatest amount different from the amount on the Final NA Statement. During the 20 Business Day review by the Independent Accounting Firm, the Purchaser and the Seller will each make available to the Independent Accounting Firm interviews with such individuals and such information, books and records as may be reasonably required by the Independent Accounting Firm to make its final determination. (e) (i) If the Final Net Assets Adjustment Amount (as set forth in the Final NA Statement) exceeds 75% of the Closing Net Assets Adjustment Amount, then the Parent and the Purchaser shall pay to the Seller an amount equal to such excess or (ii) if 75% of the Closing Net Assets Adjustment Amount exceeds the Final Net Assets Adjustment Amount (as set forth in the Final NA Statement), then the Seller shall pay to the Parent and the Purchaser an amount equal to such excess, in either case within five Business Days after the Final NA Statement becomes final and binding on the parties hereto and, in either case, together with interest thereon from the Closing Date until the date of payment at the Interest Rate. If the Final Net Assets Adjustment Amount (as set forth in the Final NA Statement) is equal to 75% of the Closing Net Assets Adjustment Amount, then neither the Parent and the Purchaser, on the one hand, nor the Seller, on the other hand, shall owe any amount to the other party pursuant to this Section 2.06. (f) The Parent and the Purchaser agree that following the Closing through the date that payment, if any, is made pursuant to Section 2.06(e), it will not take any actions with respect to any accounting books, records, policy or procedure on which the Initial NA Statement or the Final NA Statement is to be based that are inconsistent with past practices of the Seller or that would make it impossible or impracticable to calculate the Closing Net Assets in the manner and utilizing the methods required hereby. SECTION 2.07. PAYMENTS AND COMPUTATIONS. Each party shall make each payment due to the other party hereunder as soon as practicable on the day when due in U.S. dollars by wire transfer in immediately available funds. All computations of interest shall be made on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Parent and the Purchaser as follows: 15 SECTION 3.01. INCORPORATION AND AUTHORITY OF THE SELLER. (a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements by the Seller, the performance by the Seller of its obligations hereunder and thereunder and the consummation by the Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of the Seller. This Agreement has been, and upon execution the Ancillary Agreements will be, duly executed and delivered by the Seller, and (assuming due authorization, execution and delivery by the Parent and the Purchaser) this Agreement constitutes, and upon execution the Ancillary Agreements will constitute, legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with their terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally and subject, as to enforceability, to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) Each Affiliate of the Seller that is a party to one or more Ancillary Agreements is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has or prior to Closing will have all necessary corporate power and authority to enter into the Ancillary Agreements to which it is a party, to carry out its obligations thereunder and to consummate the transactions contemplated thereby. The execution and delivery of the Ancillary Agreements by each such Affiliate, the performance by each such Affiliate of its respective obligations thereunder and the consummation by each such Affiliate of the transactions contemplated thereby have been or prior to Closing will have been duly authorized by all requisite corporate action on the part of each such Affiliate. Upon execution, each such Ancillary Agreement will be duly executed and delivered by each such Affiliate, and (assuming due authorization, execution and delivery by any party that is not the Seller or an Affiliate of the Seller) the Ancillary Agreements will constitute legal, valid and binding obligations of each such Affiliate that is a party thereto, enforceable against each such Affiliate in accordance with their terms, subject, as to enforceability, to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 3.02. INCORPORATION AND QUALIFICATION OF THE PUBLISHING SUBSIDIARIES. Each Publishing Subsidiary is a corporation duly incorporated, validly existing and, to the extent legally applicable, in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to own, operate or lease its respective Assets. Each Publishing Subsidiary is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, operated or leased 16 or the nature of its activities makes such qualification necessary, except for where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.03. CAPITAL STOCK OF THE PUBLISHING SUBSIDIARIES. The Shares constitute all the authorized, issued and outstanding shares of capital stock of each of the Publishing Subsidiaries. Immediately prior to the Closing, the Directly Acquired Publishing Subsidiaries and the Directly Acquired Foreign Subsidiaries will own all the outstanding capital stock of the other Publishing Subsidiaries. The number of shares of capital stock of each Publishing Subsidiary issued and outstanding, and the owners thereof, are set forth in Section 3.03 of the Disclosure Schedule. The Shares have been duly authorized and validly issued and are fully paid and nonassessable and were not issued in violation of any pre-emptive rights. There are no subscriptions, options, warrants, calls, preemptive rights or rights of conversion or other rights, agreements, arrangements or commitments relating to the capital stock of any Publishing Subsidiary obligating such Publishing Subsidiary to issue or sell or to purchase or redeem any of its shares of capital stock. Schedule 4 hereto lists all equity interests held by any Publishing Subsidiary in any Person that is not a Publishing Subsidiary. The Seller beneficially owns the Shares and the Minority Interests, free and clear of all Liens except for Liens arising out of, under or in connection with this Agreement or created by or through the Purchaser or any of its Affiliates. There are no voting trusts, stockholder agreements, proxies or other agreements in effect with respect to the voting or transfer of the Shares or the Minority Interests. Upon payment for the Shares as contemplated by this Agreement, the Parent and the Purchaser will acquire from the Seller good and marketable title to the Shares, free and clear of all Liens, except Liens arising by or through the Purchaser or any of its Affiliates. SECTION 3.04. NO CONFLICT. Assuming all consents, approvals, authorizations and other actions described in Section 3.05 have been obtained, and except as may result from any facts or circumstances relating to the Parent or the Purchaser or as described in Section 3.04 of the Disclosure Schedule, the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Seller and its Affiliates does not and will not (a) violate or conflict with the Certificate of Incorporation, other constitutive documents or by-laws of the Seller or any Publishing Subsidiary, (b) conflict with or violate any material Law or Governmental Order applicable to the Seller or any Publishing Subsidiary or (c) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to any Person any rights of termination, amendment, acceleration or cancellation, or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under, or result in the creation of any Lien on any Shares or on any of the Assets pursuant to, any note, bond, Contract, license, permit, franchise or other instrument to which the Seller or any Publishing Subsidiary is a party or by which any of such Shares or the Assets are bound or affected, except (i) for Liens created by or through the Purchaser or any of its Affiliates and (ii) as 17 would not, individually or in the aggregate (A) have a Material Adverse Effect or (B) materially impair the ability of the Seller to consummate the sale of the Shares to the Parent and the Purchaser as contemplated by this Agreement. SECTION 3.05. CONSENTS AND APPROVALS. The execution and delivery of this Agreement and each Ancillary Agreement by the Seller and those of its Affiliates that are parties to any of the Ancillary Agreements do not, and the performance of this Agreement and each Ancillary Agreement by the Seller and such Affiliates will not, require any material consent, approval, authorization or other action by, or filing with or notification to, any Governmental Authority, except (a) as described in Section 3.05 of the Disclosure Schedule, (b) the notification requirements of the HSR Act and applicable filings under foreign antitrust and competition Laws, (c) where failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not, individually or in the aggregate, have a Material Adverse Effect or prevent the Seller from performing any of its material obligations under this Agreement and the Ancillary Agreements or (d) as may be necessary as a result of any facts or circumstances relating solely to the Purchaser or its Affiliates. SECTION 3.06. FINANCIAL INFORMATION. (a) The unaudited special purpose profit and loss statement of the Publishing Subsidiaries for the year ended December 31, 1997 and the unaudited special purpose statement of net assets of the Publishing Subsidiaries as at December 31, 1997 included in Section 3.06 of the Disclosure Schedule (collectively, the "FINANCIAL STATEMENTS") have been prepared on the basis set forth in Section 3.06 of the Disclosure Schedule and present fairly in all material respects the results of operations and net assets of the Publishing Subsidiaries as of the date indicated and for the period then ended. The Financial Statements were prepared based upon the information contained in the Seller's books and records. Each of the Parent and the Purchaser acknowledges that the Financial Statements do not reflect the net assets or results of operations of the Publishing Subsidiaries that would have occurred if such subsidiaries were a separate business on the date and during the periods presented. The unaudited special purpose statement of net assets of the Publishing Subsidiaries as at December 31, 1997 is herein referred to as the "Reference Statement of Net Assets". (b) The Audited Financial Statements, once prepared as contemplated by Section 5.11(a), shall be presented in accordance with generally accepted accounting principles in the United States ("GAAP"), consistently applied, and shall present fairly, in all material respects, the financial position, results of operations and cash flows of the Businesses as of the dates indicated and for the periods then ended. The Unaudited Interim Period Financial Statements, once prepared as contemplated by Section 5.11(a), shall be presented in accordance with GAAP, consistently applied, and shall present fairly, in all material respects, the financial position, results of operations and cash flows of the Businesses as of the dates indicated and for the periods then ended, except for the absence of footnotes and subject to normal year-end adjustments. 18 SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, except as disclosed in Section 3.06 or 3.07 of the Disclosure Schedule or as contemplated by this Agreement, the Businesses have been conducted in the ordinary course and consistent with past practice and (a) there has not occurred any event which, individually or in the aggregate, has had a Material Adverse Effect or that would materially impair the ability of the Seller to consummate the sale of the Shares to the Parent and the Purchaser as contemplated by this Agreement or (b) to the Knowledge of the Seller, except as required by GAAP, any reversal of reserves on the financial statements of the Publishing Subsidiaries except as a result of payment of the full amount specifically attributable to such reserve. For purposes of this Agreement, "payment of the full amount" shall include reserve reductions for actual returns, bad debt write-offs, inventory write-offs and accounts receivable deductions taken by customers and approved by the Publishing Subsidiaries, in each case consistent with past practice of the Publishing Subsidiaries. In addition, Seller has not permitted any Affiliate to take any action referred to in Section 5.01(b)(vi) through (ix). SECTION 3.08. ABSENCE OF LITIGATION. Except as set forth in Section 3.08 of the Disclosure Schedule, there are no material Actions pending or, to the Knowledge of the Seller, threatened in writing against the Seller or any Publishing Subsidiary, or to which any of the Shares or Assets are subject, that would reasonably be expected to have a Material Adverse Effect or that would materially impair the ability of the Seller to consummate the sale of the Shares to the Parent and the Purchaser as contemplated by this Agreement. SECTION 3.09. COMPLIANCE WITH LAWS. To the Knowledge of the Seller, neither the Seller nor any Publishing Subsidiary is in material violation of any material Laws and Governmental Orders applicable to the Businesses, the Shares or any material Asset, or by which any of them is bound, except (a) as set forth in Section 3.09 of the Disclosure Schedule or (b) for violations the existence of which would not, individually or in the aggregate, have a Material Adverse Effect or that would not materially impair the ability of the Seller to consummate the Permitted Reorganization or the sale of the Shares to the Parent and the Purchaser as contemplated by this Agreement. SECTION 3.10. GOVERNMENTAL LICENSES AND PERMITS. The Publishing Subsidiaries hold all governmental qualifications, registrations, filings, privileges, franchises, licenses, permits, approvals or authorizations (collectively, "MATERIAL LICENSES") material to the operation of the Businesses as currently operated by the Publishing Subsidiaries. All of such licenses, permits, approvals and authorizations are in full force and effect and the Businesses are in material compliance with each such Material License, except as would not, individually or in the aggregate, have a Material Adverse Effect or that would not materially impair the ability of the Seller to consummate the Permitted Reorganization or the sale of the Shares to the Parent and the Purchaser as contemplated by this Agreement. 19 SECTION 3.11. THE ASSETS. (a) Except as set forth in Section 3.11(a) of the Disclosure Schedule, the Assets, taken together with the Sublease Agreement and the License Agreements, will, as of the Closing Date, constitute all of the assets used to conduct the Businesses in all material respects as conducted on the date of this Agreement. (b) Except (i) as disclosed in Section 3.11(b) of the Disclosure Schedule, (ii) for Permitted Liens, or (iii) for Liens created by or through the Purchaser or any of its Affiliates, the Assets are owned, licensed or leased by a Publishing Subsidiary, free and clear of all Liens. SECTION 3.12. INTELLECTUAL PROPERTY. (a) The Publishing Subsidiaries own or have the right to use, and to continue using (subject to the terms thereof), all Intellectual Property that is material to the operation of the Businesses as currently operated by the Publishing Subsidiaries ("OWNED INTELLECTUAL PROPERTY" or "LICENSED INTELLECTUAL PROPERTY", as applicable). The Seller's and the Publishing Subsidiaries' ownership or right to use trademarks and service marks is subject to the rights of third parties who may have begun using such trademarks or service marks before the Seller or such Publishing Subsidiaries, and the Seller's and the Publishing Subsidiaries' ownership or right to use common law trademarks and service marks is subject to the capability of such trademarks or service marks to serve as a trademark or service mark. Except as provided for in the Consumer to Purchaser License Agreement, the Owned Intellectual Property and the Licensed Intellectual Property collectively constitute all of the Intellectual Property material to the continued operation of the Businesses as conducted on the date of this Agreement. The Seller has previously made available to the Purchaser a true and complete list of all registered U.S. and foreign trademarks, trade names and service marks that are used by the Businesses. (b) Except for such infringements as would not have a Material Adverse Effect, (i) neither the Owned Intellectual Property nor, to the Knowledge of the Seller, the Businesses' use of the Licensed Intellectual Property, infringes upon the Intellectual Property rights of any third party, and (ii) no written claim has been asserted to the Seller or any Publishing Subsidiary which is currently pending that the use of such Owned Intellectual Property or Licensed Intellectual Property in a manner consistent with past and present practice does or may infringe upon the Intellectual Property rights of any third party. (c) Subject to the exceptions described in Section 3.12(a), the Publishing Subsidiaries are entitled to use the Owned Intellectual Property in a manner consistent in all material respects with current practice of the Businesses. (d) Subject to the exceptions described in Section 3.12(a), the Publishing Subsidiaries have the right to use all Licensed Intellectual Property in a manner consistent in 20 all material respects with current practice of the Businesses and subject to the terms of the respective license agreements and permissions. (e) To the Knowledge of the Seller, no Person is engaging in any activity that infringes in any material respect upon the Owned Intellectual Property or the Publishing Subsidiaries' rights in the Licensed Intellectual Property. Except as would not have a Material Adverse Effect, the consummation of the transactions contemplated by this Agreement (including, without limitation, the purchase and sale of the Shares and the Permitted Reorganization) and the Ancillary Agreements will not result in the termination or impairment of any of the Owned Intellectual Property or of any license or sublicense of the Licensed Intellectual Property or the Owned Intellectual Property. (f) Except as would not have a Material Adverse Effect, (i) neither the Seller nor any Publishing Subsidiary is in material breach of, or material default under, any material term of any license or sublicense of the Owned Intellectual Property or the Licensed Intellectual Property and (ii) no other party to such license, sublicense or Contract is in material breach of or material default under any term of any such license, sublicense or Contract. (g) With respect to any Owned Intellectual Property filed with or recorded by any Governmental Authority (including patent, trademark, copyright and other registrations and applications), all of such registrations and applications are valid and in full force and effect and all necessary registration, maintenance and renewal fees in connection therewith have been paid and all necessary documents and certificates in connection therewith have been filed with the relevant patent, copyright, trademark or other authority in the United States or foreign jurisdictions, as the case may be, for the purpose of maintaining the registrations or applications for registration of such Owned Intellectual Property except where the failure to be valid and in full force and effect or to make such payment or filing would not have a Material Adverse Effect. (h) Except (i) as described in Section 3.12(a), (ii) as set forth in Section 3.12 of the Disclosure Schedule and (iii) for licences, options, consents and permissions granted to use Owned Intellectual Property or Licensed Intellectual Property, all right, title and interest in and to the Owned Intellectual Property is, or at the Closing will be, owned by a Publishing Subsidiary subject to no Lien other than Permitted Liens, and neither the Seller nor any of its Affiliates nor any of the Publishing Subsidiaries has, or at the Closing will have, assigned, transferred, conveyed or otherwise encumbered any right, title or interest in the Owned Intellectual Property or the Licensed Intellectual Property. SECTION 3.13. EMPLOYEE BENEFITS MATTERS. (a) Section 3.13(a)(i) of the Disclosure Schedule contains a true and complete list of all employee benefit plans (within the meaning of Section 3(3) of ERISA, hereafter "VIACOM ERISA PLANS") and all other profit 21 sharing, bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, supplemental retirement, pension, supplemental unemployment benefits, change of control, severance, death, health, dental, medical, welfare, disability, life insurance or other benefit plans, programs or arrangements and all employment, termination, severance or other Contracts or agreements with respect to which Viacom, the Seller or any Publishing Subsidiary has any obligation and which are maintained, contributed to or sponsored by Viacom, the Seller or any Publishing Subsidiary for the benefit of (i) any current employee, officer or director of Viacom, the Seller or any Publishing Subsidiary who is employed in the Businesses and who is listed on Section 3.13(a)(ii) of the Disclosure Schedule, which includes the names and current annual salary rates of all such individuals as of the date hereof, excluding those individuals listed on Section 3.13(a)(iii) of the Disclosure Schedule (collectively, the "BUSINESS EMPLOYEES") or (ii) any former employee, officer or director of Viacom, the Seller or any Publishing Subsidiary who was previously employed in the Businesses (collectively, the "FORMER BUSINESS EMPLOYEES"), other than plans, programs, arrangements, Contracts or agreements for which no benefits are payable after the Closing or for which no benefits will be required to be paid by the Purchaser or any Publishing Subsidiary (collectively, the "VIACOM PLANS"). Except as disclosed in Section 3.13(a)(i) of the Disclosure Schedule, each Viacom ERISA Plan is in writing and the Seller has previously made available to the Purchaser a true and complete copy of each Viacom ERISA Plan and the most recently received IRS determination letter for each of the Viacom Pension Plan (the "VPP") and the Viacom Investment Plan (the "VIP"). (b) Except as otherwise disclosed in Section 3.13(b) of the Disclosure Schedule, none of the Viacom Plans (i) is a "multiemployer plan", within the meaning of Section 3(37) or 4001(a)(3) of ERISA, or a "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, for which the Seller or any Publishing Subsidiary could incur liability under Section 4063 or 4064 of ERISA, or (ii) provides or promises to provide retiree medical or life insurance benefits. To the knowledge of the Seller, no circumstances exist pursuant to which any Publishing Subsidiary could incur liability under Title IV of ERISA or Section 4971 through 4980B of the Code or Section 502(i) or (l) of ERISA. (c) Except as disclosed in Section 3.13(c) of the Disclosure Schedule, none of the Seller nor any Publishing Subsidiary is a party to any collective bargaining or other labor union Contract applicable to any Business Employees. As of the date hereof, except as disclosed in Section 3.13(c) of the Disclosure Schedule, there is, to the Knowledge of the Seller, no material labor strike, slowdown or work stoppage against the Seller or any Publishing Subsidiary pending or, to the Knowledge of the Seller, threatened in writing, which may interfere in any material respect with the business activities of the Businesses. (d) With respect to each scheme or arrangement mandated by a government other than the United States (a "FOREIGN GOVERNMENT SCHEME OR ARRANGEMENT") and with respect to each Viacom Plan that is subject to laws other than United States law (a "FOREIGN 22 PLAN"), except as any inaccuracy in the following statements, individually or in the aggregate, would not have a Material Adverse Effect: (i) with respect to each Foreign Plan which is a pension plan, the Seller will furnish to the Purchaser, prior to the Closing, a copy of the most recent actuarial report, financial statement and asset statement and no changes have occurred or are reasonably expected to occur which would materially affect the solvency of such Foreign Plan (on an ongoing or winding up basis) or the information contained in such actuarial report, financial statement or asset statement; (ii) any employer and employee contributions required by law or by the terms of any Foreign Government Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with country-specific accounting practices; (iii) the fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or for each Foreign Plan where there are no such assets or insurance, a book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former beneficiaries in such Foreign Plan according to the actuarial assumptions and valuations most recently used to determine employer contributions to such Foreign Plan; and (iv) each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities. (e) The aggregate maximum severance and stay bonus liability under the Executive Management Enhanced Severance and Retention Bonus Program is approximately $88 million. The additional liability under employment agreements for Tier II executives will not exceed six additional months of severance. Further, Tier I executives' employment agreements do not extend beyond September 30, 2000, except for three executives' employment agreements as disclosed. (f) Except as disclosed in Section 3.13(f) of the Disclosure Schedule, no benefit under any Viacom Plan, including, without limitation, any severance or parachute payment plan or agreement, will be established or become accelerated, vested or payable by reason of any transaction contemplated by this Agreement or the Ancillary Agreements. SECTION 3.14. TAXES. (a) All material Tax Returns required to have been filed on or before the Closing Date by or with respect to any Publishing Subsidiary, the 23 Businesses or the Assets or any affiliated, combined, consolidated, unitary or similar group of which any Publishing Subsidiary or any Person that holds any Assets or conducts any of the Businesses, is or was a member have been duly and timely filed (or, if due between the date hereof and the Closing Date, will be duly and timely filed), and each such Tax Return correctly and completely reflects the income, franchise or other Tax liability and any other information required to be reported thereon. All Taxes owed by any Publishing Subsidiary shown on any Tax Return have been paid (or, if due between the date hereof and the Closing Date, will be duly and timely paid) or are being contested in good faith. (b) There are no currently outstanding claims by any Tax authority in a jurisdiction in which a Publishing Subsidiary does not file Tax Returns to the effect that a Publishing Subsidiary is or may be subject to taxation by that jurisdiction. (c) Each Publishing Subsidiary has withheld and paid all Taxes required by applicable law to have been withheld and paid on or before the Closing Date in connection with amounts paid or owing to any employee, former employee, creditor, shareholder, Affiliate, customer, supplier or other third party. (d) There are no accounting method changes, and, to the Knowledge of the Seller, there are no proposed or threatened accounting method changes, of any Publishing Subsidiary that could reasonably be expected to give rise to an adjustment under Section 481 of the Code for periods after the Closing Date. (e) Except with respect to a ruling from the Internal Revenue Service relating to Section 197 of the Code, no Publishing Subsidiary has received any written ruling of a Tax authority related to Taxes with respect to a Publishing Subsidiary or entered into any written and legally binding agreement with a Tax authority relating to Taxes with respect to a Publishing Subsidiary. (f) Each Publishing Subsidiary has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code or applicable predecessor provisions) on its federal income Tax Returns all positions taken therein that could reasonably be expected to give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code (or applicable predecessor provisions). (g) No Publishing Subsidiary has made or is subject to an election under Section 475 of the Code (or any similar provision of state, local or foreign law). (h) Each of the Publishing Subsidiaries listed in the definition of Election Shares is a member of the group of affiliated corporations within the meaning of Section 1504(a) of the Code of which the Seller or Viacom is the common parent, and the Seller 24 otherwise is eligible to join with Purchaser in making an Election with respect to the acquisition of the Election Shares. SECTION 3.15. ENVIRONMENTAL MATTERS. Except as disclosed in Section 3.15 of the Disclosure Schedule, or as would not, individually or in the aggregate, have a Material Adverse Effect: (a) the Publishing Subsidiaries have obtained all necessary Environmental Permits; (b) all Assets are in material compliance with all terms, conditions and provisions of all applicable (i) Environmental Permits and (ii) Environmental Laws; (c) there are no pending or threatened material Environmental Liabilities against the Seller or any of its Affiliates in connection with the Businesses or the Publishing Subsidiaries; (d) no releases of Hazardous Materials at concentrations that would be reasonably likely to give rise to material Environmental Liabilities have occurred at, from, in, to, on, or under any Site; and (e) there are no (i) underground storage tanks, active or abandoned, (ii) polychlorinated biphenyl containing equipment, or (iii) friable asbestos containing material at any Site, except for those the presence of which could not reasonably be expected to result in the Businesses or Publishing Subsidiaries incurring material Environmental Liabilities. SECTION 3.16. MATERIAL CONTRACTS. (a) Section 3.16(a) of the Disclosure Schedule lists each of the following Contracts of the Seller and the Publishing Subsidiaries (such Contracts being "MATERIAL CONTRACTS"): (i) each Contract for the purchase or lease of inventory, other materials or real or personal property with any supplier or for the furnishing of services (including printing services and fulfillment services) or equipment or the development of electronic products to the Businesses or any Publishing Subsidiary under the terms of which: (A) the Businesses or any Publishing Subsidiary (I) paid more than $1,000,000 in the aggregate during the calendar year ended December 31, 1997 or is likely to pay or receive consideration of more than $1,000,000 in the aggregate during the calendar year ended December 31, 1998 or (II) is likely to pay or otherwise give consideration of more than $5,000,000 in the aggregate over the remaining term of such Contract and (B) cannot be cancelled by the applicable Business or such Publishing Subsidiary without penalty or further payment or without more than 90 days' notice; 25 (ii) each Contract for the sale or lease of inventory or other personal or real property or for the furnishing of services by the Businesses or any Publishing Subsidiary which: (A)(I) paid more than $1,000,000 in the aggregate during the calendar year ended December 31, 1997 or is likely to involve consideration of more than $1,000,000 in the aggregate during the calendar year ended December 31, 1998 or (II) is likely to involve consideration of more than $5,000,000 in the aggregate over the remaining term of the contract and (B) cannot be cancelled by the applicable Business or such Publishing Subsidiary without penalty or further payment or without more than 90 days' notice; (iii) each Contract relating to indebtedness for borrowed money of the Businesses or any Publishing Subsidiary which individually is in excess of $1,000,000; and (iv) all Contracts that limit or purport to limit the ability of the Seller (insofar as it relates to any Business) or any Publishing Subsidiary to compete in any line of business or with any Person or in any geographic area or during any period of time after the Closing Date. (b) Except as disclosed in Section 3.16(b) of the Disclosure Schedule and except as would not, individually or in the aggregate, have a Material Adverse Effect, each Material Contract: (i) is valid and binding on the Publishing Subsidiary which is a party thereto and is in full force and effect and (ii) upon consummation of the transactions contemplated by this Agreement, except to the extent that any consents set forth in Section 3.04 or Section 3.05 of the Disclosure Schedule are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Except as would not, individually or in the aggregate, have a Material Adverse Effect, to the Seller's knowledge, neither the Seller nor any Publishing Subsidiary is in material breach of, or material default under, any Material Contract. SECTION 3.17. BROKERS. Except for fees and commissions which will be paid by Viacom, no broker, finder or investment banker is or will be entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement and the Ancillary Agreements based upon arrangements made by or on behalf of the Seller or Viacom. SECTION 3.18. EXCLUSIVITY OF REPRESENTATIONS. (a) THE REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER IN THIS AGREEMENT ARE IN LIEU OF AND ARE EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES. THE SELLER HEREBY DISCLAIMS ANY SUCH OTHER OR IMPLIED REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE 26 DELIVERY OR DISCLOSURE TO THE PURCHASER, THE PARENT OR THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION (INCLUDING ANY FINANCIAL PROJECTIONS OR OTHER SUPPLEMENTAL DATA). (b) Each of the Parent and the Purchaser acknowledges that (i) the representations and warranties contained in Sections 3.12, 3.13, 3.14, 3.15 and 3.19 are the only representations and warranties being made with respect to (A) Intellectual Property, (B) compliance with or liability under ERISA, (C) Taxes, (D) compliance with or liability under Environmental Laws and (E) Real Property, respectively, or with respect to any Intellectual Property, employee benefit, Tax or environmental, health or safety matter related in any way to the Assets, the Businesses, the Publishing Subsidiaries or to this Agreement or its subject matter and (ii) no other representation contained in this Agreement shall apply to any such matters and no other representation or warranty, express or implied, is being made with respect thereto. SECTION 3.19. REAL PROPERTY. (a) Section 3.19(a) of the Disclosure Schedule contains a list of all real property owned by Seller or its Affiliates in connection with the Businesses or any Publishing Subsidiary (such real property, together with all buildings, improvements and structures thereon and all easements, rights of way, and appurtenances relating thereto but excluding the assets listed on Schedule 1, the "OWNED REAL PROPERTY"). The applicable Seller, Affiliate or Publishing Subsidiary owns the Owned Real Property in fee subject to no Liens except as set forth on Section 3.19(a) of the Disclosure Schedule and other than Permitted Liens (collectively, the "OWNED REAL PROPERTY PERMITTED EXCEPTIONS"). After giving effect to the Permitted Reorganization, the Publishing Subsidiaries will own all of the Owned Real Property free and clear of all Liens other than the Owned Real Property Permitted Exceptions. (b) Section 3.19(b) of the Disclosure Schedule contains a list of all real property leased or subleased by Seller or any Affiliate thereof in connection with the Businesses or any Publishing Subsidiary other than the assets listed on Schedule 1 and the property that is the subject of the Sublease Agreement (the "LEASED REAL PROPERTY" and, together with the Owned Real Property, the "REAL PROPERTY"). All leases and subleases for the Leased Real Property (including all modifications, extensions or amendments thereto) (the "REAL PROPERTY LEASES") are subject to no Liens except as set forth on Section 3.19(b) of the Disclosure Schedule and other than Permitted Liens (collectively, the "LEASED REAL PROPERTY PERMITTED EXCEPTIONS", together with the Owned Real Property Permitted Exceptions, the "REAL PROPERTY PERMITTED EXCEPTIONS"). After giving effect to the Permitted Reorganization, the Publishing Subsidiaries will lease all of the Leased Real Property free and clear of all Liens other than the Leased Real Property Permitted Exceptions. 27 (c) True and complete copies of the material Real Property Leases have been made available to Purchaser by Seller. Subject to the terms of the respective Real Property Leases and the Leased Real Property Permitted Exceptions, at least one Publishing Subsidiary has a valid and subsisting leasehold estate in each parcel of Leased Real Property. The Real Property Leases are in full force and effect. Each such Seller or Affiliate and each Publishing Subsidiary has not sublet all or any portion of any Leased Real Property except as set forth on Section 3.19(c) of the Disclosure Schedule. Subject to the terms of the respective Real Property Leases, each such Seller or Affiliate and each Publishing Subsidiary is in possession of the Leased Real Property. To the Knowledge of Seller, there are no material defaults by any tenant or landlord under any Real Property Lease, and no event has occurred or failed to occur which, with the giving of notice or the passage of time, or both, would constitute a material default under any Real Property Lease, except as would not have a Material Adverse Effect. SECTION 3.20. NO UNDISCLOSED LIABILITIES. Except as would not have a Material Adverse Effect, there are no material liabilities of the Publishing Subsidiaries, other than liabilities (a) reflected or reserved against on the Reference Statement of Net Assets, (b) incurred in the ordinary course of business since the date of the Reference Statement of Net Assets or (c) disclosed in Section 3.20 of the Disclosure Schedule. SECTION 3.21. INSURANCE. Section 3.21 of the Disclosure Schedule contains a true and complete list (including the names of the insurers, the expiration dates thereof, a brief description of the interests insured thereby and any deductibles or self insurance amounts associated with such interests) of all liability, property, workers' compensation, directors' and officers' liability and other insurance policies currently in effect that insure the Assets or the business, operations, property or employees of the Businesses, or affect or relate to the ownership, use or operation of any of the Assets and that have been issued to the Seller, any of its Affiliates or any Publishing Subsidiary. Each policy listed in Section 3.21 of the Disclosure Schedule is valid and binding and in full force and effect, no premiums due thereunder have not been paid, and none of the Seller, any of its Affiliates or any Publishing Subsidiary has received any notice of reduction, cancellation or termination in respect of any such policy or is in default thereunder. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND THE PARENT The Purchaser and the Parent, jointly and severally, represent and warrant to the Seller as follows: 28 SECTION 4.01. INCORPORATION AND AUTHORITY OF THE PURCHASER. Each of the Purchaser and the Parent is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and, except for the approval of Parent's shareholders contemplated in Section 8.02(f), has all necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The Board of Directors of the Parent has unanimously approved this Agreement and the transactions contemplated hereby and this approval has not been modified or amended in any way adverse to the Seller and, as provided in Section 5.04(c), will unanimously recommend to the shareholders of the Parent that they approve this Agreement and the transactions contemplated hereby and related matters (the "PARENT BOARD RECOMMENDATION"). Except for the approval of the Parent's shareholders contemplated in Section 8.02(f), the execution and delivery of this Agreement and the Ancillary Agreements by the Purchaser and the Parent, the performance by the Purchaser and the Parent of their respective obligations hereunder and thereunder and the consummation by the Purchaser and the Parent of the transactions contemplated hereby and thereby and related matters have been duly authorized by all requisite corporate action on the part of the Purchaser and the Parent. This Agreement has been, and upon their execution the Ancillary Agreements will be, duly executed and delivered by the Purchaser and the Parent, and (assuming due authorization, execution and delivery by the Seller) constitutes, and upon their execution the Ancillary Agreements will constitute, legal, valid and binding obligations of the Purchaser and the Parent enforceable against the Purchaser and the Parent in accordance with their terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally and subject, as to enforceability, to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 4.02. NO CONFLICT. Assuming all consents, approvals, authorizations and other actions described in Section 4.03 have been obtained, and except as may result from any facts or circumstances related to the Seller or any of its Affiliates or as described in Schedule 4.02, and except for the approval of Parent's shareholders contemplated in Section 8.02(f), the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Purchaser and the Parent do not and will not (a) violate or conflict with the certificate of incorporation, other constitutive documents or By-laws (or other similar applicable documents) of the Purchaser or the Parent, (b) conflict with or violate any Law or Governmental Order applicable to the Purchaser or the Parent or (c) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to any Person any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Lien on any of the assets or properties of the Purchaser or the Parent pursuant to, any note, bond, mortgage, Contract, license, permit, franchise or other material instrument relating to such assets or properties to which the 29 Purchaser, the Parent or any of their respective Subsidiaries is a party or by which any of such assets or properties is bound or affected, except as would not materially impair the ability of the Purchaser or the Parent to consummate the purchase of the Shares from the Seller as contemplated by this Agreement. SECTION 4.03. CONSENTS AND APPROVALS. The execution and delivery of this Agreement and each Ancillary Agreement by the Purchaser and the Parent do not, and the performance of this Agreement and each Ancillary Agreement by the Purchaser and the Parent will not, require any consent, approval, authorization or other action by, or filing with or notification to, any Governmental Authority, except (a) the notification requirements of the HSR Act and applicable filings under foreign antitrust and competition laws, (b) approval from the Minister responsible for the Investment Canada Act, (c) where failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not prevent the Purchaser or the Parent from performing any of their respective material obligations under this Agreement and the Ancillary Agreements, (d) any applicable transfer tax filings, (e) in connection with obtaining the approval of Parent's shareholders contemplated in Section 8.02(f) and (f) as may be necessary as a result of any facts or circumstances relating solely to Viacom or its Affiliates. SECTION 4.04. ABSENCE OF LITIGATION. No Action is pending or, to the knowledge of the Purchaser or the Parent, threatened in writing against the Purchaser or the Parent which seeks to delay or prevent the consummation of the transactions contemplated hereby or which would materially impair the ability of the Purchaser or the Parent to consummate the purchase of the Shares from the Seller as contemplated by this Agreement. SECTION 4.05. SECURITIES MATTERS. The Purchaser and the Parent understand that the offering and sale of the Shares hereunder is intended to be exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. The Shares are being acquired by the Purchaser and the Parent for their own account and without a view to the public distribution of the Shares or any interest therein. The Purchaser and the Parent have sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of their investments in the Shares, and the Purchaser and the Parent are capable of bearing the economic risks of such investments, including a complete loss of their investments in the Shares. In evaluating the suitability of an investment in the Shares, the Purchaser and the Parent have relied solely upon the representations, warranties, covenants and agreements made by the Seller herein and neither the Purchaser nor the Parent has relied upon any other representations or other information (whether oral or written and including any projections or supplemental data) made or supplied by or on behalf of the Seller or any Affiliate, employee, agent or other representative of the Seller. The Purchaser and the Parent understand and agree that they may not sell or dispose of any of the Shares other than pursuant to a registered offering or in a transaction exempt from the registration requirements of the Securities Act. 30 SECTION 4.06. FINANCIAL ABILITY. The Purchaser and the Parent have cash available or have existing borrowing facilities or unconditional, binding firm commitments that are sufficient to enable them to consummate the transactions contemplated by this Agreement. The financing required to consummate the transactions contemplated by this Agreement is collectively referred to as the "FINANCING". The conditions to the Financing will each be satisfied and the Financing will be available on a timely basis for the transactions contemplated by this Agreement. SECTION 4.07. BROKERS. Except for fees and commissions which will be paid by the Purchaser, no broker, finder or investment banker is or will be entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement and the Ancillary Agreements based upon arrangements made by or on behalf of the Purchaser or the Parent. SECTION 4.08. SHAREHOLDER APPROVAL. No corporate proceedings on the part of Parent or the Purchaser are necessary to consummate the transactions contemplated hereby other than the approval of this Agreement and the transactions contemplated hereby and related matters by the affirmative vote of a majority of the outstanding shares of Parent capital stock which actually vote at the Extraordinary Meeting of Shareholders. SECTION 4.09. EXCLUSIVITY OF REPRESENTATIONS. THE REPRESENTATIONS AND WARRANTIES MADE BY THE PARENT AND THE PURCHASER IN THIS AGREEMENT ARE IN LIEU OF AND ARE EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES. THE PARENT AND THE PURCHASER HEREBY DISCLAIM ANY SUCH OTHER OR IMPLIED REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE SELLER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION (INCLUDING ANY FINANCIAL PROJECTIONS OR OTHER SUPPLEMENTAL DATA). ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. CONDUCT OF BUSINESS PRIOR TO THE CLOSING. (a) Unless the Purchaser otherwise agrees in writing and except as otherwise set forth in Section 5.01 of the Disclosure Schedule, between the date of this Agreement and the Closing Date, the Seller will and will cause each of its Affiliates that conducts any portion of the Businesses or holds any Assets and each Publishing Subsidiary to (i) conduct the Businesses only in the ordinary course 31 consistent with past practice, and (ii) use commercially reasonable efforts to keep available to the Purchaser the services of the key employees of the Businesses (except for retirements in the ordinary course); PROVIDED, HOWEVER, that none of the Seller, any such Affiliate nor any of the Publishing Subsidiaries shall be required to increase the compensation of, or provide any other retention incentive to, any such key employee beyond that currently provided. (b) Except as expressly provided in this Agreement or Section 5.01 of the Disclosure Schedule, between the date of this Agreement and the Closing Date, the Seller will not and will not permit any Affiliate that conducts any portion of the Businesses or holds any Assets or any Publishing Subsidiary to do any of the following without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld): (i) except in the ordinary course of business in connection with licenses of intellectual property rights, grant or permit the creating of any Lien (other than a Permitted Lien) on any material Asset (whether tangible or intangible); (ii) establish or materially increase any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan, or otherwise materially increase the compensation payable to or to become payable to any officers or key employees of any Business by the Seller, any such Affiliate or any Publishing Subsidiary, except in any case described above, in the ordinary course of business or as may be required by any applicable employment agreement or collective bargaining agreement in effect on the date hereof or by Law; (iii) enter into any material employment or severance agreement with any of the Business Employees; (iv) except (A) for dispositions of inventory in the ordinary course of business, (B) for cash dividends by the Publishing Subsidiaries to the Seller, (C) for transfers pursuant to the Permitted Reorganization or (D) in the ordinary course of business in connection with licenses of intellectual property rights, sell, assign, transfer, lease, license or otherwise dispose of any of the Assets having a value individually exceeding $2,000,000 or an aggregate value exceeding $10,000,000; (v) except for transfers pursuant to the Permitted Reorganization (A) acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division thereof or (B) incur any indebtedness for borrowed money (other than to the Seller) or issue any debt securities or assume, grant, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans (other than employee 32 loans in the ordinary course of business), advances (other than advances to authors, developers and licensors, in each case in the ordinary course of business) or distributions of cash (other than by the Publishing Subsidiaries to the Seller); (vi) except to the extent required by applicable Law, or with respect to accounting matters, by GAAP, (A) cause the books and records of the Publishing Subsidiaries to be maintained other than in the usual, regular and ordinary manner; (B) permit any material change in (1) any accounting, financial reporting, or Tax practice or policy of Seller or any of its Affiliates or any Publishing Subsidiary, (2) any method of calculating any bad debt, contingency or other reserve for accounting, financial reporting or Tax purposes of any Seller or any of its Affiliates or any Publishing Subsidiary or (3) the fiscal year of any Publishing Subsidiary; and (C) reverse any reserves set forth on the financial statements of the Publishing Subsidiaries except as a result of payment of the full amount specifically attributable to such reserve (for purposes of this Agreement, "payment of the full amount" shall include reserve reductions for actual returns, bad debt write-offs, inventory write-offs and accounts receivable deductions taken by customers and approved by the Publishing Subsidiaries, in each case consistent with past practice of the Publishing Subsidiaries); (vii) issue or sell any additional shares of the capital stock of, or other equity interests in, any Publishing Subsidiary or securities convertible into or exchangeable for such shares or equity interests, or issue or grant any options, warrants, calls, subscription rights or other rights of any kind to acquire additional shares of such capital stock, such other equity interests, or such securities; (viii) amend the certificate of incorporation, other constitutive documents or by-laws of any Publishing Subsidiary; or (ix) except in the ordinary course of business, enter into any amendment, modification, extension, waiver, or termination of any material Real Property Lease or Material Contract. SECTION 5.02. ACCESS TO INFORMATION. (a) From the date hereof until the Closing (upon reasonable notice to and approval of the Seller, which shall not be unreasonably withheld) during normal business hours with the purpose that an uninterrupted and efficient transfer of the Businesses may be accomplished or in order to permit the Purchaser or the Parent to arrange the possible resale of certain of the Businesses, the Seller shall, and shall cause the officers, directors, employees, auditors and agents of each Business to (i) afford the officers, employees and authorized agents and representatives of the Purchaser reasonable access to the offices, properties, books and records of each Business, (ii) furnish to the officers, employees and authorized agents and representatives of the Purchaser such additional financial and operating data and other information regarding the Businesses and the Assets as 33 the Purchaser may from time to time reasonably request and (iii) afford the officers, employees and authorized agents and representatives of the Purchaser reasonable access to the relevant employees and consultants of each Business to aid the Purchaser in its preparation for "Year 2000 Conformity" (as defined in the British Standards Institution document PD2000-1 "A Definition of Year 2000 Conformity Requirements"); PROVIDED, HOWEVER, that such investigation shall not unreasonably interfere with any of the businesses or operations of the Seller or any Affiliate of the Seller, including the Publishing Subsidiaries and the Businesses. (b) The Seller shall, and shall cause its Affiliates and their respective officers, employees and representatives to, provide reasonable access to the Purchaser and the Purchaser's independent auditors to the financial books and records of the Publishing Subsidiaries in connection with the Purchaser's preparation of such audited and unaudited financial statements of the Publishing Subsidiaries and for preparation by Parent of the offering circular required to be issued by Parent to its shareholders for the purpose of obtaining its shareholders' approval of this Agreement and the transactions contemplated hereby and related matters at the meeting of Parent's shareholders contemplated by Section 8.02(f) (the "OFFERING CIRCULAR"), or as the Purchaser may reasonably determine are necessary to satisfy the requirements of its financing sources, the London Stock Exchange, the Securities Act or the Exchange Act applicable to the Purchaser and its Affiliates. Under no circumstances shall the Seller, its Affiliates or any such officer, employee or representative have any liability whatsoever (other than as expressly provided in this Agreement) to the Parent, the Parent's independent auditors, the Purchaser, the Purchaser's independent auditors or otherwise to any Person or Governmental Authority, including under the Securities Act or the Exchange Act in connection with such financial statements or the preparation or use thereof and the Parent and the Purchaser shall indemnify, defend and hold harmless the Seller and each such Person against and reimburse the Seller and each such Person for any and all such liability. The Parent and the Purchaser shall pay all expenses in connection with the preparation of such financial statements, including any reasonable expenses incurred by the Seller. SECTION 5.03. CONFIDENTIALITY. (a) The terms of the confidentiality agreement (the "CONFIDENTIALITY AGREEMENT") between Viacom and the Parent with respect to the transactions contemplated by this Agreement are hereby incorporated herein by reference and shall continue in full force and effect until the Closing, at which time such Confidentiality Agreement and the obligations of the Parent and the Purchaser under this Section 5.03 shall terminate; PROVIDED, HOWEVER, that the Confidentiality Agreement shall terminate only in respect of that portion of the Evaluation Material (as defined in the Confidentiality Agreement) exclusively relating to the Assets, the Businesses and transactions contemplated by this Agreement. If this Agreement is, for any reason, terminated prior to the Closing, the Confidentiality Agreement shall nonetheless continue in full force and effect in accordance with its terms. 34 (b) From and after the Closing Date, the Seller shall, and shall cause its Affiliates and their respective officers, directors, employees and advisors (collectively, the "RECIPIENTS") to, keep confidential any information relating to the Publishing Subsidiaries, the Assets or the Businesses, except for any such information that (i) is available to the public on the Closing Date, (ii) thereafter becomes available to the public other than as a result of a disclosure by any of the Recipients or (iii) is or becomes available to a Recipient on a non-confidential basis from a source that to the Recipient's knowledge is not prohibited from disclosing such information to such Recipient by a legal, contractual or fiduciary obligation to any other Person. Should a Recipient be required to disclose any such information in response to a court order or as otherwise required by Law or administrative process, it shall inform the Purchaser in writing of such request or obligation as soon as possible after it is informed of it and, if possible, before any information is disclosed, so that a protective order or other appropriate remedy may be obtained. If a Recipient is obliged to make the disclosure, it shall only make the disclosure to the extent to which it is so obliged but not further or otherwise. Nothing in this Section 5.03 shall interfere with Viacom's normal reporting obligations under the Securities Act and the Exchange Act. SECTION 5.04. REGULATORY AND OTHER AUTHORIZATIONS; CONSENTS. (a) Each of the Parent and the Purchaser shall use its best efforts to promptly obtain all authorizations, consents, orders and approvals of all federal, state and local and foreign regulatory bodies and officials that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Ancillary Agreements and the Seller will cooperate with each of the Parent and the Purchaser in promptly seeking to obtain all such authorizations, consents, orders and approvals; it being understood that the Seller shall not be required to pay any fees or other payments to any such regulatory bodies or officials in order to obtain any such authorization, consent, order or approval (other than normal filing fees). (b) Each party hereto agrees to make an appropriate filing of a notification and report form pursuant to the HSR Act with respect to the transactions contemplated hereby within ten Business Days after the date hereof and to supply promptly any additional information and documentary material that may be requested pursuant to the HSR Act. In addition, each party agrees to promptly make any other filing that may be required under any antitrust Law or by any antitrust authority. Each of the Parent and the Purchaser agrees to take any and all steps necessary to avoid or eliminate each and every impediment under any antitrust law that may be asserted by any United States or foreign governmental antitrust authority or any other party so as to enable the parties to expeditiously close the transactions contemplated hereby, including without limitation, negotiating, committing to and/or effecting, by consent decree, hold separate orders, or otherwise, the sale or disposition of such of its assets or businesses or of the Assets or the Shares to be acquired by it pursuant hereto as are required to be divested in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding, which would 35 otherwise have the effect of materially delaying or preventing the consummation of the transactions contemplated hereby. Each party shall bear its respective filing fees associated with the HSR filings and any other similar filings required in any other jurisdictions. (c) The Parent will take all action necessary to hold an extraordinary general meeting of its shareholders (the "EXTRAORDINARY MEETING OF SHAREHOLDERS") as promptly as reasonably practicable following the date of this Agreement and, in any event, within 45 days after the Seller has delivered the Audited Financial Statements to the Parent, to consider and vote upon the approval of this Agreement and the transactions contemplated hereby and related matters. Subject to the fiduciary duties of the Parent's board of directors and the requirements of applicable Law, the Parent agrees to (i) unanimously recommend to its shareholders approval of this Agreement and the transactions contemplated hereby and related matters and not to withdraw or modify in a manner adverse to the Seller such recommendation, and (ii) use its best efforts to obtain from its shareholders the approval and adoption of this Agreement and the transactions contemplated hereby and related matters. Parent will take all action necessary to prepare the Offering Circular, and shall cause the Offering Circular to comply as to form and substance in all material respects with the applicable requirements of the London Stock Exchange and other applicable Law. The Seller agrees upon reasonable request by the Purchaser to furnish the Purchaser with all information concerning itself and its Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary in connection with the Offering Circular; PROVIDED, HOWEVER, that the Seller shall in no event be required to disclose nonpublic information other than required financial information. (d) Each party hereto agrees to cooperate in obtaining any other consents and approvals that may be required in connection with the transactions contemplated by this Agreement and the Ancillary Agreements; PROVIDED, HOWEVER, that the Seller shall not be required to compensate any third party to obtain any such consent or approval. The Seller shall use all reasonable efforts to obtain the consent of SAP America, Inc. required in connection with the transactions contemplated hereby and by the Ancillary Agreements. SECTION 5.05. INTERCOMPANY ACCOUNTS. Immediately prior to the Closing, there shall be no amounts owing from the Publishing Subsidiaries to the Seller and the Seller's Affiliates (other than the Publishing Subsidiaries) other than in respect of trade payables incurred in the ordinary course, and there shall be no amounts owing from the Seller and its Affiliates (other than the Publishing Subsidiaries) to the Publishing Subsidiaries other than in respect of trade payables incurred in the ordinary course. SECTION 5.06. INSURANCE. (a) Effective 12:01 a.m. (New York time) on the Closing Date, each Publishing Subsidiary and each Business shall cease to be insured by the Seller's or its Affiliates' (other than the Publishing Subsidiaries) insurance policies; PROVIDED, HOWEVER, that with respect to insurance coverage written on an "occurrence basis", to the extent one of the Publishing Subsidiaries was an insured under such policies, such Publishing 36 Subsidiary shall continue to have rights under such policies to the extent the events giving rise to a claim under such policies occurred prior to 12 midnight (New York time) on the Closing Date. The Sellers agree to cooperate with the Purchaser or any Publishing Subsidiary in making claims under the Seller's insurance policies in connection with insurable events that occurred prior to 12 midnight (New York time) on the Closing Date, and shall remit any recoveries promptly to the Purchaser. With respect to events or circumstances covered by insurance coverage written on an "occurrence basis", the Seller and its Affiliates will have no liability for occurrences that take place on and after 12 midnight (New York time) on the Closing Date. With respect to events or circumstances covered by insurance coverage written on a "claims made basis", the Seller and its Affiliates will have no liability for claims made after 12:01 a.m. on the Closing Date. Each of the Parent and the Purchaser agrees to indemnify, defend and hold harmless the Seller and its Affiliates against and reimburse the Seller and its Affiliates for any Losses, that the Seller and its Affiliates may at any time suffer or incur, or become subject to, as a result or in connection with any such occurrences, losses or claims. (b) From and after the Closing Date, neither the Seller nor any of its Affiliates shall have any liability for self-insured workers' compensation claims with respect to the Publishing Subsidiaries in existence on the Closing Date or arising from any event or circumstance taking place or existing prior to, on or subsequent to the Closing Date. The Parent and the Purchaser shall take all steps necessary under any applicable law to assume the liability for self-insured workers' compensation pursuant to this Section 5.06 and shall fully indemnify the Seller and its Affiliates with respect to any liability, claim, damage or expense of any kind whatsoever arising out of or relating to any workers' compensation claim assumed by the Purchaser hereunder. The Parent and the Purchaser shall cooperate with the Seller and its Affiliates in order to obtain the return or release of bonds or securities or indemnifications given by the Seller or any of its Affiliates to any state in connection with workers' compensation self-insurance with respect to the Businesses; and, in order to effectuate such return or release, the Parent and the Purchaser shall, to the extent required by any state, post its own bonds, letters of credit, indemnifications or other securities in substitution therefor. SECTION 5.07. LETTERS OF CREDIT. The Parent and the Purchaser agree to use their reasonable efforts (a) to arrange for substitute letters of credit and the Parent and the Purchaser guarantee, respectively, to replace (i) the letters of credit and guarantees entered into by or on behalf of the Seller or any of its Affiliates (other than the Publishing Subsidiaries) outstanding as of the date of this Agreement in connection with any Business as set forth in Section 5.07 of the Disclosure Schedule and (ii) any letters of credit and guarantees entered into by or on behalf of the Seller or any of its Affiliates (other than the Publishing Subsidiaries) in the ordinary course of business consistent with past practice on or after the date of this Agreement and prior to the Closing (together, the "SELLER LOCS") or (b) to assume all obligations of reimbursement under each Seller LOC, obtaining from the applicable creditor a full release of all parties liable, directly or indirectly, for reimbursement to the 37 creditor in connection with amounts drawn under a Seller LOC under the existing terms of a Seller LOC. The Parent and the Purchaser further agree that to the extent the beneficiary under any Seller LOC refuses to accept any such substitute letter of credit or Parent or Purchaser guarantee proffered by the Parent or the Purchaser, the Parent or the Purchaser shall indemnify, defend and hold harmless the Seller against and reimburse the Seller for any and all costs or expenses in connection with such Seller LOCs, including the Seller's expenses in maintaining such Seller LOCs whether or not any such Seller LOC is drawn upon, and shall in any event promptly reimburse the Seller to the extent any Seller LOC is called upon and the Seller makes any payment thereunder or is obligated to reimburse the party issuing the Seller LOC. SECTION 5.08. PERMITTED REORGANIZATION. On or prior to the Closing Date, the Seller shall, and shall cause its Subsidiaries to, effect the Permitted Reorganization. The Seller agrees to reasonably consult with the Purchaser with respect to effecting the Permitted Reorganization. Seller shall be responsible for all out-of-pocket costs and expenses arising out of or related to the Permitted Reorganization. SECTION 5.09. FINANCING. Each of the Parent and the Purchaser covenants and agrees not to take any action between the date of this Agreement and the Closing Date that would reasonably be expected to make the Financing unavailable for any reason. SECTION 5.10. FURTHER ACTION. (a) From and after the Closing Date each of the parties hereto shall, and shall cause their respective Affiliates to, execute and deliver such documents and other papers and take such further actions as may be reasonably required to carry out the provisions of this Agreement and the Ancillary Agreements and give effect to the transactions contemplated hereby and thereby. Without limiting the foregoing, from and after the Closing, (i) the Seller shall do all things necessary, proper or advisable under the applicable Laws to put the Parent and the Purchaser in effective possession, ownership and control of the Assets and the Parent and the Purchaser shall cooperate with the Seller for that purpose and (ii) the Parent and the Purchaser shall do all things necessary, proper or advisable under applicable Laws to put the Seller in effective possession, ownership and control of assets not included within the Assets and the Seller shall cooperate with the Parent and the Purchaser for that purpose. Subject to the terms of the Services Agreement, all cash and other remittances, mail and other communications relating to the Assets or the Businesses received by the Seller or its Affiliates shall be promptly turned over to the Purchaser by the Seller. Subject to the terms of the Services Agreement, all cash and other remittances, mail and other communications relating to any business of the Seller not included within the Businesses being purchased by the Parent and the Purchaser hereunder that are received by the Parent or the Purchaser shall be promptly turned over to the Seller by the Parent or the Purchaser. (b) For a period of ten years from the date hereof, the Parent and the Purchaser shall use commercially reasonable efforts to maintain all books and records of the 38 Publishing Subsidiaries relating to periods ending on or prior to the Closing Date and shall make them, and any individuals responsible for the preparation and maintenance of such books and records, available to the Seller as reasonably requested. If at any time after the Closing, the Seller requires a copy of any such book or record, it shall have the right to promptly obtain a copy thereof (at the Seller's cost) from the Parent or the Purchaser. SECTION 5.11. ADDITIONAL FINANCIAL STATEMENTS AND INFORMATION. (a) The Seller (i) shall provide or cause to be provided to Parent within six weeks of the date of this Agreement, and shall use its best efforts to provide or cause to be provided to Parent within one month of the date of this Agreement, the audited consolidated balance sheets, statements of income and statements of cash flows as at and for the years ended December 31, 1995, 1996 and 1997 (collectively, the "AUDITED FINANCIAL STATEMENTS") and (ii) shall provide or cause to be provided to Parent by August 7, 1998, the unaudited consolidated balance sheets, statements of income and cash flows as at and for the six month periods ended June 30, 1997 and 1998 and, to the extent reasonably available prior to the Closing (and promptly after the preparation thereof), each subsequent quarter thereafter and the corresponding quarter of the prior year, in each case, for the Businesses (collectively, the "UNAUDITED INTERIM PERIOD FINANCIAL STATEMENTS"). (b) The Audited Financial Statements shall be audited by Price Waterhouse, LLP ("PW"). The Audited Financial Statements shall be presented in accordance with GAAP, consistently applied and in accordance with Regulation S-X as promulgated by the Securities and Exchange Commission (the "SEC"). The Seller shall use reasonable efforts to cause PW to provide, in connection with the Audited Financial Statements, PW's unqualified opinion that the Audited Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Businesses as of the dates indicated and for the periods then ended in conformity with GAAP. The Unaudited Interim Period Financial Statements shall be prepared in accordance with GAAP, consistently applied and in accordance with Regulation S-X as promulgated by the SEC and shall present fairly, in all material respects, the financial position, results of operations and cash flows of the Businesses as of the dates indicated and for the periods presented in conformity with GAAP, except for the absence of footnotes and subject to normal year end adjustments. (c) Prior to the Closing, the Seller shall reasonably cooperate with the Purchaser in connection with the preparation by the Purchaser of audited consolidated balance sheets as at December 31, 1996 and 1997 and audited consolidated statements of income and statements of cash flows for the years ended December 31, 1995, 1996 and 1997 and unaudited consolidated balance sheets, statements of income and cash flows as at and for the six month periods ended June 30, 1997 and 1998 and, to the extent reasonably available prior to the Closing, each subsequent quarter thereafter and the corresponding quarter of the prior year, in each case, for (i) the portion of the Businesses that comprise the "reference" and 39 "business and professional" publishing segments and (ii) the portion of the Businesses that comprise all publishing segments other than "reference" and "business and professional." (d) Prior to the Closing, the Seller shall deliver to the Parent true and complete copies of the monthly financial statements with respect to the Publishing Subsidiaries and the Businesses that are prepared by the Seller, within 15 days of the date each of the monthly financial statements are delivered to the Seller's senior management. SECTION 5.12. NON-COMPETITION. The Seller acknowledges that reasonable limits on its ability to engage in activities competitive with the Purchaser are warranted to protect the Purchaser's substantial investment in acquiring the Shares, the Assets and the Businesses. Accordingly, the Seller hereby covenants and agrees that during the period commencing with the Closing Date and ending on the third anniversary of the Closing Date, Viacom and the Seller shall not, and shall cause their direct and indirect Subsidiaries not to (subject, in the case of its existing Subsidiaries that are not wholly owned, to its fiduciary duties to holders of minority interests), for the Seller's own account or jointly with any other Person, publish or produce textbooks intended for use primarily in instruction in academic institutions of higher learning or publish or produce any branded series of tutorial reference books in the computer applications and operating systems categories (a "COMPETING BUSINESS"); PROVIDED, HOWEVER, that the foregoing shall not be breached as a result of (a) the ownership or other right to acquire by Viacom or the Seller (or any of their Subsidiaries) of not more than an aggregate of 10% of any class of stock of a Person engaged, directly or indirectly, in a Competing Business; (b) the acquisition of, holding by, operation of, or disposition by Viacom or the Seller (or any of their Subsidiaries) of an interest in any Person whose primary business is not a Competing Business; (c) the licensing or sale of any of the Seller's or its Subsidiaries' intellectual property for use in connection with any Competing Business; (d) any activity relating to the publication of fiction or non-fiction (other than in the subject matter of computer applications and operation systems) sold primarily into the consumer retail channel; or (e) any activity relating to any book or category of books presently published by Simon & Schuster's Consumer division or similar in genre to any such book or category. SECTION 5.13. NON-SOLICITATION. The Seller shall not, and shall cause each of its Affiliates not to, during the period beginning at the Closing and ending on January 1, 2000, solicit or recruit any information technology employee of the Businesses or encourage any such employee to leave the employment of the Businesses; PROVIDED that this Section 5.13 shall not be breached as a result of a general solicitation that is not directed at the information technology employees of the Businesses; PROVIDED FURTHER that this Section 5.13 shall not be breached unless the Purchaser shall have notified the Seller in writing that the Purchaser was aware of a potential breach hereof and, following receipt of such notice, the Seller shall have failed to use all reasonable efforts to end such soliciting or recruiting. 40 ARTICLE VI EMPLOYEE MATTERS SECTION 6.01. EMPLOYEES. (a) The Seller or one of its Affiliates shall retain responsibility under the health and welfare benefits plans in which the Business Employees participate for all amounts payable by reason of, or in connection with, any and all medical and dental claims made by Business Employees within 120 days after the Closing Date to the extent such claims relate to events which occurred prior to the Closing Date; PROVIDED, HOWEVER, that the Purchaser shall be responsible for all amounts payable under any short-term or long-term disability programs maintained by the Seller to the extent such amounts are not covered by insurance. Following the Closing Date, the Purchaser shall be responsible for all other such benefit claims made by the Business Employees whether under the Seller's or the Purchaser's medical or dental plans. (b) To the extent that service is relevant for eligibility and vesting (and, solely for purposes of calculating entitlement to vacation and sick days, benefit accruals) under any retirement plan, employee benefit plan, program or arrangement established or maintained by the Purchaser or any of its Subsidiaries for the benefit of Business Employees, such plan, program or arrangement shall credit such Business Employees for service on or prior to the Closing with the Seller or any Affiliate or predecessor thereof. In addition, the Purchaser shall waive limitations on benefits relating to any pre-existing conditions to the same extent eligible for coverage under a Viacom ERISA Plan and recognize, for purposes of annual deductible and out-of-pocket limits under its medical and dental plans, deductible and out-of-pocket expenses paid by Business Employees, Retirees and their respective dependents under the Seller's medical and dental plans in the calendar year in which the Closing Date occurs. SECTION 6.02. RETIREMENT PLANS. (a) It is agreed by both parties that the Seller or one of its Affiliates will continue to maintain the VPP, the Viacom Excess Pension Plan ("VEPP") and the VIP, with the benefit accruals of the Business Employees under such plans ceasing as of the Closing Date and Seller shall retain all liabilities thereunder. The Seller shall cause the Business Employees to be fully vested in their accrued benefits in each such plan as of the Closing Date. (b) As soon as practicable after the Closing Date, the Seller shall prepare and deliver to the Purchaser a schedule listing the Business Employees and Former Business Employees who were participants in the VIP as of the Closing Date. Seller shall cause the Trustee of the VIP to transfer to the Trustee of a defined contribution plan designated by the Purchaser (the "PURCHASER'S DC PLAN") an amount equal to the aggregate account balances of the Business Employees and Former Business Employees participating in the VIP, including 41 any loan obligation. To the extent that a loan obligation is transferred to the Purchaser's DC Plan, the Purchaser's DC Plan shall continue to accept repayments of such loan amounts and shall otherwise administer such loans in accordance with their terms and ERISA until such loan amounts are repaid or are defaulted. Other than with respect to the loan obligations (which shall be transferred in the form of promissory notes or other documentation thereof), the transfer shall be in cash or property as mutually agreed by Purchaser and Seller (which agreement shall not be unreasonably withheld) based on the value of the account balances on the date of transfer, which shall occur as soon as reasonably practicable after the Closing. Upon such transfer, the Purchaser's DC Plan shall assume the liabilities represented by such transferred account balances. The Seller shall cause the Business Employees to be fully vested in their account balances under the VIP as of the Closing Date. Prior to Closing, one or more of the Publishing Subsidiaries shall have established a separate non-qualified deferred compensation plan (the "S&S EIP") with terms and benefits identical to those provided under the Viacom Excess Investment Plan (the "VEIP") and providing for the unsecured contractual commitment to deliver at a future date all of the following: (i) deferred compensation credited to an account under the S&S EIP, (ii) deferred bonus compensation credited to an account under the S&S EIP, (iii) amounts credited to an account under the S&S EIP as matching contributions, and (iv) amounts credited to an account under the S&S EIP as investment income under the foregoing amounts. The S&S EIP will assume the responsibility for all account balances, and earnings thereon, of Business Employees and Former Business Employees participating in the VEIP. The Purchaser agrees that it will assume the S&S EIP at Closing, and cause the Publishing Subsidiaries to honor the terms of any elections previously made by the VEIP participants. For the avoidance of doubt, the parties hereto acknowledge that the VEIP is an unfunded plan for which no assets have been segregated from the Seller's general account for the payment of obligations thereunder, and that no assets will be transferred by the Seller to the Purchaser or to the Publishing Subsidiaries in connection with the establishment of the S&S EIP and the assumption thereof by the Purchaser. (c) Following the Closing Date, the Purchaser shall (i) provide continuation health care coverage to all Business Employees and their qualified beneficiaries who incur a qualifying event on and after the date hereof in accordance with the continuation health care coverage requirements of Section 4980B of the Code and Title I, Subtitle B, Part 6 of ERISA ("COBRA") and (ii) assume the obligation of the Seller and its Affiliates to provide such continuation coverage to Former Business Employees and their qualified beneficiaries to whom the Seller or any of its Affiliates is, on the Closing Date, providing such continuation coverage or to whom the Seller or any of its Affiliates is under an obligation to provide such continuation coverage at the election of such Former Business Employee or qualified beneficiary. (d) Prior to the Closing Date or as soon as practicable thereafter, Prentice-Hall Canada shall have established and registered a separate defined benefit pension plan (the 42 "PRENTICE-HALL CANADA PENSION PLAN") to provide for Prentice-Hall Canada Business Employees and Former Business Employees pension and other benefits that are identical to those provided under the terms of the Pension Plan for Salaried Employees of Viacom International Canada Ltd. and Affiliated Companies (the "VICL PENSION PLAN") on the Closing Date. Effective upon receipt of applicable regulatory approvals and the transfer of assets from the VICL Pension Plan to the Prentice-Hall Canada Pension Plan as described below, the Prentice-Hall Canada Pension Plan shall assume responsibility for all pension and other benefits earned by Prentice-Hall Canada Business Employees and Former Business Employees under the VICL Pension Plan prior to the Closing Date (the "ASSUMED PENSION BENEFITS") and shall recognize the period of service and pensionable earnings recognized under the VICL Pension Plan for the purposes and to the extent such service and pensionable earnings are recognized under the VICL Pension Plan. The Assumed Pension Benefits under the Prentice-Hall Canada Pension Plan shall be fully funded on a going concern basis effective as of the Closing Date through a transfer of assets from the VICL Pension Plan in the amount determined by the VICL Pension Plan actuary based upon the actuarial methods and assumptions provided to the Purchaser prior to Closing, subject to receipt of applicable regulatory approvals. In the event that the necessary regulatory approvals for the Prentice-Hall Canada Pension Plan are not received until after the Closing Date, the Seller will continue to administer the Assumed Pension Benefits after the Closing Date on behalf of and at the expense of the Purchaser pending receipt of such approvals, immediately after which the Assumed Pension Benefits and assets will be transferred from the VICL Pension Plan to the Prentice-Hall Canada Pension Plan in accordance with the provisions hereof, PLUS interest accrued from (and including) the Closing Date to (but not including) the date of asset transfer at the same rate utilized by the Seller's actuaries for determining liabilities. For a period of two years, the Purchaser agrees not to amend or terminate the Prentice-Hall Canada Pension Plan, other than amendments which are required under applicable law. (e) Prior to the Closing Date, one or more of the Publishing Subsidiaries shall have established a separate non-qualified deferred compensation plan (the "S&S DCP") providing for the payment of deferred benefits to Business Employees or Former Business Employees who have previously deferred the settlement of performance awards under the terms of the Paramount Communications, Inc. Corporate Annual Performance Plan (the "PARAMOUNT DCP") and the Seller shall transfer assets, if any, and liabilities related to each Participant's account balance in the Paramount DCP, including all earnings thereon, into the S&S DCP. The S&S DCP shall contain provisions that are identical to those in the Paramount DCP, including provisions for the crediting of earnings and losses on deferred benefits, other than provisions that are no longer applicable. The Purchaser agrees that it will cause the Publishing Subsidiaries to honor the terms of the distribution elections previously made by the Business Employees or Former Business Employees, subject to the terms of the S&S DCP. (f) Prior to the Closing Date or as soon as practicable thereafter, the Seller shall cause the Paramount Communications UK Pension Plan (the "UK PENSION PLAN") to 43 transfer the accrued benefits calculated in accordance with the actuarial assumptions as determined by Seller's actuarial advisor and related assets for all plan beneficiaries who are not Business Employees or Former Business Employees to another retirement plan sponsored or to be established by the Seller or one of its Affiliates, at which time, and subject to the receipt of applicable regulatory approvals, if any, the Publishing Subsidiaries shall assume responsibility for all pension and other benefits provided under the terms of the UK Pension Plan. For a period of one year following the later of the Closing Date or, if applicable, the date of the Purchaser's assumption of the UK Pension Plan, the Purchaser agrees not to amend or terminate the UK Pension Plan, other than amendments that are required under applicable law or permitted under applicable law without adversely affecting the split-up of such plan or resulting in any constructive termination of any Business Employee. SECTION 6.03. RETIREE MEDICAL AND DENTAL BENEFITS. The Purchaser agrees to assume the obligations of the Seller and its Subsidiaries for the provision of retiree medical and dental benefits described on Section 3.13(b) of the Disclosure Schedule (whether through participation in the Purchaser's equivalent plans or by establishing a new retiree medical and dental plan) to (a) all Former Business Employees and their eligible dependents who are currently receiving such benefits and who are listed on Section 6.03 of the Disclosure Schedule and (b) all Business Employees and their eligible dependents (upon becoming eligible to begin receiving such benefits) (collectively, the "RETIREES"). SECTION 6.04. FOREIGN PLANS. (a) If a Foreign Plan is sponsored or maintained by one or more entities, and all of the shares or other indicia of ownership of such entity or entities are to be acquired (directly or indirectly) by the Purchaser pursuant to the transactions contemplated herein, the Purchaser shall assume all obligations under such Foreign Plan to current and former employees of such entity or entities. (b) In the event that the acquisition of a foreign division of the Seller by the Purchaser is structured in a manner other than described in clause (a) above, and one or more of the entities comprising such foreign division sponsors a Foreign Plan, the following rules shall apply with respect to such Foreign Plan: (i) To the extent that any Foreign Plan is an externally funded plan, the Purchaser and the Seller agree to determine the actuarially appropriate level of assets to be transferred from such Foreign Plan to a similar employee benefit plan maintained by (or to be established by) the Purchaser. To the extent that book reserves have been established for an internally financed Foreign Plan and assets have been placed in a separate account for the purpose of funding obligations under such Foreign Plan, the Seller or the applicable entity will transfer sufficient funds to cover the accrued benefit obligations of participating Business Employees and Former Business Employees. To the extent that actuarial reserves have been built up within an insured Foreign Plan, the 44 Seller will transfer the amount necessary to fund the accrued obligations of participating Business Employees and Former Business Employees. (ii) All such transfers and payments described in clause (i) shall occur as soon as practicable after the Closing Date and the amount to be transferred, if applicable, with respect to any Foreign Plan shall be sufficient to cover the accrued benefit obligations of the Business Employees and Former Business Employees participating in such plan calculated using usual country-specific actuarial assumptions. (c) For the one-year period commencing on the Closing Date, the Purchaser agrees to provide all Business Employees and Former Business Employees, if applicable, of a foreign division of the Seller acquired by the Purchaser with health, welfare and other employee benefits that in the aggregate are substantially equivalent to, and no less favorable than, those provided to such Business Employees and Former Business Employees immediately prior to the Closing Date and, with respect to those Business Employees and Former Business Employees whose employment is governed by the terms of a collective bargaining agreement, such health, welfare and other employee benefits as are required by the terms of such collective bargaining agreement for the duration thereof. SECTION 6.05. INDEMNITY. (a) Anything in this Agreement to the contrary notwithstanding (including Section 10.01), the Purchaser hereby agrees to indemnify, defend and hold harmless the Seller and its Affiliates against and reimburse the Seller and its Affiliates for any Losses that the Seller and its Affiliates may at any time suffer or incur, or become subject to, as a result or in connection with (i) any failure of the Purchaser or its Subsidiaries to comply with their obligations under any collective bargaining agreement listed in Section 3.13(c) of the Disclosure Schedule, (ii) any claim made by any Business Employee or Former Business Employee against the Seller or any of its Affiliates for any severance or termination benefits pursuant to any Viacom Plan, (iii) any suit or claim of violation brought against the Seller or any of its Affiliates under the Workers Adjustment and Retraining Notification Act for any actions taken by the Purchaser or its Subsidiaries on or after the Closing Date with respect to any facility, site of employment or operating unit, (iv) any suit or claim of violation brought against the Seller or any of its Affiliates under the continuation health care coverage requirement of COBRA for failure by the Purchaser to provide such continued coverage at the election of the Business Employees, Former Business Employees or qualified beneficiaries or the failure to assume responsibility for ongoing COBRA obligations related to Former Business Employees or qualified beneficiaries of the Publishing Subsidiaries, (v) any claim for payments of benefits by Former Business Employees, Business Employees, Retirees or their respective beneficiaries under any Viacom Plan that the Purchaser assumes or continues to maintain after the Closing Date or with respect to any benefit arrangement that the Purchaser has agreed hereunder to maintain for such individuals (or in which the Purchaser has agreed hereunder to permit such individuals to participate), (vi) any claim of employment discrimination by the Purchaser, including, but not limited to, discrimination in the 45 Purchaser's hiring or termination of any employees, (vii) any claim of wrongful discharge of any Business Employee (including constructive discharge) and (viii) any claim made by any Business Employee or any Former Business Employee against the Seller or any of its Subsidiaries arising out of the payment or non-payment of deferred benefits under the S&S EIP or VEIP, the S&S DCP or the Paramount DCP. (b) For a period of nine months following the Closing, the Purchaser shall replicate the Viacom enhanced severance plan as disclosed in Section 3.13(f) of the Disclosure Schedule, and shall pay severance benefits thereunder to any Business Employee that is terminated by the Purchaser within such nine month period. SECTION 6.06. NO THIRD-PARTY BENEFICIARIES, ETC. Nothing in this Article VI or elsewhere in this Agreement shall be deemed to (a) make any present or future Business Employees or Former Business Employees third-party beneficiaries of this Agreement, (b) confer on any Business Employee any right to specific compensation or benefits or any right to continued employment, or (c) prevent the Purchaser from terminating or modifying any benefit plan that the Purchaser may establish or maintain. SECTION 6.07. COOPERATION AND EXCHANGE OF INFORMATION. The Purchaser and the Seller shall, and the Seller shall cause the Publishing Subsidiaries to, provide one another with such cooperation and information, and all such other reasonable assistance, as any of them may reasonably request of another in the provision of current information regarding the Business Employees, Former Business Employees, Retirees and their dependents and beneficiaries on an ongoing basis in order to facilitate (a) determination of eligibility of, and payments of benefits to, Business Employees, Former Business Employees, Retirees and their dependents and beneficiaries under the VPP or any other Viacom Plan and (b) the administration and maintenance of any plan maintained by the Seller or its Affiliates. Each party shall make its employees available on a mutually convenient basis to provide explanations of any documents or information provided hereunder. Any information obtained under this Section 6.07 shall be kept confidential, except as may otherwise be required under applicable Law. 46 ARTICLE VII TAX MATTERS SECTION 7.01. TAX INDEMNITIES. (a) From and after the Closing Date, the Seller shall be responsible for, shall pay or cause to be paid, and shall indemnify, defend and hold harmless the Parent, the Purchaser and the Publishing Subsidiaries against and reimburse the Parent, the Purchaser and the Publishing Subsidiaries for (i) any Tax imposed on Viacom or any member of an affiliated group with which Viacom files a consolidated or combined income Tax Return (other than the Publishing Subsidiaries) with respect to any Tax period that ends on or before the Closing Date or includes the Closing Date, including any such Tax for which any Publishing Subsidiary may be liable under Section 1.1502-6 of the Treasury Regulations (or any similar provision of state, local or foreign law), (ii) any Tax imposed on the Publishing Subsidiaries with respect to any Tax period or portion thereof that ends on or before the Closing Date, in excess of the amount, if any, for Taxes in Section 3.06 of the Disclosure Schedule; (iii) any Tax arising from a breach of a representation or warranty set forth in Section 3.14 of this Agreement; (iv) any Section 338 Tax; (v) any Tax arising from the Permitted Reorganization; and (vi) any obligation to pay an amount under the Tax Benefit Agreement among Prentice-Hall, Inc., Macmillan, Inc., and the Realization Trust dated as of February 28, 1994 with respect to the use of Pre-Closing Date NOL in any period ending on or before the Closing Date; PROVIDED, HOWEVER, that no indemnity shall be provided under this Agreement for any Tax resulting from any transaction of the Publishing Subsidiaries occurring on the Closing Date but after the Closing that is not contemplated by this Agreement or is not in the ordinary course of business. (b) From and after the Closing Date, the Parent, the Purchaser and the Publishing Subsidiaries shall, jointly and severally, be responsible for, shall pay or cause to be paid, and shall indemnify, defend and hold harmless the Seller and its Affiliates against and reimburse the Seller and its Affiliates for all Taxes that the Seller and its Affiliates may at any time suffer or incur, or become subject to, as a result or in connection with the Publishing Subsidiaries that are not subject to indemnification pursuant to paragraph (a) of this Section 7.01, including, but not limited to, Taxes resulting from any transaction of the Publishing Subsidiaries occurring on the Closing Date but after the Closing that is not contemplated by this Agreement or is not in the ordinary course of business. (c) Payment by the indemnitor of any amount due to the indemnitee under this Section 7.01 shall be made within 10 days following written notice by the indemnitee that payment of such amounts to the appropriate Tax authority is due by the indemnitee, provided that the indemnitor shall not be required to make any payment earlier than two days before it is due to the appropriate Tax authority. If the Seller receives an assessment or other notice of Tax due with respect to the Publishing Subsidiaries for any period ending on or before the Closing Date for which the Seller is not responsible, in whole or in part, pursuant to Section 47 7.01(a) because all or a part of such Tax does not exceed the amount for Taxes in Section 3.06 of the Disclosure Schedule, and the Seller or any of its Affiliates pay such Tax, then the Parent, the Purchaser or a Publishing Subsidiary shall pay to the Seller, in accordance with the first sentence of this Section 7.01(c), the amount of such Tax for which the Seller is not responsible. In the case of a Tax that is contested in accordance with the provisions of Section 7.03, payment of the Tax to the appropriate Tax authority will not be considered to be due earlier than the date a final determination to such effect is made by such Tax authority or a court. (d) For purposes of this Agreement, in the case of any Tax that is imposed on a periodic basis and is payable for a period that begins before the Closing Date and ends after the Closing Date, the portion of such Taxes payable for the period ending on the Closing Date shall be (i) in the case of any Tax other than a Tax based upon or measured by income, the amount of such Tax for the entire period multiplied by a fraction, the numerator of which is the number of days in the period ending on the Closing Date and the denominator of which is the number of days in the entire period; PROVIDED, HOWEVER, that (x) if any property, asset or other right of a Publishing Subsidiary is sold or otherwise transferred prior to the Closing Date, then ad valorem Taxes pertaining to such property, asset or other right shall be attributed entirely to the pre-Closing period, and (y) if any property, asset or other right of a Publishing Subsidiary is purchased or otherwise acquired after the Closing Date, then ad valorem Taxes pertaining to such property, asset or other right shall be attributed entirely to the post-Closing period, and (ii) in the case of any Tax based upon or measured by income, the amount which would be payable if the taxable year ended as of the close of the Closing Date; PROVIDED, HOWEVER, that any Tax resulting from the departure of a Publishing Subsidiary from an affiliated, combined or consolidated group in which it was a member in a pre-Closing period (resulting from the triggering into income of deferred intercompany transactions under Section 1.1502-13 of the Treasury regulations or excess loss accounts under Section 1.1502-19 of the Treasury regulations or otherwise) shall be allocated to the pre-Closing period. In the case of any Tax based upon or measured by capital (including net worth or long-term debt) or intangibles, any amount thereof required to be allocated under this Section 7.01(d) shall be computed by reference to the level of such items on the Closing Date; PROVIDED, HOWEVER, that (x) if any property, asset or other right of a Publishing Subsidiary is sold or otherwise transferred prior to the Closing Date, then any such Tax computed by reference to such property, asset or other right shall be attributed entirely to the pre-Closing period, and (y) if any property, asset or other right of a Publishing Subsidiary is purchased or otherwise acquired after the Closing Date, then any such Tax computed by reference to such property, asset or other right shall be attributed entirely to the post-Closing period. SECTION 7.02. REFUNDS AND TAX BENEFITS. (a) The Seller shall be entitled to any refund or credit of Taxes (including any interest paid or credited with respect thereto), and the Purchaser shall promptly pay to the Seller any such refund or credit of Taxes (including any interest paid or credited with respect thereto) received by the Purchaser, the Parent or the 48 Publishing Subsidiaries (i) relating to Tax periods or portions thereof ending on or before the Closing Date or (ii) attributable to an amount for which the Seller is responsible under Section 7.01(a) hereof, PROVIDED, HOWEVER, that the rights and obligations described in this sentence shall not apply to any net operating loss, capital loss or other Tax attribute or benefit item of a Publishing Subsidiary arising in any Tax period ending on or before the Closing Date (a "PRE-CLOSING DATE NOL") that is utilized by the Purchaser, the Parent or any Publishing Subsidiary in any Tax period beginning after the Closing Date. The Purchaser agrees to assume the rights and obligations of Prentice-Hall, Inc. and/or Macmillan, Inc. under the Tax Benefit Agreement among Prentice-Hall, Inc., Macmillan, Inc. and the Realization Trust dated as of February 28, 1994. The Seller may utilize any Pre-Closing Date NOL on any Tax Return for any Tax period ending on or before the Closing Date and shall have no obligation of any nature to indemnify the Purchaser with respect to the utilization of such Pre-Closing Date NOL other than as provided in Section 7.01(a)(vi). The Purchaser shall, if the Seller so requests and at the Seller's expense, cause a Publishing Subsidiary to file for and obtain any refund determined by the Seller to be due to the Seller. The Purchaser shall permit the Seller to control (at the Seller's expense) the prosecution of any such refund claim, and shall cause the Publishing Subsidiary to authorize by appropriate power of attorney such Persons as the Seller shall designate to represent such Publishing Subsidiary with respect to such refund claim. In the event that any refund or credit of Taxes for which a payment has been made pursuant to this Section 7.02(a) is subsequently reduced or disallowed, the Seller shall indemnify, defend and hold harmless the Publishing Subsidiary against and reimburse the Publishing Subsidiary for any Tax liability, including interest and penalties, assessed against such Publishing Subsidiary by reason of the reduction or disallowance. (b) Any refund or credit of Taxes (including any interest paid or credited with respect thereto) that relates to any Publishing Subsidiary and that is attributable to a post-Closing period shall be the property of the Publishing Subsidiary and shall be retained by the Publishing Subsidiary (or, if any such refund (or interest thereon) is received by Seller or any of its Affiliates, promptly paid by Seller to the Publishing Subsidiary). Without limiting the generality of the preceding sentence, any such refund or other benefit realized by any Publishing Subsidiary in a post-Closing period that results from the carry forward of any Pre-Closing Date NOL shall be the property of the Publishing Subsidiary and shall be retained by the Publishing Subsidiary. (c) If, as a result of any payment by the Seller, the Publishing Subsidiaries or their Affiliates on or prior to the Closing Date of any amounts with respect to which the timing of any available deduction would be determined under Section 404 of the Code, the Purchaser or any Publishing Subsidiary becomes entitled to any deductions or tax credits in any Tax period or portion thereof ending after the Closing Date (a "POST-CLOSING DATE TAX BENEFIT"), then the Purchaser shall pay the Seller an amount equal to the Tax savings resulting from such Post-Closing Date Tax Benefit. The amount of any such Tax savings for any Tax period shall be the amount of the reduction in Taxes reflected on any Tax Return for such Tax 49 period as compared to the Taxes that would have been reflected on such Tax Return in the absence of such Post-Closing Date Tax Benefit. All payments to the Seller pursuant to this Section 7.02(c) shall be made within 30 days after the filing of a Tax Return for the Tax period in which a Post-Closing Date Tax Benefit results in a reduction in the Taxes paid by the Purchaser. SECTION 7.03. CONTESTS. (a) After the Closing, the party first receiving notice shall promptly notify the other party in writing of any demand or claim on the first party from any Tax authority or other party with respect to Taxes for which the other party is liable pursuant to Section 7.01. Such notice shall contain factual information (to the extent known) describing the asserted Tax liability in reasonable detail and shall include copies of any notice or other document received from any Tax authority in respect of any such asserted Tax liability. If such notifying party fails to give the other party prompt notice of an asserted Tax liability as required by this Section 7.03, then (a) if the other party is precluded by the failure to give prompt notice from contesting the asserted Tax liability in both the administrative and judicial forums, then such notifying party shall have sole responsibility for such Tax liability or (b) if the other party is not precluded from contesting but such failure to give prompt notice results in detriment to the other party, then any amount that the other party is otherwise required to pay to such notifying party pursuant to Section 7.01 with respect to such liability shall be reduced by the amount of such detriment. (b) The Seller may elect to control the conduct to a final determination, through counsel of its own choosing and at its own expense, of any audit, claim for refund and administrative or judicial proceeding involving any asserted liability with respect to which indemnity may be sought by the Purchaser under Section 7.01(a) (any such audit, claim for refund or proceeding relating to an asserted Tax liability is referred to herein as a "CONTEST"). If the Seller elects to control a Contest, it shall within 30 calendar days of receipt of the notice of asserted Tax liability notify the Purchaser in writing of its intent to do so. In such case, thereafter the Seller shall have all rights to settle, compromise and/or concede such asserted liability and the Purchaser shall cooperate and shall cause a Publishing Subsidiary or any of its successors to cooperate, at the expense of the Seller, in each phase of such Contest; PROVIDED, HOWEVER, that (i) Seller shall not, other than in good faith based on the merits, enter into any compromise or settlement of such Contest that would result in any Tax detriment to the Purchaser, the Parent or any Publishing Subsidiary; and (ii) if a Publishing Subsidiary is requested by the Seller to pay or cause to be paid the tax claimed and to sue for a refund, then the Seller shall advance to the Publishing Subsidiary on an interest-free basis the amount of Tax claimed. The Seller shall inform the Purchaser of all developments and events relating to such Contest (including, without limitation, providing to the Purchaser copies of all written materials relating to such contest reasonably requested by Purchaser), and the Purchaser and its authorized representatives shall be entitled, at the expense of the Purchaser, to attend, but not participate in or control, all conferences, meetings and proceedings relating to such Contest. If, pursuant to Section 7.03(b)(ii), the Seller advances to a Publishing Subsidiary an 50 amount of Tax claimed under a Contest and there is a final determination that the Publishing Subsidiary is entitled to a refund of all or any portion thereof, then the Publishing Subsidiary shall promptly pay or cause to be paid to Seller such refund upon its receipt thereof (together with any interest paid or credited thereon by the applicable Tax authority). If the Seller elects not to control the Contest, fails to notify the Purchaser of its election as herein provided or contests its obligation to indemnify under Section 7.01(a), the Purchaser or a Publishing Subsidiary may pay, compromise or contest such asserted liability. Neither the Purchaser nor any Publishing Subsidiary may settle or compromise any asserted liability with respect to which indemnity may be sought by the Purchaser over the objection of the Seller; PROVIDED, HOWEVER, that consent to settlement or compromise shall not be unreasonably withheld. In any event, the Seller may participate, at its own expense, in the Contest. If the Seller chooses to control the Contest, the Purchaser shall promptly empower and shall cause a Publishing Subsidiary or any of its successors promptly to empower (by power of attorney and such other documentation as may be appropriate) such representatives of the Seller as it may designate to represent the Purchaser, a Publishing Subsidiary or any of their successors in the Contest insofar as the Contest involves an asserted Tax liability with respect to which indemnity may be sought by the Purchaser. SECTION 7.04. PREPARATION OF TAX RETURNS. The Seller shall prepare and file U.S. federal, state, local and foreign income and franchise Tax Returns relating to the Publishing Subsidiaries for any Tax period ending on or prior to the Closing Date and which are required to be filed after the Closing Date on a basis consistent with prior tax years unless different treatment is required by applicable Law. Without limitation to the obligations of the Seller under Section 7.01(a), the Seller shall pay any Taxes shown to be due on such Tax Returns. With respect to any Tax Returns for which the Seller has filing responsibility pursuant to the preceding sentence, the Publishing Subsidiaries will be included in consolidated, combined or unitary Tax Returns that include the Seller on a basis consistent with prior tax years unless a different treatment is required by applicable Law. The parties agree that if a Publishing Subsidiary is permitted, but not required, under applicable state, local or foreign income or franchise tax laws to treat the Closing Date as the last day of a Tax period, they will treat the Tax period as ending on the Closing Date. The Seller or its designee shall prepare and file all other Tax Returns for any period ending on or prior to the Closing Date to the extent the Seller or Viacom previously was responsible for the preparation and filing of such Tax Returns for the immediately preceding Tax period. Without limitation to the obligations of the Seller under Section 7.01(a), the Seller shall pay any Taxes shown to be due on such Tax Returns. The Seller shall not, on any Tax Return referred to in this Section 7.04(a) or otherwise, make any election under Section 475 of the Code (or any similar provision of state, local or foreign law) with respect to any Publishing Subsidiary. The Purchaser shall prepare and timely file or cause a Publishing Subsidiary to prepare and timely file all Tax Returns for which the Seller is not responsible pursuant to this Section 7.04. The Purchaser will deliver to the Seller for its review and approval a complete and accurate copy of each Tax Return required to be filed by the Purchaser or a Publishing Subsidiary under this 51 Section 7.04 for Tax periods that end on or prior to the Closing Date or that include the Closing Date, and any amendment to such Tax Return, accompanied by an allocation between the pre-Closing period and the post-Closing period of any Taxes shown to be due on such Tax Return at least 30 days prior to the date such Tax Return is filed with the appropriate Tax authority. Such Tax Return and allocation shall be final and binding on the Seller, unless, within 20 calendar days after the date of receipt by the Seller of such Tax Return and allocation, Seller delivers to Purchaser a written request for changes to such Tax Return or allocation. If the Purchaser and the Seller have been unable to resolve their differences within 30 days after the Purchaser has received the Seller's written request for changes to such Tax Return and allocation, then any disputed issues shall be submitted to an Independent Accounting Firm to resolve in a final binding manner after hearing the views of both parties. The fees and expenses of the Independent Accounting Firm shall be shared equally between the Seller and the Purchaser. In the case of a Tax Return that includes a period that begins on or before the Closing Date and ends after the Closing Date, not later than (i) five Business Days before the due date (including any extension thereof) for payment of Taxes with respect to such Tax Return or (ii) in the event of a dispute, five Business Days after the resolution thereof either by mutual agreement of the parties or by a determination of an Independent Accounting Firm, without prejudice to the obligations of the parties under Section 7.01, each party shall pay to the other the portion of the Taxes set forth on such Tax Return that are allocable to the portion of the period for which such party bears responsibility, to the extent that such Tax has not been previously paid to such other party or to the appropriate Tax authority, after giving effect to any agreement of the parties or any determination by the Independent Accounting Firm, net of any payments made prior to the Closing Date in respect of such Taxes, whether as estimated Taxes or otherwise. SECTION 7.05. SECTION 338(H)(10) ELECTION AND ALLOCATIONS. (a) The Seller and the Purchaser shall jointly make the election provided for by Section 338(h)(10) of the Code and any corresponding elections under state, local or foreign tax law (the "ELECTIONS") solely with respect to the Election Shares and not with respect to any other Publishing Subsidiary. The Seller and the Purchaser shall provide to the other all necessary information to permit the Election to be made. The Seller and the Purchaser shall, as promptly as practicable following the Closing Date, take all actions necessary and appropriate (including filing IRS Form 8023 and other such forms, returns, elections, schedules, attachments, and other documents as may be required (together, the "FORMS")) to effect a timely Election. (b) The Purchaser shall further allocate the Stock Allocations determined in accordance with Section 2.02 for purposes of making the Election described in Section 7.05(a). In connection with such Elections, the Purchaser shall determine (i) the amount of the modified aggregate deemed sales price ("MADSP") of the Election Shares (within the meaning of Treas. Reg. Section 1.338(h)(10)-1(f)) and (ii) the proper allocations of the MADSP among the Assets in accordance with Treas. Reg. Section 1.338(h)(10)-1(f). The allocations referred to in the two preceding sentences are referred to herein as the "ELECTION ALLOCATIONS". The 52 Seller will calculate the gain or loss, if any, in a manner consistent with the Election Allocations and will not take any position with respect to Taxes that is inconsistent with the Election Allocations in any Tax Return or otherwise, except as may be required by Law. The Purchaser will allocate the Purchase Price consistently with the Election Allocations and will not take any position with respect to Taxes that is inconsistent with the Election Allocations in any Tax Return or otherwise, except as may be required by law. (c) The Seller and the Purchaser agree that the Forms shall be timely filed with the appropriate Tax authorities not earlier than 60 days before the latest date for the filing thereof. At least 120 days prior to the latest date for the filing of each Form, the Purchaser shall prepare and submit to the Seller a draft of each Form setting forth the Election Allocations. No party hereto shall file any Form unless it shall have obtained the consent of the other party hereto, which consent shall not be unreasonably withheld. On or prior to the 30th day after the Seller's receipt of a draft Form, the Seller shall either (i) consent to such filing or (ii) notify the Purchaser that it disagrees with the Election Allocations as set forth on the draft Forms. If the Purchaser and the Seller have been unable to resolve their differences within 30 days after the Purchaser has been notified with respect to the Seller's disagreement with the Election Allocations as set forth on the draft Forms, then any remaining disputed issues shall be submitted to an Independent Accounting Firm to resolve in a final binding manner after hearing the views of both parties. The fees and expenses of the Independent Accounting Firm shall be shared equally between the Seller and the Purchaser. SECTION 7.06. COOPERATION AND EXCHANGE OF INFORMATION. The Seller, the Purchaser and the Publishing Subsidiaries will provide each other with such cooperation and information as any of them reasonably may request of another in filing any Tax Return, amended Tax Return or claim for refund, determining a liability for Taxes or a right to a refund of Taxes or participating in or conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include the preparation of tax packages for the Seller in substantially the same form and at the same time in which such information customarily was provided to the Seller in previous Tax periods and providing copies of relevant Tax Returns or portions thereof, together with accompanying schedules and related work papers and documents relating to rulings or other determinations by Tax authorities. Each such party shall make its employees available on a mutually convenient basis to provide explanations of any documents or information provided hereunder. Subject to the preceding sentence, each party required to file Tax Returns pursuant to this Agreement shall bear all costs of filing such Tax Returns. Each such party will retain all Tax Returns, schedules and work papers and all material records or other documents relating to Tax matters of the Publishing Subsidiaries for their Tax period first ending after the Closing Date and for all prior Tax periods until the later of (a) the expiration of the statute of limitations of the Tax periods to which such Tax Returns and other documents relate, without regard to extensions except to the extent notified by another party in writing of such extensions for the respective Tax periods, or (b) eight years following the due date (without extension) for such Tax 53 Returns. Any information obtained under this Section 7.06 shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting an audit or other proceeding. SECTION 7.07. CONVEYANCE TAXES. Except as provided in Section 2.04(d), the Purchaser and the Seller shall each assume liability for, indemnify the other party against and pay 50% of all sales, value added, transfer, stamp, registration, real property transfer or gains and similar Taxes incurred as a result of the transactions contemplated hereby and shall file all required change of ownership and similar statements, provided that Seller shall pay and be solely responsible for any such Taxes that are attributable to the Permitted Reorganization. In addition, each of Purchaser and Seller shall indemnify the other party and its Affiliates for any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties (including attorneys' and consultants' fees and expenses) incurred by the other party and its Affiliates arising out of such party's failure to make timely or full payments of such Taxes. SECTION 7.08. TERMINATION OF TAX SHARING AGREEMENTS. Except as otherwise provided in this Article VII and except for the Tax Benefit Agreement among Prentice-Hall, Inc., Macmillan, Inc. and the Realization Trust dated as of February 28, 1994, any and all Tax allocation or sharing agreements or other agreements or arrangements relating to Tax matters between any Publishing Subsidiary on the one hand and the Seller or any of its Affiliates on the other hand shall be terminated with respect to the Publishing Subsidiary as of the day before the Closing Date and, from and after the Closing Date, no Publishing Subsidiary shall be obligated to make any payment to the Seller or any of its Affiliates, any Tax authority or any other person pursuant to any such agreement or arrangement for any past or future period. SECTION 7.09. FIRPTA CERTIFICATES. The Seller and each of its Affiliates that are required to do so to prevent the imposition of withholding under Section 1445 of the Code shall deliver to the Purchaser on the Closing Date a duly completed and executed certification of non-foreign status pursuant to Section 1.1445-2(b)(2) of the Treasury regulations. SECTION 7.10. MISCELLANEOUS. (a) The parties agree to treat all payments made under Article X and the Articles and Sections listed in Section 10.04(a) as adjustments to the Purchase Price for Tax purposes. (b) Except as expressly provided otherwise and except for the representations contained in Section 3.14 of this Agreement, this Article VII shall be the sole provision governing Tax matters and indemnities therefor under this Agreement. (c) For purposes of this Article VII, all references to the Purchaser or the Seller include successors thereto. 54 (d) Neither Purchaser, its Affiliates nor any foreign Publishing Subsidiary shall take any action which may result in a distribution with respect to the stock of a foreign Publishing Subsidiary prior to the last day of the first U.S. taxable year of such foreign Publishing Subsidiary which ends after the Closing Date. After the date of this Agreement and prior to the Closing, Seller will not allow the foreign Publishing Subsidiaries to take any action which may result in a distribution with respect to the stock of a foreign Publishing Subsidiary. (e) The Purchaser, its Affiliates and any Publishing Subsidiary shall not take any action or enter into any transaction not in the ordinary course of business which may result in an amount included in the gross income of the Seller pursuant to Section 951 or Section 956 of the Code and the Treasury regulations thereunder. ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.01. CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligation of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. (i) The representations and warranties of the Parent and the Purchaser contained in Article IV shall be true and correct in all material respects as of the Closing as though made on and as of the Closing, except (A) for changes specifically permitted by this Agreement and (B) that those representations and warranties that address matters only as of a particular date shall remain true and correct in all material respects as of such date; PROVIDED THAT any representation or warranty that is qualified by materiality shall be true in all respects as of the Closing Date or as of such particular date, as the case may be; (ii) the covenants contained in this Agreement to be complied with by the Parent or the Purchaser on or before the Closing shall have been complied with in all material respects except that the Parent and the Purchaser shall have complied in all respects with their respective obligations under Article II hereof; and (iii) the Seller shall have received a certificate of each of the Parent and the Purchaser to such effect signed by a duly authorized officer of each thereof; (b) HSR ACT; OTHER GOVERNMENTAL CONSENTS AND APPROVALS. Any waiting period (and any extension thereof) under the HSR Act applicable to the purchase of the Shares and the Assets contemplated hereby shall have expired or shall have been terminated and, to the extent applicable, any necessary approval (i) under 55 the Competition Act (Canada) and (ii) of the German Cartel Office shall have been obtained; (c) NO GOVERNMENTAL ORDER. There shall be no Governmental Order in existence which expressly prohibits or materially restrains the transactions contemplated by this Agreement or materially impairs the value to be received by the Seller under this Agreement; (d) RESOLUTIONS. The Seller shall have received a true and complete copy, certified by the Secretary or an Assistant Secretary of each of the Purchaser and the Parent, of the resolutions duly and validly adopted by the Board of Directors of the Purchaser and the Parent respectively, evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby; and (e) ANCILLARY AGREEMENTS. Each of the Parent and the Purchaser shall have executed and delivered to the Seller each of the Ancillary Agreements to which it or any of its Affiliates is a party. SECTION 8.02. CONDITIONS TO OBLIGATIONS OF THE PARENT AND THE PURCHASER. The obligations of the Parent and the Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. (i) The representations and warranties of the Seller contained in Article III shall be true and correct in all material respects as of the Closing as though made on and as of the Closing, except (A) for changes specifically permitted by this Agreement and (B) that those representations and warranties which address matters only as of a particular date shall remain true and correct in all material respects as of such date (PROVIDED THAT any representation or warranty that is qualified by materiality (including, without limitation, by reference to a Material Adverse Effect) shall be true in all respects as of the Closing Date, or as of such particular date, as the case may be), except in any case for such failures to be true and correct which would not, individually or in the aggregate, have a Material Adverse Effect; (ii) the covenants contained in this Agreement to be complied with by the Seller on or before the Closing shall have been complied with in all material respects except that the Seller shall have complied in all respects with its obligations under Article II hereof; and (iii) the Purchaser and the Parent shall have received a certificate of the Seller to such effect signed by a duly authorized officer thereof; (b) HSR ACT; OTHER GOVERNMENTAL CONSENTS AND APPROVALS. Any waiting period (and any extension thereof) under the HSR Act applicable to the purchase of the Shares and the Assets contemplated hereby shall have expired or shall have been 56 terminated and, to the extent applicable, any necessary approval (i) under the Competition Act (Canada) and (ii) of the German Cartel Office shall have been obtained; (c) NO GOVERNMENTAL ORDER. There shall be no Governmental Order in existence which expressly prohibits or materially restrains the transactions contemplated by this Agreement or materially impairs the value to be received by the Purchaser and the Parent under this Agreement; (d) RESOLUTIONS. The Purchaser shall have received a true and complete copy, certified by the Secretary or an Assistant Secretary of the Seller, of the resolutions duly and validly adopted by the Board of Directors of the Seller evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby; (e) ANCILLARY AGREEMENTS. The Seller shall have executed and delivered, or cause to be executed and delivered, to the Parent and the Purchaser each of the Ancillary Agreements to which it or any of its Affiliates (other than a Publishing Subsidiary) is a party; (f) SHAREHOLDER APPROVAL. The Parent's shareholders shall have approved this Agreement and the transactions contemplated hereby and related matters, as contemplated in Section 4.08; and (g) PERMITTED REORGANIZATION. The Seller and its Subsidiaries shall have effected the Permitted Reorganization in accordance with the terms of Section 5.08. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER SECTION 9.01. TERMINATION. This Agreement may be terminated at any time prior to the Closing (except as limited as to time in paragraph (b) below): (a) by the mutual written consent of the Seller and the Parent; (b) by either the Seller or the Parent, if the Closing shall not have occurred prior to December 31, 1998, PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 9.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall 57 have resulted in, the failure of the Closing to occur prior to such date; and PROVIDED FURTHER that this Agreement may be extended by the Seller to February 15, 1999 by written notice to the Parent given prior to December 31, 1998 if the failure of the Closing to have occurred prior to such date is due to the failure of the condition specified in Section 8.01(b) or (c) or 8.02(b) or (c) to have been satisfied; (c) by the Seller in the event (i) a condition set forth in Section 8.01 becomes incapable of being fulfilled, (ii) the Board of Directors of Parent modifies, changes or withdraws the Parent Board Recommendation in a manner that is adverse to the Seller or (iii) the Parent's shareholders fail to approve this Agreement and the transactions contemplated hereby and related matters at the Extraordinary Meeting of Shareholders contemplated by Section 5.04(c); (d) by the Parent in the event a condition set forth in Section 8.02 becomes incapable of being fulfilled; or (e) by either party in the event of the issuance of a final, nonappealable Governmental Order restraining or prohibiting the transactions contemplated herein. SECTION 9.02. EFFECT OF TERMINATION. (a) In the event of the termination of this Agreement by the Seller pursuant to Section 9.01(c)(ii) or (iii), the Parent shall pay to the Seller within two Business Days of termination a fee of L70 million, which amount shall be payable in immediately available funds, in cash, by wire transfer to an account specified by the Seller. (b) In the event of the termination of this Agreement as provided in Section 9.01, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto, except as set forth in Section 5.03, Section 11.02 and Section 9.02; PROVIDED, HOWEVER, that nothing herein shall relieve either the Seller or the Purchaser from liability for (i) failure to perform the obligations set forth in Section 5.04 or (ii) any willful breach of this Agreement or willful failure to perform hereunder. SECTION 9.03. WAIVER. At any time prior to the Closing, any party may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. 58 ARTICLE X INDEMNIFICATION SECTION 10.01. INDEMNIFICATION BY THE PARENT AND THE PURCHASER. (a) Subject to Section 11.01, the Parent and the Purchaser shall, jointly and severally, indemnify, defend and hold harmless the Seller, its Affiliates and their respective employees, officers and directors (collectively, the "SELLER INDEMNIFIED PARTIES") against and reimburse any Seller Indemnified Party for, any and all losses, damages, costs, expenses, liabilities, obligations and claims of any kind (including any Action brought by any Governmental Authority or Person and including reasonable attorneys' and consultants' fees and expenses and other legal costs and expenses reasonably incurred in investigation, remediation, defense or settlement) (collectively, "LOSSES"), that such Seller Indemnified Party may at any time suffer or incur, or become subject to, as a result or in connection with: (i) the inaccuracy of any representations and warranties made by the Parent or the Purchaser in this Agreement; (ii) any failure by the Parent or the Purchaser to perform any of its covenants or agreements under this Agreement; or (iii) any claim or cause of action by any party arising before, on or after the Closing Date against any Seller Indemnified Party with respect to the Assets, the Businesses or the operations of the Publishing Subsidiaries, except for any claims with respect to which the Seller is obligated to indemnify the Purchaser Indemnified Parties under Section 10.02 hereof. (b) Notwithstanding any other provision to the contrary, the Parent and the Purchaser shall not be required to indemnify, defend or hold harmless any Seller Indemnified Party against or reimburse any Seller Indemnified Party for any Losses pursuant to subclause (i) or (ii) of Section 10.01(a) unless the Seller has notified the Purchaser in writing in accordance with Section 10.03(a) of a pending or threatened claim with respect to such matters within the applicable survival period set forth in Section 11.01. SECTION 10.02. INDEMNIFICATION BY THE SELLER. (a) Subject to Section 11.01 hereof, the Seller shall indemnify, defend and hold harmless the Purchaser, its Affiliates and their respective employees, officers and directors (collectively, the "PURCHASER INDEMNIFIED PARTIES") against, and reimburse any Purchaser Indemnified Party for, any and all Losses that such Purchaser Indemnified Party may at any time suffer or incur, or become subject to, as a result or in connection with: 59 (i) the inaccuracy of any representations and warranties made by the Seller in this Agreement; or (ii) any failure by the Seller to perform any of its covenants or agreements under this Agreement. In all cases, the amount of indemnifiable Losses pursuant to this Section 10.02(a) shall be determined as if the term "Material Adverse Effect" were not included in the representation, warranty, covenant or agreement that forms the basis of any such claim for indemnification. (b) Notwithstanding any other provision to the contrary, the Seller shall not be required to indemnify, defend or hold harmless any Purchaser Indemnified Party against or reimburse any Purchaser Indemnified Party for any Losses pursuant to Section 10.02(a)(i) or Section 10.02(a)(ii) in connection with any failure by the Seller to perform any of its covenants or agreements under Section 5.01 and Section 5.02(a), (i) if such claim or demand otherwise was raised (whether or not accepted) in connection with the Purchase Price adjustment procedures set forth in Section 2.06, (ii) with respect to any claim, unless such claim involves Losses in excess of $25,000 (nor shall such item be applied to or considered for purposes of calculating the aggregate amount of the Purchaser Indemnified Parties' Losses), (iii) unless the Purchaser has notified the Seller in writing in accordance with Section 10.03(a) of a pending or threatened claim with respect to such matters within the applicable survival period set forth in Section 11.01, and (iv) until the aggregate amount of the Purchaser Indemnified Parties' Losses exceeds $20 million, after which the Seller shall be obligated for all Losses of the Purchaser Indemnified Parties in excess of such amount; PROVIDED, HOWEVER, that the cumulative indemnification obligation of the Seller under this Article X in respect of Section 10.02(a) shall in no event exceed the Purchase Price. Notwithstanding the foregoing, the limits on indemnification contained in this Section 10.02(b) shall not apply to any Losses arising from a misrepresentation or breach of warranty by Seller contained in Sections 3.01, 3.02, 3.03 and 3.17. SECTION 10.03. NOTIFICATION OF CLAIMS. (a) A party that may be entitled to be indemnified pursuant to Section 10.01 or 10.02 (the "INDEMNIFIED PARTY") shall promptly notify the party liable for such indemnification (the "INDEMNIFYING PARTY") in writing of any pending or threatened claim or demand which the Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement (including a pending or threatened claim or demand asserted by a third party against the Indemnified Party), describing in reasonable detail the facts and circumstances with respect to the subject matter of such claim or demand; PROVIDED, HOWEVER, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article X except to the extent the Indemnifying Party is materially prejudiced by such failure. Subject to the Indemnifying Party's right to defend in good faith third party claims as hereinafter provided, the 60 Indemnifying Party shall satisfy its obligations under this Article X within 30 days after the receipt of written notice thereof from the Indemnified Party. (b) If the Indemnified Party shall notify the Indemnifying Party of any claim or demand pursuant to Section 10.03(a), and if such claim or demand relates to a pending or threatened claim or demand asserted by a third party against the Indemnified Party which the Indemnifying Party acknowledges is a claim or demand for which it must indemnify, defend and hold harmless the Indemnified Party against or reimburse the Indemnified Party for under Section 10.01 or 10.02, the Indemnifying Party shall have the right to employ counsel reasonably acceptable to the Indemnified Party to defend any such claim or demand asserted against the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any such claim or demand at its own expense. The Indemnifying Party shall notify the Indemnified Party in writing, as promptly as possible (but in any case at least three Business Days before the due date for the answer or response to a claim) after the date of the notice of claim given by the Indemnified Party to the Indemnifying Party under Section 10.03(a) of its election to defend in good faith any such third party claim or demand. So long as the Indemnifying Party is defending in good faith any such claim or demand asserted by a third party against the Indemnified Party, the Indemnified Party shall not settle or compromise such claim or demand. The Indemnified Party shall make available to the Indemnifying Party or its agents all records and other material in the Indemnified Party's possession reasonably required by it for its use in defending any third party claim or demand. Whether or not the Indemnifying Party elects to defend any such claim or demand, the Indemnified Party shall have no obligations to do so. The Indemnifying Party shall not settle or compromise any such claim or demand, unless the Indemnified Party is given a full and completed release of any and all liability by all relevant parties relating thereto. SECTION 10.04. EXCLUSIVE REMEDIES. (a) Following the Closing, except for performance of the obligations set forth in Article II and Sections 5.03, 5.08, 5.12 and 5.13 and except for the indemnification obligations specified in Sections 5.02(b), 5.06, 5.07 and 10.04(b) and in Article VI and Article VII, the Seller, the Parent and the Purchaser acknowledge and agree that the indemnification provisions of Sections 10.01 and 10.02 shall be the sole and exclusive remedies of the Seller, the Parent and the Purchaser, respectively, for any breach of the representations or warranties herein or nonperformance of any covenants and agreements herein of another party, except in the event of willful breach or fraud. (b) Subject to the Parent's and the Purchaser's right to indemnification pursuant to Section 10.02, from and after the Closing Date, (i) each of the Parent and the Purchaser shall fully release the Seller from any Environmental Liability incurred by the Parent or the Purchaser, its parents, Subsidiaries, divisions and Affiliates, their predecessors, successors and assigns, and their officers, directors, employees and agents; (ii) each of the Parent and the Purchaser hereby waives on its behalf and on behalf of its parents, Subsidiaries, divisions and Affiliates, their predecessors, successors and assigns, and their officers, 61 directors, employees and agents, to the fullest extent permitted under applicable law, any claim or remedy against the Seller Indemnified Parties now or hereafter available under any applicable Environmental Law, including the Comprehensive Environmental Response, Compensation and Liability Act or any similar federal or state law, whether or not in existence on the date hereof; and (iii) each of the Parent and the Purchaser shall indemnify, defend and hold harmless the Seller Indemnified Parties against and reimburse the Seller Indemnified Parties for any Environmental Liability that the Seller, Viacom, their respective Subsidiaries, divisions and Affiliates, their predecessors, successors and assigns, and their officers, directors, employees and agents may at any time suffer or incur, or become subject to, as a result or in connection with any Environmental Liability. ARTICLE XI GENERAL PROVISIONS SECTION 11.01. SURVIVAL. The representations, warranties, covenants and agreements of the Seller, the Parent and the Purchaser contained in or made pursuant to this Agreement and the Ancillary Agreements or in any certificate furnished pursuant hereto shall terminate at the Closing, except that (a) the representations and warranties made in Sections 3.01, 3.02, 3.03, 3.14, 3.17, 4.01 and 4.07 shall survive in full force and effect until the expiration of the applicable statute of limitations and the representations and warranties made in Sections 3.13 and 3.15 shall survive in full force and effect until the date that is three years after the Closing Date, (b) the representations and warranties made in Article III and Article IV, other than those specified in Section 11.01(a), shall survive in full force and effect until the later of March 31, 1999 (or March 31, 2000, if the Closing occurs after December 31, 1998) and the date six months following the Closing, (c) the covenants and agreements made in this Agreement that are to be performed in whole or in part subsequent to the Closing Date and that do not, by their terms, expire on a date certain, and in Sections 5.02(b), 5.03, 5.06, 5.07 and 5.10 and in Article VI, Article VII, Article X and Article XI of this Agreement shall survive in full force and effect indefinitely, (d) the covenants and agreements made in Article II shall survive in full force and effect until such time as fully complied with and (e) the covenants and agreements made in this Agreement that are to be performed in whole or in part subsequent to the Closing Date and that, by their terms, expire on a certain date, shall survive until such certain date. SECTION 11.02. EXPENSES. Except as may be otherwise specified herein, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. 62 SECTION 11.03. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by facsimile (followed by delivery of a copy via overnight courier service) or by registered or certified mail (postage prepaid, return receipt requested) 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 11.03): (a) if to the Seller: c/o Viacom Inc. 1515 Broadway New York, NY 10036 Attention: Deputy General Counsel Telecopier: (212) 258-6099 with a copy to: Shearman & Sterling 599 Lexington Avenue New York, NY 10022 Attention: Creighton O'M. Condon, Esq. Telecopier: (212) 848-7179 (b) if to the Parent or the Purchaser: c/o Addison-Wesley Longman Publishing One Jacob Way Reading, MA 01867 Attention: Robert Dancy, Esq. Telecopier: (781) 942-1756 with copies to: Pearson plc 3 Burlington Gardens London W1X 1LE Attention: Paul Vickers, Esq. Telecopier: 011-44-171-411-2254 and to: Morgan, Lewis & Bockius LLP 63 101 Park Avenue New York, NY 10178 Attention: Charles Engros, Esq. Telecopier: (212) 309-6273 SECTION 11.04. PUBLIC ANNOUNCEMENTS. Except as may be required by law or stock exchange rules, no party to this Agreement shall make any public announcements in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without prior notification to the other parties, and the parties shall cooperate as to the timing and contents of any such announcement. Notwithstanding the foregoing, where an announcement is required by law or stock exchange rules, the party required to make such an announcement shall notice the other parties of such (and provide a copy of such to the other parties) as soon as practicable in advance of such announcement and, to the extent practical, take the views of the other parties in respect of such announcement into account prior to making such announcement. SECTION 11.05. HEADINGS. 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. SECTION 11.06. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible. SECTION 11.07. ENTIRE AGREEMENT. This Agreement and the Ancillary Agreements constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all prior agreements and undertakings, both written and oral, other than the Confidentiality Agreement, among the Seller, the Parent and the Purchaser with respect to the subject matter hereof and except as otherwise expressly provided herein. SECTION 11.08. ASSIGNMENT. This Agreement shall not be assigned by operation of Law or otherwise, except that (a) the Seller may assign any or all of its rights and obligations under this Agreement to any of its Affiliates; PROVIDED that no such assignment shall release the Seller from any liability hereunder and (b) each of the Parent and the Purchaser may assign any or all of its rights and obligations under this Agreement in connection with the sale by the Parent or the Purchaser, as the case may be, to Hicks, Muse, 64 Tate and Furst Incorporated (and/or any Affiliate thereof) of certain Assets and/or Shares of any of the Publishing Subsidiaries and to any Subsidiary of the Parent; PROVIDED that no such assignment shall release the Parent or the Purchaser from any liability hereunder or delay the consummation of the purchase and sale of the Shares hereunder; PROVIDED, FURTHER, that no assignment shall be permitted by this sentence that would result in the sale by the Seller or the Seller's Subsidiaries at the Closing of any Assets or Shares to any party (including Hicks, Muse, Tate and Furst Incorporated (and/or any Affiliate thereof)) other than the Parent, any wholly-owned Subsidiary of the Parent or the Purchaser. The Seller agrees that if the Parent or the Purchaser is required to sell or otherwise dispose of a significant amount of Assets in connection with obtaining the regulatory approvals referred to in Section 5.04(b), it will in good faith discuss permitting the Parent or the Purchaser to assign the related rights and obligations under this Agreement to the party acquiring such Assets. SECTION 11.09. NO THIRD-PARTY BENEFICIARIES. Except as provided in Article X, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 11.10. AMENDMENT. This Agreement may not be amended or modified except by an instrument in writing signed by the Seller, the Parent and the Purchaser. SECTION 11.11. SECTIONS AND SCHEDULES. Any disclosure with respect to a Section or Schedule of this Agreement shall be deemed to be disclosure for all other Sections and Schedules of this Agreement. SECTION 11.12. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVERS. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of New York. Each of the Seller, the Parent and the Purchaser agrees that any dispute relating to or arising from this Agreement or the transactions contemplated hereby shall be resolved only in the Courts of the State of New York sitting in the County of New York or the United States District Court for the Southern District of New York and the appellate courts having jurisdiction of appeals in such courts. In that context, and without limiting the generality of the foregoing, each of the Seller, the Parent and the Purchaser hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal suit, action or proceeding relating to this Agreement or the transactions contemplated hereby, or for recognition and enforcement of any judgment in respect thereof, to the exclusive jurisdiction of the Courts of the State of New York sitting in the County of New York, the court of the United States of America for the Southern District of New York, and appellate courts having jurisdiction of appeals from any of the foregoing, and each of the parties hereto 65 irrevocably and unconditionally agrees that all claims in respect of any such suit, action or proceeding shall be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court; (b) consents that any such suit, action or proceeding may and shall be brought in such courts and waives any objection that it may now or hereafter have to the venue or jurisdiction of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such suit, action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address as provided in Section 11.03; and (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by New York law. SECTION 11.13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 11.14. NO PRESUMPTION. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above by its respective officer thereunto duly authorized. VIACOM INTERNATIONAL INC. By /s/ Philippe P. Dauman ------------------------------- Name: Philippe P. Dauman Title: Deputy Chairman PEARSON INC. By /s/ John Makinson ------------------------------- Name: John Makinson Title: Vice President PEARSON PLC By /s/ John Makinson ------------------------------- Name: John Makinson Title: Finance Director EXECUTION COPY AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT dated as of November 25, 1998 among VIACOM INTERNATIONAL INC., PEARSON plc and PEARSON INC. AMENDMENT NO. 1, dated as of November 25, 1998 (this "Amendment"), to the Stock Purchase Agreement, dated as of May 17, 1998 (the "Stock Purchase Agreement"), among VIACOM INTERNATIONAL INC., a Delaware corporation (the "Seller"), PEARSON INC., a Delaware corporation (the "Purchaser"), and PEARSON plc, a corporation organized under the laws of the United Kingdom that is the indirect holder of all of the outstanding capital stock of the Purchaser (the "Parent"). W I T N E S S E T H : WHEREAS, the Seller, the Purchaser and the Parent desire to amend the Stock Purchase Agreement in certain respects to provide for, among other things, (i) the designation of additional direct or indirect Subsidiaries of the Seller as Publishing Subsidiaries, Directly Acquired Publishing Subsidiaries, Directly Acquired B&P and Reference Publishing Subsidiaries (as defined herein), and Directly Acquired Foreign Subsidiaries and of certain assets as Assets; (ii) the assignment by Parent of its right to purchase the Shares of certain Directly Acquired Publishing Subsidiaries, Directly Acquired Foreign Subsidiaries, Directly Acquired B&P and Reference Publishing Subsidiaries (including certain of the additional Subsidiaries designated herein) and certain other properties (all such Shares and other properties, including those which Parent or any of its Affiliates is to purchase, together with all right, title and interest therein and thereto, collectively, the "Sold Properties"), (x) to Purchaser or other Subsidiaries of the Parent (each a "Parent Purchaser") or (y) to certain Parent Purchasers and, if Parent so elects pursuant to Section 2.01(b) hereof, the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant not to compete set forth in Section 5.12(c) of the Stock Purchase Agreement, as amended by this Amendment, to Hicks, Muse Books LLC, a Delaware limited liability company ("Hicks Muse"; the Parent Purchasers, together with Hicks Muse if such election is made, the "Purchasing Entities"); provided, however, that no such assignment shall release the Purchaser or the Parent from any liability under the Stock Purchase Agreement or delay the consummation of the purchase and sale of the Sold Property under the Stock Purchase Agreement; (iii) the manner in which each Sold Property is to be sold and the consideration to be paid at Closing by each Purchasing Entity for each Sold Property; and (iv) if Parent makes the election pursuant to Section 2.01(b) hereof, the execution of the acknowledgment by Seller, Parent and Hicks Muse of the right of Parent to assign the right to purchase the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant not to compete set forth in Section 5.12(c) of the Stock Purchase Agreement, as amended by this Amendment, to Hicks Muse (capitalized terms not defined herein have the meanings ascribed to them in the Stock Purchase Agreement); NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION 1. Amendments to Stock Purchase Agreement. (a) The defined term "Ancillary Agreements" set forth in Section 1.01 is hereby deleted in its entirety and replaced with the following: 2 ""Ancillary Agreements" means the Services Agreements, the License Agreements, the Sublease Agreement, the S&S Software License Agreement and the Purchaser Software License Agreement." (b) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Assets" set forth therein: ""B&P and Reference Publishing Businesses" means, collectively, on the date hereof, the United States business and professional and reference publishing businesses included within the publishing segment of Viacom as reported in the Annual Report on Form 10-K of Viacom for the year ended December 31, 1997, and specifically excluding the Consumer Business, and the children's learning, higher education and non-United States business and professional and reference publishing businesses (other than the interest in New York Institute of Finance (Holdings) L.D.C.). For the purposes of this Agreement, "children's learning", "higher education", "business and professional" and "reference" shall have the meanings commonly employed by the management of Simon & Schuster on the date of this Agreement, "reference" specifically includes "reference", "library reference", "Macmillan Computer Publishing" and "Macmillan Publishing" (and any other variation on the term "Macmillan", other than in connection with Macmillan College Publishing, but specifically excluding any consumer titles listed in Schedule D attached to the Purchaser to Consumer Trademark License Agreement) and "business" refers to businesses managed as a unit, without regard to the specific legal entity that conducts such business." (c) The defined term "Base Price" set forth in Section 1.01 is hereby deleted in its entirety and replaced with the following: ""Base Price" means $4,620,000,000." (d) The defined term "Consumer Business" set forth in Section 1.01 is hereby deleted in its entirety and replaced with the following: ""Consumer Business" means the consumer/trade publishing business that is included within the publishing segment of Viacom as reported in the Annual Report on Form 10-K of Viacom for the year ended December 31, 1997 and the Learning Products Group. For the purposes of this Agreement, "consumer" and "trade" shall have the meanings commonly employed by the management of Simon & Schuster on the date of this Agreement." (e) The defined term "Closing Net Assets" set forth in Section 1.01 is hereby modified by inserting the following text immediately after the phrase "total assets" and immediately before the phrase "minus total liabilities": 3 "(excluding intangibles, net, consisting of goodwill and publishing rights)" (f) The defined term "Closing Net Assets Adjustment Amount" set forth in Section 1.01 is hereby modified by inserting the following text at the end thereof: "(excluding intangibles, net, consisting of goodwill and publishing rights). For purposes of calculating the Closing Net Assets Adjustment Amount, the December 31, 1997 Audited Balance Sheet shall be adjusted to eliminate the total net assets (excluding intangibles, net, consisting of goodwill and publishing rights) of the Learning Products Group." (g) The defined term "December 31, 1997 Audited Balance Sheet" set forth in Section 1.01 is hereby modified by inserting the following sentence immediately after the first sentence thereof: "For purposes of computing the Closing Net Assets Adjustment Amount, the December 31, 1997 Audited Balance Sheet and the Estimated Closing Net Assets shall be adjusted to exclude intangibles, net, consisting of goodwill and publishing rights." (h) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "December 31, 1997 Audited Balance Sheet": ""Directly Acquired B&P and Reference Publishing Subsidiaries" means the entities set forth on Schedule 5." (i) The defined term "Final Net Assets Adjustment Amount" set forth in Section 1.01 is hereby modified by (i) inserting the phrase "(excluding intangibles, net, consisting of goodwill and publishing rights)" immediately after the phrase "total assets" and immediately before the phrase "minus total liabilities" and (ii) inserting the following sentence to the end thereof: "For purposes of calculating the Final Net Assets Adjustment Amount, the December 31, 1997 Audited Balance Sheet shall be adjusted to eliminate the total net assets (excluding intangibles, net, consisting of goodwill and publishing rights) of the Learning Products Group." (j) The following defined terms are hereby inserted in Section 1.01 immediately following the defined term "Hazardous Materials" set forth therein: ""Hicks Muse" means Hicks, Muse Books LLC, a Delaware limited liability company. 4 "Hicks Muse Transfer" means the transfer and delivery of all of the outstanding capital stock of the Directly Acquired B&P and Reference Publishing Subsidiaries by the Seller or its Affiliates to Hicks Muse, if the Parent elects to assign the right to purchase such capital stock to Hicks Muse pursuant to Section 2.01(b) of this Agreement." (k) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Law" set forth therein: ""Learning Products Group" means all right, title and interest in the assets and liabilities comprising the Simon & Schuster Learning Products Group (which shall have the meaning commonly employed by the management of Simon & Schuster on the date of this Agreement), including, without limitation, all rights to the business known as the "Red Rocket" website, which includes, without limitation, the domain name (being "redrocket.com"), the trademark (being "Red Rocket"), and any third-party contracts and equipment used exclusively in such business." (l) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Lien" set forth therein: ""Macmillan Trademark Sharing Agreement" means the agreement, dated November 8, 1993, between Macmillan, Inc. and Macmillan Limited relating to names and marks." (m) The defined term "Permitted Reorganization" set forth in Section 1.01 is hereby deleted in its entirety and replaced with the following: ""Permitted Reorganization" means an internal reorganization of assets owned and employees employed by the Seller or its Subsidiaries, including the Restructuring, to be completed prior to the Closing Date (1) to effect any transfer (a) of Assets and employees to the Publishing Subsidiaries (or otherwise in connection with an assignment permitted pursuant to Section 11.08 hereof), (b) of assets and employees from the Publishing Subsidiaries to the Seller or an Affiliate of the Seller (other than a Publishing Subsidiary) and (c) of assets and employees from any Publishing Subsidiary to any other Publishing Subsidiary and (2), at the election of the Seller, in its sole discretion, to transfer any inactive Subsidiary to the Seller or one of its Affiliates that is not a Publishing Subsidiary." (n) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Purchase Price": 5 ""Purchaser Software License Agreement" means the Software License Agreement between Simon & Schuster and Silver Burdett Ginn Inc. in the form attached hereto as Exhibit 1.01(d)". (o) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Purchase Price" set forth therein: ""Restructuring" means the series of transactions effected on September 30, 1998 whereby the Seller has caused (i) Prentice-Hall, Inc., a Delaware corporation ("PHI"), to contribute to Arco Publishing, Inc. ("Arco"), Executive Reports Corporation, Executive Tax Reports, Inc., and Robert J. Brady Co. certain United States business and professional and reference publishing business assets owned by PHI and (ii) Macmillan, Inc., a Delaware corporation ("Macmillan"), to contribute to Jossey-Bass, Inc., Publishers, a California corporation ("Jossey-Bass"), certain United States business and professional and reference publishing business assets owned by Macmillan." (p) The following defined term is hereby inserted in Section 1.01 immediately following the defined term "Simon & Schuster": ""Simon & Schuster Software License Agreement" means the Software Licence Agreement between Simon & Schuster and Silver Burdett Ginn Inc. in the form attached as Exhibit 1.01(e)". (q) The defined term "Sublease Agreement" is hereby deleted in its entirety and replaced with the following: ""Sublease Agreement" means, collectively, (i) the Sublease Agreement between the Purchaser (or an assignee reasonably acceptable to the Seller and acceptable to the landlord for such property) and the Seller and (ii) the Sublease Agreement between the Purchaser, or if Parent makes the election pursuant to Section 2.01(b) of this Agreement, Hicks Muse (or, in each case, an assignee reasonably acceptable to the Seller and acceptable to the landlord for such property) on the one hand and the Seller on the other, in the case of each of clause (i) and (ii) hereof with respect to 1633 Broadway, each substantially in the form attached hereto as Exhibit 1.01(c) and containing representations and warranties with respect to subleased property comparable to those contained in Section 3.19 of this Agreement." (r) Section 1.02 is hereby amended as follows: (i) To insert the terms "Competing Computer Business", "Competing Education Business" and "Competing International Business" and the section 6 references "5.12(c)", "5.12(a)" and "5.12(b)", respectively, immediately following the term and corresponding section reference for "COBRA"; (ii) To insert the term "Initial Allocation" and the section reference "2.02(a)" immediately following the term and corresponding section reference for "Indemnifying Party"; (iii) To insert the term "Parent Purchaser" and the section reference "Recitals" immediately following the term and corresponding section reference for "Parent Board Recommendation"; (iv) To insert the term "Purchasing Entities" and the section reference "Recitals" immediately following the term and corresponding section reference for "Purchaser's DC Plan"; (v) To insert the term "Sold Properties" and the section reference "Recitals" immediately following the term and corresponding reference for "Shares"; (vi) To delete the term "Competing Business" and the corresponding section reference; (vii) To delete the term "Draft Allocation Statement" and the corresponding section reference; and (viii) To delete the term "Stock Allocation" and the corresponding section reference. (s) Section 2.01 is hereby deleted in its entirety and replaced with the following text: "SECTION 2.01 Purchase and Sale (a) On the terms and subject to the conditions set forth in this Agreement, at the Closing the Seller shall sell, convey, assign, transfer and deliver to each Purchasing Entity (and/or cause one or more of its Subsidiaries to sell, convey, assign, transfer and deliver to such Purchasing Entity) each Sold Property being acquired by such Purchasing Entity and each Purchasing Entity shall purchase, acquire and accept from the Seller or such Subsidiaries each Sold Property, with each Sold Property being sold by the party shown under the column "Seller" and purchased by the party shown under the column "Purchaser" on Schedule A. Such transactions shall occur in the following order, with all such transactions constituting the Closing: all of the transactions shown under Step I of Schedule A shall be completed first and prior to any of the transactions shown under Steps II or III of Schedule A; all of the transactions shown under Step II of Schedule A shall be completed second and prior to any of the transactions shown under Step III of Schedule A; all of the transactions shown 7 under Step III of Schedule A shall be completed last and after any of the transactions shown under Steps I and II of Schedule A; and all proceeds received by a Publishing Subsidiary in connection with any such Step shall be distributed by such Publishing Subsidiary to a non-Publishing Subsidiary before the sale of such Publishing Subsidiary pursuant to any subsequent Step. (b) Parent shall have the right to elect to assign its right to purchase the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant not to compete set forth in Section 5.12(c) hereof to Hicks Muse and/or Hicks Muse's Affiliates. In order for such election to be effective, (i) Parent must notify Seller in writing of such election at least five days prior to the Closing and (ii) such notice shall have attached to it an original of a parallel notice from Hicks Muse to Parent whereby Hicks Muse notifies Parent of its intent to consummate the purchase of the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant not to compete set forth in Section 5.12(c) hereof, as contemplated by the Stock Purchase Agreement, dated July 2, 1998, among Purchaser, Parent and Hicks Muse, as such agreement may be amended, and as further set forth in this Agreement." (t) The first sentence of Section 2.02(a) is hereby deleted in its entirety and replaced with the following text: "Each Purchasing Entity shall pay that portion of the Purchase Price relating to each Sold Property as is specified in the Purchase Price Notice (in accordance with the amounts shown under the column "Purchase Price" in Schedule A next to each such Sold Property (the "Initial Allocations"); the Initial Allocation with respect to Prentice-Hall, Inc. shall be increased or decreased from the amount listed on Schedule A, as the case may be, to reflect the portion of the Closing Net Assets Adjustment Amount required to be taken into account pursuant to Section 2.05(a)), in cash to the "Seller" shown next to such Sold Property in Schedule A at the Closing, as provided in Section 2.05(a). Parent and Purchaser agree that the Initial Allocations shall be the maximum amounts allocated with respect to each Sold Property other than Prentice-Hall, Inc., and, notwithstanding anything else contained herein, such Initial Allocations to each Sold Property other than Prentice-Hall, Inc. shall not be adjusted upward at any time. In addition, Parent and Purchaser agree that at the Closing if any Purchasing Entity is for any reason unwilling or unable to so pay or for any reason fails to pay such portion of the Purchase Price so specified in the Purchase Price Notice, Parent and Purchaser shall be liable and shall pay such portion of the Purchase Price at Closing." (u) The following text is hereby inserted at the end of Section 2.02(a): "Notwithstanding the foregoing, no assignment of rights and obligations to any Purchasing Entity shall release the Purchaser or Parent from any liability hereunder. In 8 the event that Parent has previously elected to assign the rights to purchase certain Sold Property to Hicks Muse and/or one or more of its Affiliates pursuant to Section 2.01(b) hereof, and Hicks Muse and/or such Affiliates fail to perform at the Closing, then the Closing shall proceed as though such election was not made, and such Sold Property shall be sold directly to Parent and certain of Parent's Affiliates at the Closing." (v) The first sentence of Section 2.02(b) is hereby deleted in its entirety. The second sentence of Section 2.02(b) is hereby amended by substituting the phrase "IBD Holdings" for the phrase "Viacom Holdings [name to be changed]", deleting the word "and" before the phrase "at least $300 million," and adding at the end of such sentence the phrase "and, in the aggregate, $708 million to the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant set forth in Sections 5.12(c), with the aggregate amount allocated to all the Sold Properties with respect to the Base Price in all events not to exceed the Base Price." The fifth sentence of Section 2.02(b) is hereby deleted in its entirety and replaced with the following text: "Within 75 days after the Closing Date, the Seller shall notify the Purchaser either (i) that it consents to the Initial Allocations as set forth in Schedule A or (ii) that it disagrees with the Initial Allocations." (w) The sixth sentence of Section 2.02(b) is hereby amended by substituting the phrase "Initial Allocations," for the phrase "Draft Allocation Statement,". (x) Following the last sentence of Section 2.02(b), the following sentence shall be added: "If the resolution of any dispute regarding the Initial Allocations results in a different amount of consideration being allocated to the purchase of any Sold Property, the excess of any Initial Allocation paid by the party listed in Schedule A as "Purchaser" over the amount of any final allocation determined under this Section 2.02(b) shall be deemed paid by such party on behalf of the actual "Purchaser" of Prentice-Hall, Inc. and received by the "Seller" of Prentice-Hall, Inc." (y) The first sentence of Section 2.02(c) is hereby deleted in its entirety and replaced with the following text: "The Seller, the Parent and the Purchaser shall, and, if applicable, the Parent and the Purchaser shall cause Hicks Muse to, report the federal, state, local and foreign Tax consequences of the transactions contemplated by this Agreement in a manner consistent with the transactions and order and timing of steps described in Section 2.01(a) and the Initial Allocations, revised as agreed by the Seller, the Parent and the Purchaser or as determined by the Independent Accounting Firm, as the case may be." 9 (z) The second sentence of Section 2.02(c) is hereby amended by substituting for the phrase "Stock Allocations" the phrase "transactions, order and timing of steps and Initial Allocations, as so revised," (aa) The final sentence of Section 2.03 shall be amended by inserting the following text at the start thereof: "Except as otherwise contemplated by the sequence of steps set forth in Section 2.01(a)," (bb) Section 2.04 is hereby deleted in its entirety and replaced with the following text: "SECTION 2.04. Closing Deliveries by the Seller. At the Closing, the Seller shall deliver or cause to be delivered to each Purchasing Entity (or Parent, on behalf of Parent, Purchaser and, if applicable, Hicks Muse): (i) stock certificates evidencing all of the shares of capital stock acquired by such Purchasing Entity of (A) the Directly Acquired Publishing Subsidiaries, (B) the Directly Acquired Foreign Subsidiaries and (C) the Directly Acquired B&P and Reference Publishing Subsidiaries, duly endorsed in blank or accompanied by stock powers and transfer forms duly executed in blank; (ii) receipts for the portion of the Purchase Price as is specified in the Purchase Price Notice relating to each Sold Property; (iii) the Ancillary Agreements required to be delivered pursuant to Section 8.02; and (iv) any required stock transfer tax stamps." (cc) Section 2.05 is hereby amended by substituting for the phrase "Parent and the Purchaser shall deliver to the Seller" the phrase "each Purchasing Entity shall deliver to the "Seller" noted opposite its name on Schedule A with respect to each Sold Property being purchased by such Purchasing Entity" and by inserting after the words "wire transfer" in Section 2.05(a) the words "or intra-bank transfer". (dd) Section 2.06(e) is hereby amended by substituting for the phrase "the Parent and the Purchaser" the phrase "Pearson AG" and for the word "Seller" the phrase "Paramount Communications Acquisitions Corp.", and inserting in the first sentence of such Section 2.06(e) after the word "excess" the phrase ",which amount shall be deemed to be paid in respect of the Shares of Prentice-Hall, Inc.," 10 (ee) Section 2.07 is hereby amended by inserting after the words "wire transfer" the words "or intra-bank transfer." (ff) Section 3.03 is hereby amended by inserting the following text immediately after the phrase "Directly Acquired Publishing Subsidiaries": ", the Directly Acquired B&P and Reference Publishing Subsidiaries" (gg) Section 3.12 is hereby amended by inserting the following text immediately after the Section heading "Intellectual Property" and immediately before clause (a): "Except to the extent caused by (i) the direct sale of additional Publishing Subsidiaries pursuant to this Amendment, (ii) the series of transactions contemplated by clauses (i) and (ii) of the defined term "Restructuring" set forth in Section 1.01 hereof or (iii) the Hicks Muse Transfer (but, in the case of the Hicks Muse Transfer, only to the extent that any inaccuracy or breach of the representations or warranties set forth in this Section 3.12 would not have occurred had the transactions contemplated by the Stock Purchase Agreement as in effect prior to this Amendment been consummated in the manner set forth therein);" (hh) Section 3.13(a) of the Stock Purchase Agreement is hereby amended by adding the following sentence to the end thereof: "Anything in this Section 3.13(a) to the contrary notwithstanding, no individual currently or formerly employed in the Learning Products Group, which individuals are listed on Section 3.13(a)(iv) of the Disclosure Schedule, shall be a "Business Employee" or a "Former Business Employee" for any purpose under this Agreement. (ii) Section 3.13(a)(iv) is hereby added to the Disclosure Schedule in the form attached to this Amendment. (jj) Section 5.04(d) is hereby amended by inserting the following text immediately after the phrase "consents and approvals" and immediately before the phrase "that may be required": "(including, without limitation, any consents, approvals, authorizations or other actions or filings or notifications that are the responsibility of Parent and Purchaser pursuant to Section 5.04(e); provided, however, that in no event shall Seller or its Affiliates be liable under this Agreement or otherwise for the failure to obtain any such consents, approvals, authorizations or other actions or filings or notifications, which shall be the sole responsibility of Parent and Purchaser pursuant to Section 5.04(e))". 11 (kk) Section 5.04 is hereby amended by inserting the following text immediately after Section 5.04(d): "(e) The Parent and the Purchaser shall be solely responsible, to the extent not previously obtained, for (i) obtaining any consents, approvals, authorizations or other action of or by, or making any filing with or notification to, any Governmental Authority, including, but not limited to, trademark or copyright filings, and (ii) obtaining any consents, approvals, waivers, authorizations or other actions or giving (or instructing the Seller to give) any notice under or pursuant to any bond, note, Contract, Real Property Lease, license, permit, franchise or other instrument to which the Seller or any B&P and Reference Publishing Subsidiary is a party or by which any shares or assets of any B&P and Reference Publishing Businesses may be bound or affected, arising from or made necessary by, in the case of each of clause (i) and (ii), the direct sale of additional Publishing Subsidiaries pursuant to this Amendment, the Restructuring or the Hicks Muse Transfer. The Parent and the Purchaser hereby acknowledge and agree that neither the Seller nor its Affiliates shall have any liability to the Parent or the Purchaser in connection with any Losses arising from the failure to obtain or to give any notice on the consents, approvals, authorizations or other matters set forth in this Section 5.04(e) including, without limitation, any change in the rights granted to Macmillan, Inc. under the Macmillan Trademark Sharing Agreement." (ll) The first sentence of Section 5.08 is hereby deleted in its entirety and replaced with the following text: "Prior to the Closing Date, the Seller shall, and shall cause its Subsidiaries to, effect the Permitted Reorganization." (mm) Section 5.12 is hereby deleted in its entirety and replaced with the following: "SECTION 5.12. Non-Competition. (a) The Seller acknowledges that reasonable limits on its ability to engage in activities competitive with the Purchaser are warranted to protect the Purchaser's substantial investment in acquiring the Shares, the Assets and the Businesses. Accordingly, the Seller hereby covenants and agrees that during the period commencing with the Closing Date and ending on the third anniversary of the Closing Date, Viacom and the Seller shall not, and shall cause their direct and indirect Subsidiaries not to (subject, in the case of its existing Subsidiaries that are not wholly owned, to its fiduciary duties to holders of minority interests), for the Seller's own account or jointly with any other Person, publish or produce textbooks intended for use primarily in instruction in academic institutions of higher learning in the United States (a "Competing Education Business"); provided, however, that the foregoing shall not be breached as a result of (a) the ownership or other right to acquire by Viacom or the Seller (or any of their Subsidiaries) of not more than an aggregate of 10% of any class of stock 12 of a Person engaged, directly or indirectly, in a Competing Education Business; (b) the acquisition of, holding by, operation of, or disposition by Viacom or the Seller (or any of their Subsidiaries) of an interest in any Person whose primary business is not a Competing Education Business; (c) the licensing or sale of any of the Seller's or its Subsidiaries' intellectual property for use in connection with any Competing Education Business; (d) any activity relating to the publication of fiction or non-fiction (other than in the subject matter of computer applications and operation systems) sold primarily into the consumer retail channel; or (e) any activity relating to any book or category of books presently published by Simon & Schuster's Consumer division or similar in genre to any such book or category. "(b) The Seller acknowledges that reasonable limits on its ability to engage in activities competitive with the Purchaser are warranted to protect the Purchaser's substantial investment in acquiring the Shares, the Assets and the Businesses. Accordingly, the Seller hereby covenants and agrees that during the period commencing with the Closing Date and ending on the third anniversary of the Closing Date, Viacom and the Seller shall not, and shall cause their direct and indirect Subsidiaries not to (subject, in the case of its existing Subsidiaries that are not wholly owned, to its fiduciary duties to holders of minority interests), for the Seller's own account or jointly with any other Person, publish or produce (i) textbooks intended for use primarily in instruction in academic institutions of higher learning outside of the United States or (ii) any branded series of tutorial reference books in the computer applications and operating systems categories outside of the United States (a "Competing International Business"); provided, however, that the foregoing shall not be breached as a result of (a) the ownership or other right to acquire by Viacom or the Seller (or any of their Subsidiaries) of not more than an aggregate of 10% of any class of stock of a Person engaged, directly or indirectly, in a Competing International Business; (b) the acquisition of, holding by, operation of, or disposition by Viacom or the Seller (or any of their Subsidiaries) of an interest in any Person whose primary business is not a Competing International Business; (c) the licensing or sale of any of the Seller's or its Subsidiaries' intellectual property for use in connection with any Competing International Business; (d) any activity relating to the publication of fiction or non-fiction (other than in the subject matter of computer applications and operation systems) sold primarily into the consumer retail channel; or (e) any activity relating to any book or category of books presently published by Simon & Schuster's Consumer division or similar in genre to any such book or category. "(c) The Seller acknowledges that reasonable limits on its ability to engage in activities competitive with the Purchaser are warranted to protect the Purchaser's substantial investment in acquiring the Shares, the Assets and the Businesses. Accordingly, the Seller hereby covenants and agrees that during the period commencing with the Closing Date and ending on the third anniversary of the Closing Date, the Seller shall not, and shall cause their direct and indirect Subsidiaries not to (subject, in the case 13 of its existing Subsidiaries that are not wholly owned, to its fiduciary duties to holders of minority interests), for the Seller's own account or jointly with any other Person, publish or produce any branded series of tutorial reference books in the computer applications and operating systems categories in the United States (a "Competing Computer Business"); provided, however, that the foregoing shall not be breached as a result of (a) the ownership or other right to acquire by the Seller (or any of their Subsidiaries) of not more than an aggregate of 10% of any class of stock of a Person engaged, directly or indirectly, in a Competing Computer Business; (b) the acquisition of, holding by, operation of, or disposition by the Seller (or any of their Subsidiaries) of an interest in any Person whose primary business is not a Competing Computer Business; (c) the licensing or sale of any of the Seller's or its Subsidiaries' intellectual property for use in connection with any Competing Computer Business; (d) any activity relating to the publication of fiction or non-fiction (other than in the subject matter of computer applications and operation systems) sold primarily into the consumer retail channel; or (e) any activity relating to any book or category of books presently published by Simon & Schuster's Consumer division or similar in genre to any such book or category." (nn) The following text is hereby inserted immediately following Section 5.13: "SECTION 5.14. Harvard Medical School Publishing Program. (a) Each party hereto agrees to cooperate in obtaining the consent of the President and Fellows of Harvard College ("Harvard") under the agreement, dated as of September 24, 1996, between Simon & Schuster and Harvard regarding the Harvard Medical School Publishing Program (the "Harvard Agreement") in connection with the division of the rights granted to Simon & Schuster under the Harvard Agreement as between the Business and the Consumer Business in connection with (i) the sale by Seller of the Business as contemplated by this Agreement and the Ancillary Agreements and (ii) the possible sale by Parent and Purchaser, or Affiliates thereof, of the B&P and Reference Publishing Business following the Closing. Such consent and division of rights, including, without limitation, any related amendment to the Harvard Agreement, shall be in a form reasonably satisfactory to the Seller and the Parent. (b) Seller represents and warrants to Parent and Purchaser that as of November 25, 1998, (i) $1,993,332 has been paid to Harvard as advances under the Harvard Agreement ("Advances"), of which $1,160,000 has been internally allocated to the Consumer Business, $166,666 to the B&P and Reference Publishing Business and $666,666 to the "education business" (as commonly used by the management of Simon & Schuster on the date of this Agreement) and (ii) $4,006,668 in Advances remains to be paid. Commencing from the Closing Date and ending on the date which is the earlier of (x) the termination of the Harvard Agreement or (y) such time as all Advances have been paid, each milestone comprising all of the remaining Advances shall be payable as between Seller or its Affiliates on the one hand and Parent and/or Purchaser or their 14 Affiliates on the other hand, in a ratio of 58.33% by the Seller or its Affiliates and 41.67% by Parent and/or Purchaser or their Affiliates. To the extent that there are any reductions in the Advances payable to Harvard from those payable under the Harvard Agreement on the date hereof, the Advances payable by Seller or its Affiliates on the one hand and by Parent and/or Purchaser on the other hand shall be reduced by a proportionate amount of such reduction equal to the proportionate amount of all remaining Advances payable by each party, as set forth in the preceding sentence. As used in this Agreement (i) "Consumer Business Advance Amount" means (x) $3.5 million plus (y) any Budget amounts (as the term "Budget" is defined in the Harvard Agreement) expended from the date hereof by the Seller or its Affiliates minus (z) any reduction in remaining Advances payable by Seller or its Affiliates and (ii) "Business Advance Amount" means (x) $2.5 million plus (y) any Budget amounts (as the term "Budget" is defined in the Harvard Agreement) expended from the date hereof by Parent and/or Purchaser or their Affiliates minus (z) any reduction in remaining Advances payable by Parent and/or Purchaser or their Affiliates. (c) Any royalties owed under the Harvard Agreement in connection with books, imprints, titles and the like published thereunder ("Royalties") relating to (i) the Consumer Business, up to the Consumer Business Advance Amount, shall be the property of and paid over to Seller or its Affiliates and (ii) the Business, up to the Business Advance Amount, shall be the property of and paid over to Purchaser or its Affiliates, in each case as a recoupment against the Consumer Business Advance Amount or the Business Advance Amount, as the case may be. If at any time Seller or its Affiliates has recouped the Consumer Business Advance Amount and Purchaser or its Affiliates has not recouped the Business Advance Amount, then from such time all Royalties relating to the Consumer Business shall be the property of and paid over to Purchaser or its Affiliates until Purchaser or its Affiliates has recouped the Business Advance Amount. Similarly, if at any time Purchaser or its Affiliates has recouped the Business Advance Amount and Seller or its Affiliates has not recouped the Consumer Business Advance Amount, then from such time all Royalties relating to the Business shall be the property of and paid over to Seller or its Affiliates until Seller or its Affiliates has recouped the Consumer Business Advance Amount. At such time as Seller or its Affiliates has recouped the Consumer Business Advance Amount and Purchaser or its Affiliates has recouped the Business Advance Amount, all Royalties shall be paid to Harvard in accordance with the Harvard Agreement. (d) Each party hereto agrees to cooperate with each other party in sharing all information in its possession from time to time relating to the Harvard Agreement necessary for the calculation of the Royalties and all amounts advanced in respect of Consumer Business Advance Amounts and Business Advance Amounts, as the case may be, and any further information which the parties reasonably believe is necessary or 15 desirable for the proper administration of their mutual relationship under the Harvard Agreement and as set forth in this Section 5.14. (e) In the event that the consents described in Section 5.14(a) are not obtained or are only partially obtained, each party hereto agrees to negotiate in good faith to reach an agreement as between them that accomplishes the same economic result as is set forth in Sections 5.14(b) and (c) hereof." (oo) Section 6.02(a) of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the following: "SECTION 6.02. Retirement Plans. (a) It is agreed by both parties that the Seller or one of its Affiliates will continue to maintain the VPP and the Viacom Excess Pension Plan, with the benefit accruals of the Business Employees under such plans ceasing as of the Closing Date and Seller shall retain all liabilities thereunder. The Seller shall cause the Business Employees to be fully vested in their accrued benefits in each such plan as of the Closing Date." (pp) Section 6.02(b) of the Stock Purchase Agreement is hereby amended by inserting the following text at the end of the fifth full sentence thereof: "and Seller shall retain all other liabilities under the VIP. Notwithstanding anything to the contrary in this Section 6.02(b), in the event that the Parent makes the election pursuant to Section 2.01(b) of this Agreement, the Seller shall transfer and deliver the VIP account balances of Business Employees and Former Business Employees designated in writing by the Parent and the Purchaser, and the Seller shall also transfer and deliver to Hicks Muse, or, if so directed by the Parent and the Purchaser, cause the trustee of the VIP to transfer and deliver to the trustee of a Hicks Muse defined contribution plan designated in writing by the Parent and the Purchaser or Hicks Muse, if applicable, an amount equal to the aggregate account balances of Business Employees and Former Business Employees of the B&P and Reference Publishing Businesses so designated by the Parent and the Purchaser." (qq) Section 6.02(b) of the Stock Purchase Agreement is hereby further amended by adding the following text to the end thereof: "Notwithstanding anything to the contrary in this Section 6.02(b), in the event that the Parent makes the election pursuant to Section 2.01(b) of this Agreement, then (i) the Seller shall, (A) prior to Closing, establish a separate non-qualified deferred compensation plan (the "HM EIP") with terms, benefits and commitments identical to those provided under the VEIP for the benefit of participating Business Employees and Former Business Employees of the B&P and Reference Publishing Businesses designated 16 in writing by the Parent and the Purchaser and (B) at Closing, transfer the HM EIP to Hicks Muse, (ii) the HM EIP shall assume responsibility for all account balances and earnings thereon of such designated individuals under the VEIP (it being understood that the S&S EIP shall not assume any responsibility for the VEIP account balances and earnings thereon with respect to such individuals) and (iii) the Parent and the Purchaser shall cause Hicks Muse to assume the HM EIP at Closing and to honor the terms of any elections previously made by participants under the VEIP. The Purchaser and the Parent acknowledge that no assets will be transferred to Hicks Muse in connection with the establishment of the HM EIP and the assumption thereof by Hicks Muse." (rr) Section 6.02(e) of the Stock Purchase Agreement is hereby amended by (i) inserting the phrase "as soon as practicable, after the Closing," immediately after the phrase "and the Seller shall" in the first sentence thereof and (ii) adding the following text to the end thereof: "Notwithstanding anything to the contrary in this Section 6.02(e), in the event that the Parent makes the election pursuant to Section 2.01(b) of this Agreement, then (i) the Seller shall, (A) prior to Closing, (I) establish a separate non-qualified deferred compensation plan (the "HM DCP") providing for the payment of deferred benefits to participating Business Employees and Former Business Employees of the B&P and Reference Publishing Businesses designated in writing by the Parent and the Purchaser who have previously deferred the settlement of performance awards under the terms of the Paramount DCP and (II) transfer assets, if any, and liabilities related to each designated individual's account balance in the Paramount DCP, including all earnings thereon, into the HM DCP (it being understood that no assets or liabilities related to any such individual's account balance in the Paramount DCP will be transferred to the S&S DCP) and (B) at Closing, transfer of the HM DCP to Hicks Muse and (ii) the Parent and the Purchaser shall cause Hicks Muse to assume the HM DCP at Closing and to honor the terms of the distribution election previously made by the designated individuals, subject to the terms of the HM DCP." (ss) The following sentence is hereby inserted at the end of Section 6.03: "For the avoidance of doubt, the Purchaser and the Seller acknowledge that the term "Former Business Employees" for all purposes under this Agreement shall mean all individuals who were at any time employed in a publishing business other than the Consumer Business, including but not limited to former employees of those businesses previously disposed of and set forth on Schedule 8 attached hereto." (tt) Section 6.05(a) of the Stock Purchase Agreement is hereby amended by inserting the text "(other than severance liability arising from any claim by any Business Employee for the disputed severance benefits described in Schedule 7)" at the end of clauses (ii), (v) and (vii) thereof. 17 (uu) Section 6.05(b) of the Stock Purchase Agreement is hereby amended by inserting the following text at the beginning thereof: "Except as may be otherwise agreed by a Business Employee and Purchaser," (vv) Section 6.05 of the Stock Purchase Agreement is hereby amended by inserting the following text immediately following Section 6.05(b): "(c) Subject to Section 6.09, the Purchaser acknowledges that it shall make all required stay bonus and cash severance payments to Business Employees under the plans, programs, arrangements and agreements referred to in Sections 3.13(a)(i)(A)(I)(13), (A)(I)(14) and (A)(III)(1) of the Disclosure Schedule (as such plans, programs, arrangements and agreements may be amended by the Purchaser and, with respect to the agreements referenced in Section 3.13(a)(i)(A)(III)(1) of the Disclosure Schedule, with the consent of the Business Employees) and shall not look to the Seller for the cash payment of any amounts required to be paid thereunder." (ww) The following text is hereby inserted immediately following Section 6.07: "SECTION 6.08. Transition Period. During the period between the Closing and December 31, 1998, the Seller shall maintain the benefits of the Business Employees and Former Business Employees under each of the Viacom Plans listed on Schedule 6 attached hereto. Purchaser or Parent shall promptly reimburse Seller for Seller's direct out-of-pocket expenses for maintaining such Viacom Plans upon transmission to Purchaser or Parent of a statement of such expenses in relation thereto. SECTION 6.09. Enhanced Severance and Retention Agreements. The Seller agrees to reimburse the Parent and the Purchaser for any severance payment that the Parent or the Purchaser becomes obligated to make to any Business Employee who received an Enhanced Severance and Retention Agreement pursuant to the claim of any Business Employee described on Schedule 7 attached hereto; provided, however, that the Parent and the Purchaser agree (i) to notify the Seller promptly and in writing of any such claim brought against the Parent, the Purchaser or any of the Publishing Subsidiaries on or after the Closing Date and (ii) not to settle any such claim without approval of the Seller, such approval not to be unreasonably withheld or delayed; and, provided, further, that the Parent and the Purchaser have not amended the employment agreement and/or the Enhanced Severance Retention Agreement with the Business Employee in a manner that adversely impacts Seller's ability to defend the claim of such Business Employee. Seller shall notify Parent and Purchaser promptly after receiving the notice described in clause (i) whether or not it intends to defend such claim and, if no such notice is received by Parent or Purchaser within thirty days after such receipt, Seller shall be deemed to intend 18 not to defend. The Parent and the Purchaser agree that the Seller shall be entitled to assume and control the defense of any such claim through counsel of its choice, reasonably acceptable to Parent and Purchaser, and that, in the event the Seller undertakes any such defense, the Parent and the Purchaser shall, and shall cause the Publishing Subsidiaries to, cooperate with the Seller in such defense (or, if related to the claim in question, in making a counterclaim or any cross-complaint) and make available to the Seller all witnesses, records materials and information in the possession or under the control of the Parent, the Purchaser or any of the Publishing Subsidiaries as is reasonably requested by the Seller. SECTION 6.10. Business Employee. Notwithstanding any other provision of this Agreement to the contrary, including any Schedules or Exhibits attached hereto, each of the parties hereto agrees that Jonathan Newcomb shall not be considered a Business Employee or Former Business Employee for purposes of this Agreement." (xx) Section 7.07 is hereby amended by adding at the end of such Section the following sentence: "The party responsible under local law for filing the Tax Return with respect to each such Tax shall file such return, pay such Tax and notify the other party of the amount of such Tax, and the other party shall promptly pay to such party 50% of the amount of such Tax." (yy) Section 7.09 is hereby amended by adding at the end of such Section the following phrase: "or, at the Parent or the Purchaser's request, a certificate that one or more of the Publishing Subsidiaries being sold pursuant to this Agreement and identified in such request is not a "United States real property holding company" within the meaning of Section 897 of the Code." (zz) Section 7.10(b) is hereby amended by inserting "(i)" immediately following the phrase "except for" and by inserting "and (ii) the indemnity contained in Section 10.01(a)(iv) of this Agreement" immediately following the phrase "Section 3.14 of this Agreement". (aaa) Section 7.10(d) is hereby amended by adding at the end of such Section the following sentence: "Notwithstanding the preceding sentence, any foreign Publishing Subsidiary that receives any proceeds pursuant to Section 2.01(a) shall distribute such proceeds as provided in Section 2.01(a), and Prentice-Hall Hispanoamericana, S.A. will, at and in accordance with the request of Parent or Purchaser, if agreed to by Seller, distribute 19 before the Closing an amount reflecting its "CUFIN" account, as determined for Mexican tax law purposes." (bbb) Section 10.01(a) is hereby amended by deleting the word "or" at the end of paragraph (ii), by inserting the text"; or" at the end of paragraph (iii) and by inserting the following text immediately thereafter: "(iv) any claim or cause of action against any Seller Indemnified Party or as to which any Seller Indemnified Party is otherwise involved (through discovery, as a witness or otherwise) by or through Hicks Muse or any of its Affiliates relating to or arising out of (A) the assignment contemplated by Section 11.08(b)(i) or (B) the direct sale to Hicks Muse or any of its Affiliates of any Directly Acquired B&P and Reference Publishing Subsidiaries, the business or operations of the B&P and Reference Publishing Businesses, this Agreement or the transactions contemplated hereby or any assignment to Hicks Muse or any of its Affiliates contemplated by Section 11.08(b)(ii) of this Agreement, other than any claim or cause of action by or through Hicks Muse or any of its Affiliates with respect to the Ancillary Agreements to which any of them may be a party or to the transactions contemplated thereby; provided that nothing contained in this clause (iv) shall preclude the Parent or Purchaser from asserting any claim against any Seller Indemnified Party, to the extent otherwise permitted by and subject to the applicable terms and conditions of this Agreement, with respect to the Directly Acquired B&P and Reference Publishing Subsidiaries, the business or operations of the B&P and Reference Publishing Business, this Agreement or the transactions contemplated hereby." (ccc) Section 11.08 is hereby amended by deleting subsection (b) thereof in its entirety and substituting the following phrase therefor: "each of the Parent and the Purchaser may assign any or all of its rights and obligations under this Agreement (but with respect to clauses (i) and (ii) below, Parent and Purchaser may only assign the right to purchase the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries and the covenant not to compete set forth in Section 5.12(c) hereof) (i) in connection with the sale by the Parent or the Purchaser or any wholly-owned Subsidiary of the Parent or the Purchaser, as the case may be, to Hicks, Muse, Tate and Furst Incorporated (and/or any Affiliate thereof) of certain Sold Property; provided that Hicks, Muse, Tate and Furst Incorporated shall execute, and the effectiveness of such assignment shall be conditional upon such execution, the form of Acknowledgment and Covenant Not to Sue attached hereto as Exhibit 11.08(b)(i), (ii) if Parent makes the election pursuant to Section 2.01(b) of this Agreement, to Hicks, Muse, Tate and Furst Incorporated (and/or any Affiliate thereof); provided that Hicks, Muse, Tate and Furst Incorporated shall execute, and the effectiveness of such assignment shall be conditional upon such execution, the form of Acknowledgment and Covenant Not to Sue attached hereto as Exhibit 11.08(b)(ii) and (iii) to any Subsidiary of the Parent; 20 provided that no such assignment pursuant to clauses (i), (ii) and (iii) of this Section 11.08(b) shall release the Parent or the Purchaser from any liability hereunder or delay the consummation of the purchase and sale of the Sold Properties hereunder; provided, further, that no assignment shall be permitted by this sentence that would result in the sale by the Seller or the Seller's Subsidiaries at the Closing of any assets or Shares to any party other than the Parent, any wholly-owned Subsidiary of the Parent or the Purchaser, or Hicks Muse, Tate and Furst Incorporated (and/or any Affiliate thereof)" (ddd) Schedule A is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (eee) Schedule 2 of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the Schedule 2 attached to this Amendment. (fff) Schedule 2A of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the Schedule 2A attached to this Amendment. (ggg) Schedule 3 of the Stock Purchase Agreement is hereby modified by deleting the following subsidiaries from the list captioned "Inactive Domestic"and adding them to the list captioned "Domestic": "Arco Publishing, Inc., Executive Reports Corporation, Executive Tax Reports, Inc. and Robert J. Brady Co.". (hhh) Schedule 5 is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (iii) Schedule 6 is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (jjj) Schedule 7 is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (kkk) Schedule 8 is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (lll) Exhibit 1.01(a) of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the Exhibit 1.01(a) attached to this Amendment. (mmm) Exhibit 1.01(b) of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the Exhibit 1.01(b) attached to this Amendment. 21 (nnn) Exhibit 1.01(c) of the Stock Purchase Agreement is hereby deleted in its entirety and replaced with the Exhibit 1.01(c) attached to this Amendment. (ooo) Exhibit 1.01(d) is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (ppp) Exhibit 1.01(e) is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (qqq) Exhibit 11.08(b)(i) is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (rrr) Exhibit 11.08(b)(ii) is hereby added to the Stock Purchase Agreement in the form attached to this Amendment. (sss) Section 5.07 of the Disclosure Schedule is hereby amended to delete the Standby Letters of Credit listed in items (i) and (ii) thereto. SECTION 2. Representations and Warranties; Indemnity. (a) The Parent and the Purchaser each agree and acknowledge that the Seller shall have no liability as a result of the inaccuracy of any representations and warranties made by the Seller in the Stock Purchase Agreement if such representations and warranties were accurate when made and in light of the form of transaction contemplated by the Stock Purchase Agreement prior to this Amendment but are inaccurate as of the Closing Date as a result of the direct sale of any additional Publishing Subsidiaries pursuant to this Amendment, the Restructuring or the Hicks Muse Transfer. In addition, the Parent and the Purchaser each agree and acknowledge that the inaccuracy of any representations and warranties arising under the circumstances set forth in the preceding sentence shall not (i) relieve the Parent and the Purchaser from their respective obligations to consummate the transactions contemplated by the Stock Purchase Agreement, as amended by this Amendment, pursuant to Section 8.02(a) thereof or (ii) give the Parent the right to terminate the Stock Purchase Agreement, as amended by this Amendment, prior to Closing pursuant to Section 9.01(d) thereof. (b) The Parent and the Purchaser agree, jointly and severally, to indemnify and hold harmless the Seller Indemnified Parties for any Losses that any Seller Indemnified Party may at any time suffer or incur, or become subject to, as a result of any claim or cause of action by any third party against any Seller Indemnified Party for any matter that is the subject of a representation or warranty made by the Seller in the Stock Purchase Agreement if such representation or warranty was accurate when made and in light of the form of transaction contemplated by the Stock Purchase Agreement prior to this Amendment but is inaccurate as of the Closing Date as a result of the direct sale of any additional Publishing Subsidiaries pursuant 22 to this Amendment, the Restructuring or the Hicks Muse Transfer, including, without limitation, any losses related to or arising under that certain Macmillan Trademark Sharing Agreement. SECTION 3. No Contractual Relationship with Hicks Muse. The Parent and the Purchaser each acknowledge and agree neither (i) the agreement by the Seller to transfer and deliver the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries to Hicks Muse pursuant to Section 2.01(a) of the Stock Purchase Agreement, if the Parent so elects pursuant to Section 2.01(b) of the Stock Purchase Agreement, in each case as amended by this Amendment nor (ii) any assignment by the Parent and the Purchaser permitted by Section 11.08(b)(i) of any or all of its rights and obligations under this Agreement in connection with the sale by the Parent or the Purchaser or any wholly owned Subsidiary of the Parent or the Purchaser, as the case may be, to Hicks, Muse, Tate and Furst Incorporated, or any Affiliate thereof, of certain Sold Property, is intended to create, and does not in any way create, a contractual relationship between the Seller or any of its Affiliates on the one hand and Hicks Muse, or any Affiliates thereof, on the other, except as otherwise provided in any of the Ancillary Agreements. SECTION 4. Effect of Amendments. Except as and to the extent expressly modified by this Amendment, the Stock Purchase Agreement shall remain in full force and effect in all respects. SECTION 5. Acknowledgment and Covenant Not to Sue. (a) If Parent makes the election pursuant to Section 2.01(b) of the Stock Purchase Agreement, as amended by this Amendment, each of Seller, Parent, Purchaser and Hicks Muse, simultaneously with the execution hereof, shall execute and deliver to the other the Acknowledgment and Covenant Not to Sue attached as Exhibit 11.08(b)(ii). (b) Seller, Parent and Purchaser acknowledge and agree that in the event of any sale of Sold Property following the Closing contemplated by Section 11.08(b)(i), Seller, Parent, Purchaser and Hicks Muse shall execute and deliver to the other the Acknowledgment and Covenant Not to Sue attached as Exhibit 11.08(b)(i). SECTION 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the Laws of the State of New York, and, for greater certainty, the provisions set forth in Section 11.12 of the Stock Purchase Agreement are incorporated herein by reference and made a part hereof. SECTION 7. Counterparts. This Amendment may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this 23 Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed as of the date first written above by its respective officer thereunto duly authorized. VIACOM INTERNATIONAL INC. By ----------------------------- PEARSON INC. By ----------------------------- PEARSON PLC By ----------------------------- EX-10.2 13 ex-10_2.txt EXHIBIT 10.2 EXHIIBIT 10.2 EXECUTION COPY - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER among PEARSON PLC, PN ACQUISITION SUBSIDIARY INC. and NATIONAL COMPUTER SYSTEMS, INC. Dated as of July 30, 2000 - --------------------------------------------------------------------------------
TABLE OF CONTENTS PAGE ARTICLE I THE OFFER AND THE MERGER.........................................................................................2 Section 1.01. The Offer....................................................................2 Section 1.02. Company Actions..............................................................4 Section 1.03. Directors....................................................................5 Section 1.04. The Merger...................................................................6 Section 1.05. Closing......................................................................6 Section 1.06. Effective Time...............................................................6 Section 1.07. Articles of Incorporation and By-Laws........................................7 Section 1.08. Directors and Officers.......................................................7 ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES..........................................................7 Section 2.01. Effect On Capital Stock......................................................7 Section 2.02. Dissenters' Rights...........................................................8 Section 2.03. Exchange Of Certificates.....................................................8 Section 2.04. Taking of Necessary Action; Further Action..................................10 ARTICLE III REPRESENTATIONS AND WARRANTIES..................................................................................10 Section 3.01. Representations and Warranties of the Company...............................10 Section 3.02. Representations and Warranties of Parent and Sub............................23 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS.......................................................................24 Section 4.01. Conduct Of Business.........................................................24 Section 4.02. No Solicitation.............................................................28 ARTICLE V ADDITIONAL AGREEMENTS...........................................................................................30 Section 5.01. Preparation Of The Proxy Statement; Shareholders Meeting; Offering Circular....................................................................30 Section 5.02. Access To Information.......................................................31 Section 5.03. Commercially Reasonable Efforts; Notification...............................32 Section 5.04. Stock Options And Other Equity Based Awards.................................33 Section 5.05. Indemnification, Exculpation And Insurance..................................35 Section 5.06. Fees And Expenses...........................................................35 Section 5.07. Post-Effective Date Employee Benefits.......................................36 Section 5.08. Public Announcements........................................................37 ARTICLE VI CONDITIONS PRECEDENT............................................................................................38 Section 6.01. Conditions to Each Party's Obligation to Effect the Merger..................38 Section 6.02 Conditions to Parent's and Sub's Obligations to Effect the Merger...........................................................38 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...............................................................................38 Section 7.01. Termination.................................................................38 Section 7.02. Amendment...................................................................40 Section 7.03. Extension; Waiver...........................................................40 ARTICLE VIII GENERAL PROVISIONS..............................................................................................40 Section 8.01. Nonsurvival of Representations and Warranties...............................40 Section 8.02. Notices.....................................................................41 Section 8.03. Definitions.................................................................42 Section 8.04. Interpretation..............................................................45 Section 8.05. Counterparts................................................................46 Section 8.06. Entire Agreement; No Third-Party Beneficiaries..............................46 Section 8.07. Governing Law...............................................................46 Section 8.08. Assignment..................................................................46 Section 8.09. Enforcement.................................................................46 Section 8.10. Severability................................................................47
EXHIBITS Exhibit A Conditions to the Offer ii
SCHEDULES Schedule I Company Disclosure Schedule Section 3.01(b) Subsidiaries Section 3.01(c) Capital Structure Section 3.01(d) Noncontravention; Governmental Approvals Section 3.01(f) Certain Changes or Events Section 3.01(g) Litigation Section 3.01(h) Contracts Section 3.01(i) Compliance with Laws Section 3.01(l) Employee Compensation and Benefit Plans Section 3.01(m)(ii) Tax Deficiencies Section 3.01(m)(iii) Tax Extensions Section 3.01(m)(viii) Tax-Free Stock Distribution Section 3.01(n)(ii) Intellectual Property Section 3.01(n)(iii) Intellectual Property Infringement by Company Section 3.01(n)(iv) Intellectual Property Infringement by Third Parties Section 3.01(n)(v) Termination/Impairment of Intellectual Property Section 3.01(o) Property Section 4.01(a) Conduct of Business Section 5.04(d) Phantom Stock Options Section 5.07(b)(1) Level 1 Employees Section 5.07(b)(2) Level 2 Employees Section 8.03(a)(viii) Knowledge of the Company Schedule II Parent Disclosure Schedule Section 3.02(b) Governmental Approvals
iii AGREEMENT AND PLAN OF MERGER, dated as of July 30, 2000, by and among PEARSON PLC, a public limited company registered in England and Wales ("PARENT"), PN ACQUISITION SUBSIDIARY INC., a Minnesota corporation and a wholly owned subsidiary of Parent ("SUB"), and NATIONAL COMPUTER SYSTEMS, INC., a Minnesota corporation (the "COMPANY"). WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have approved the acquisition of the Company by Parent on the terms and subject to the conditions set forth in this Agreement (the "ACQUISITION"); WHEREAS, as a first step in the Acquisition, Parent proposes to cause Sub to make a cash tender offer (as it may be amended from time to time as permitted under this Agreement, the "OFFER") to purchase all the issued and outstanding shares of common stock, par value $0.03 per share, of the Company (the "COMPANY COMMON STOCK") (including the associated rights ("RIGHTS") issued pursuant to the Second Amended and Restated Rights Agreement, dated as of March 4, 1996, between the Company and Norwest Bank Minnesota, N.A. (the "RIGHTS AGREEMENT")), at a price per share of $73.00 (the "MERGER CONSIDERATION"), net to the seller in cash without interest, on the terms and subject to the conditions set forth in this Agreement and the Offer; WHEREAS, to complete the Acquisition, the respective Boards of Directors of Parent, Sub and the Company and the Committee have approved this Agreement and the merger of Sub with and into the Company (the "MERGER"), pursuant to which, on the terms and subject to the conditions set forth in this Agreement, each issued and outstanding share of Company Common Stock not tendered and purchased by Sub pursuant to the Offer and not owned by Parent, Sub or the Company (other than Dissenting Shares) will be converted into the right to receive the Merger Consideration in accordance with the Minnesota Business Corporation Act (the "MBCA"); WHEREAS, the Board of Directors of the Company (the "COMPANY BOARD") has resolved to recommend that all holders of Company Common Stock ("SHAREHOLDERS") accept the Offer, tender their shares of Company Common Stock pursuant to the Offer and approve this Agreement and the Merger, and has determined that the Offer and the Merger are fair to and in the best interests of the Company and the Shareholders; and WHEREAS, the parties hereto desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I THE OFFER AND THE MERGER SECTION 1.01. THE OFFER. (a) Subject to the conditions of this Agreement, as promptly as practicable, but in no event later than August 7, 2000, Sub shall, and Parent shall cause Sub to, commence the Offer within the meaning of the applicable rules and regulations of the United States Securities and Exchange Commission (the "SEC"). The obligations of Sub to, and of Parent to cause Sub to, accept for payment or pay for any shares of Company Common Stock tendered pursuant to the Offer are subject to the conditions set forth in Exhibit A. The initial expiration date of the Offer shall be the 20th business day following the date on which the Offer is commenced. Sub expressly reserves the right to waive any condition to the Offer or to modify the terms of the Offer, in each case in its sole discretion; PROVIDED, HOWEVER, that without the consent of the Company, Sub shall not (i) reduce the number of shares of Company Common Stock subject to the Offer, (ii) reduce or change the form of the Merger Consideration, (iii) amend or waive the Minimum Tender Condition or add to the conditions set forth in Exhibit A, (iv) except as provided below in this Section 1.01(a), extend the Offer, or (v) otherwise amend the terms of the Offer in any manner adverse to the holders of Company Common Stock. Notwithstanding the foregoing, Sub may, at any time and from time to time, take one or more of the following actions without the consent of the Company: (A) extend the Offer for one or more periods of time that Sub reasonably believes are necessary to cause the conditions to the Offer to be satisfied, if at the scheduled expiration date of the Offer any of the conditions to Sub's obligation to accept shares of Company Common Stock for payment is not satisfied or waived, until such time as all such conditions are satisfied or waived, (B) extend the Offer for any period required by any rule, regulation, interpretation or position of the SEC or the staff thereof that is applicable to the Offer, (C) extend the Offer for an aggregate period of not more than 20 business days beyond the initial expiration date of the Offer to the extent required by Parent to enable Parent and Sub to complete the financing of the purchase of shares of Company Common Stock tendered pursuant to the Offer or (D) 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 (A), (B) or (C) of this sentence, if, as of such date, all of the conditions to Sub's obligation to accept shares of Company Common Stock for payment (including the Minimum Tender Condition) are satisfied or waived, but the number of shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer equals less than 90% of the outstanding shares of Company Common Stock. Without limiting the rights of Sub to extend the Offer pursuant to the immediately preceding sentence, Parent and Sub agree that if (x) all of the conditions to the Offer are not satisfied on any scheduled expiration date of the Offer and (y) the Company is in compliance with all of its covenants in this Agreement, then Sub shall extend the Offer for one or more periods of time that Sub reasonably believes are necessary to cause the conditions of the Offer to be satisfied, until all such conditions are satisfied or waived; PROVIDED, HOWEVER, that Sub shall not be required to extend the Offer pursuant to this sentence beyond December 31, 2000. Sub may, without the consent of the Company, elect to provide a subsequent offering period for the Offer in accordance with Rule 14d-11 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), following its acceptance of shares of Company Common Stock for payment pursuant to the Offer. On the terms and subject to the conditions of the Offer 2 and this Agreement, Sub shall, and Parent shall cause Sub to, pay for all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer that Sub becomes obligated to purchase pursuant to the Offer as soon as practicable after the expiration of the Offer. (b) As soon as practicable on the date of commencement of the Offer, Sub shall, and Parent shall cause Sub to, file with the SEC a Tender Offer Statement on Schedule TO with respect to the Offer (such Tender Offer Statement, together with all amendments and supplements thereto, the "SCHEDULE TO"), which shall contain an offer to purchase and a related letter of transmittal and summary advertisement (such Schedule TO and the documents contained therein pursuant to which the Offer will be made, in each case together with all supplements and amendments thereto, the "OFFER DOCUMENTS"). Parent and Sub (i) agree that, on the date on which the Schedule TO is filed with the SEC and on each date on which any amendment or supplement to any Offer Document is filed with the SEC, the Offer Documents shall comply as to form in all material respects with the Exchange Act and the rules and regulations promulgated thereunder, and (ii) represent and warrant that, on the date first published, sent or given to Shareholders, the Offer Documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by Parent or Sub with respect to information supplied by or on behalf of the Company or any of its officers or directors for inclusion or incorporation by reference in any Offer Document. Each of Parent and Sub (or the Company, in the case of any information supplied by or on behalf of the Company or any of its officers or directors specifically for inclusion or incorporation by reference in any Offer Document) agree promptly to correct any information contained in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and each of Parent and Sub shall take all steps necessary to amend or supplement the Offer Documents to reflect such correction and to cause the Offer Documents as so amended or supplemented to be filed with the SEC and disseminated to the Shareholders, in each case as and to the extent required by applicable Federal securities laws. Parent and Sub agree to give the Company and its counsel reasonable opportunity to review and comment upon the Offer Documents (including, without limitation, any amendment or supplement thereto) prior to their filing with the SEC or dissemination to the Shareholders. Parent and Sub shall provide the Company and its counsel in writing with any written comments (and orally, with any oral comments) that Parent, Sub or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments and shall consult with the Company and its counsel prior to responding to any such comments. (c) Parent and Sub agree to promptly file with the Commissioner of Commerce of the State of Minnesota any registration statement relating to the Offer required to be filed pursuant to Chapter 80B of the Minnesota Statutes. Parent and Sub shall deliver to all offerees the information contained in any such registration statement relating to the Offer required to be filed pursuant to Chapter 80B of the Minnesota Statutes as required by Chapter 80B of the Minnesota Statutes. 3 SECTION 1.02. COMPANY ACTIONS. (a) The Company hereby approves of and consents to the Offer and represents that (i) the Company Board (at a meeting duly called and held) has (x) determined that this Agreement, the Offer and the Merger are fair to and in the best interests of the Company and the Shareholders, (y) approved and adopted this Agreement and the transactions contemplated hereby, including the Offer and the Merger, and (z) resolved to recommend that the Shareholders accept the Offer and tender their shares of Company Common Stock pursuant to the Offer, and approve and adopt this Agreement and the transactions contemplated hereby (the determinations, approvals and recommendations of the Company Board set forth in this clause (i) being hereinafter collectively referred to as the "RECOMMENDATION"), (ii) a committee of the Company Board formed pursuant to Section 302A.673 of the MBCA (the "COMMITTEE") (at a meeting duly called and held) has approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger (the approval of the Committee set forth in this clause (ii) being hereinafter referred to as the "COMMITTEE APPROVAL"), (iii) Salomon Smith Barney Inc. has provided to the Company Board the opinion described in Section 3.01(r) and (iv) assuming the accuracy of Parent's and Sub's representation in Section 3.02(c), the Offer, the Merger, this Agreement and the transactions contemplated hereby will not be impeded by the provisions of Sections 302A.671, 302A.673 and 302A.675 of the MBCA. The Company hereby consents to the inclusion in the Offer Documents of the Recommendation and the Committee Approval, and the Company shall not permit the Recommendation and disclosure regarding the Committee Approval or any component thereof to be modified in any manner adverse to Parent or Sub or withdrawn by the Company Board or the Committee, as applicable, or in any other manner, except as provided in Section 4.02(b). (b) On the date on which the Offer Documents are filed with the SEC, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 under the Exchange Act with respect to the Offer (such Schedule 14D-9, as amended or supplemented from time to time, the "SCHEDULE 14D-9") containing the Recommendation and disclosure regarding the Committee Approval, and shall mail the Schedule 14D-9 to the Shareholders. The Company shall include in the Schedule 14D-9 information furnished by Parent in writing concerning Parent's designees for directors of the Company as required by Section 14(f) of the Exchange Act and Rule 14f-1 thereunder, and shall use its commercially reasonable efforts to have the Schedule 14D-9 available for inclusion in the initial mailing of the Offer Documents to the Shareholders. The Company (i) agrees that on the date on which the Schedule 14D-9 is filed with the SEC and on each date on which any amendment or supplement to the Schedule 14D-9 is filed with the SEC, the Schedule 14D-9 shall comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder, and (ii) represents and warrants that, on the date filed with the SEC and on the date first published, sent or given to Shareholders, the Schedule 14D-9 will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by the Company with respect to information supplied by Parent pursuant to this Section 1.02(b) for inclusion in the Schedule 14D-9. The Company (or Parent, with respect to information supplied by Parent pursuant to this Section 1.02(b) for inclusion in the Schedule 14D-9) agrees promptly to correct any information contained in the Schedule 14D-9 if and to the extent that such 4 information shall have become false or misleading in any material respect, and the Company shall take all steps necessary to amend or supplement the Schedule 14D-9 to reflect such correction and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Shareholders, in each case as and to the extent required by applicable Federal securities laws. The Company agrees to give Parent, Sub and their counsel reasonable opportunity to review and comment upon the Schedule 14D-9 prior to its filing with the SEC or dissemination to the Shareholders. The Company shall provide Parent, Sub and their counsel in writing with any written comments (and orally, with any oral comments) that the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments and shall consult with Parent and its counsel prior to responding to such comments. (c) In connection with the Offer and the Merger, the Company shall as promptly as reasonably practicable but, in any event, within three business days after the date hereof, furnish, or cause its transfer agent to furnish, Sub promptly with mailing labels containing the names and addresses of all record holders of Company Common Stock as of a recent date and of those persons becoming record holders subsequent to such date, together with copies of all lists of Shareholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Company Common Stock, and shall furnish to Sub such information and assistance (including updated lists of Shareholders, security position listings and computer files) as Sub or Parent may reasonably request in communicating the Offer to Shareholders. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer, the Merger and the other transactions contemplated by this Agreement, Parent and Sub shall, and shall instruct each of their respective Affiliates, associates, employees, agents and advisors to, hold in confidence the information contained in any such labels, listings and files. SECTION 1.03. DIRECTORS. Promptly upon the acceptance for payment of, and payment by Sub for, any shares of Company Common Stock pursuant to the Offer, Sub shall, subject to compliance with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, be entitled to designate such number of directors on the Company Board as will give Sub representation on the Company Board equal to that number of directors, rounded up to the next whole number, which is the product of (a) the total number of directors on the Company Board (giving effect to the directors elected pursuant to this sentence) MULTIPLIED BY (b) a fraction, the numerator of which is the number of shares of Company Common Stock so accepted for payment and paid for by Sub and the denominator of which is the number of shares of Company Common Stock outstanding at the time of Sub's designation, and the Company shall, at such time, cause Sub's designees to be elected or appointed to the Company Board; PROVIDED, HOWEVER, that during the period commencing with the election or appointment of Sub's designees to the Company Board until the Effective Time, the Company Board shall have at least three directors who are directors on the date of this Agreement and who are not officers of the Company or representatives of any Affiliates of the Company (the "INDEPENDENT DIRECTORS"); and PROVIDED FURTHER, HOWEVER, that if during such period the number of Independent Directors shall be reduced below three for any reason whatsoever, the remaining Independent Directors (or Independent Director, if there shall be only one remaining) shall be entitled to designate persons 5 to fill any such vacancies who shall be deemed to be Independent Directors for purposes of this Agreement or, if no Independent Directors then remain, the other directors shall designate three persons to fill such vacancies who are not Shareholders, officers or Affiliates of the Company, Parent or Sub, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. Subject to applicable law, the Company shall take all action requested by Parent for the purpose of effecting any such election or appointment of Sub's designees. In connection with the foregoing, the Company shall promptly, at the option of Sub, either increase the size of the Company Board or obtain the resignation of such number of its current directors as is necessary to enable Sub's designees to be elected or appointed to the Company Board as provided above. Prior to the Effective Time, the Company shall cause each member of the Company Board, other than Sub's designees, to execute and deliver a letter effectuating his or her resignation as a director of the Company Board effective immediately prior to the Effective Time. SECTION 1.04. THE MERGER. (a) Subject to the terms and conditions of this Agreement and in accordance with the MBCA, at the Effective Time, Sub will merge with and into the Company. The separate corporate existence of Sub shall cease at the Effective Time, and the Company shall be the surviving corporation in the Merger and shall continue in existence following the Effective Time under its current name (the "SURVIVING CORPORATION"). (b) At the Effective Time, the Merger will have the effects provided in the applicable provisions of the MBCA. Without limiting the generality of the foregoing, at the Effective Time, all the property, rights, privileges, powers, immunities and franchises of the Company and Sub will vest in the Surviving Corporation, and all debts, liabilities, obligations and duties of the Company and Sub will become the debts, liabilities, obligations and duties of the Surviving Corporation. SECTION 1.05. CLOSING. The closing of the Merger (the "CLOSING") shall take place at the offices of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York, commencing at 10:00 a.m. New York City time, on the second business day immediately following the satisfaction or waiver of the conditions set forth in Article VI (other than those provisions that by their terms cannot be satisfied until the time of the Closing, it being understood that the Merger shall nonetheless be subject to the satisfaction or waiver of such conditions), or at such other time, date or place as the parties hereto may mutually determine in writing; PROVIDED, HOWEVER, that if all the conditions set forth in Article VI shall not have been satisfied or waived on such second business day, then the Closing shall take place on the first business day on which all such conditions shall have been satisfied or waived. The date on which the Closing occurs is referred to in this Agreement as the "CLOSING DATE". SECTION 1.06. EFFECTIVE TIME. Concurrently with the Closing, Sub and the Company will execute in the manner required by the MBCA and deliver for filing to the Secretary of State of the State of Minnesota articles of merger with respect to the merger (the "ARTICLES OF MERGER"). The Merger will become effective upon the filing of the Articles of Merger in accordance with the MBCA. The time at which the Merger becomes effective is herein referred to as the "EFFECTIVE TIME." 6 SECTION 1.07. ARTICLES OF INCORPORATION AND BY-LAWS. (a) At the Effective Time, the articles of incorporation of the Surviving Corporation shall be the articles of incorporation of Sub as in effect immediately prior to the Effective Time, until thereafter amended in accordance with the MBCA and the terms of such certificate of incorporation. (b) At the Effective Time, the by-laws of the Surviving Corporation shall be the by-laws of Sub as in effect immediately prior to the Effective Time, until thereafter amended in accordance with by the MBCA, the articles of incorporation of the Surviving Corporation and such by-laws. SECTION 1.08. DIRECTORS AND OFFICERS. The directors of Sub shall be the initial directors of the Surviving Corporation and the officers of the Company shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the articles of incorporation and by-laws of the Surviving Corporation. ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES SECTION 2.01. EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Sub or any Shareholder: (a) CAPITAL STOCK OF SUB. All of the issued and outstanding shares of common stock, par value $.03 per share, of Sub (the "SUB COMMON STOCK") shall be converted into an equal number of fully paid and nonassessable shares of common stock, $.03 par value per share, of the Surviving Corporation (the "SURVIVING CORPORATION COMMON STOCK"), which will constitute all of the issued and outstanding shares of capital stock of the Surviving Corporation immediately after the Effective Time. From and after the Effective Time, each outstanding certificate theretofore representing shares of Sub Common Stock will be deemed for all purposes to evidence ownership of, and to represent the same number of shares of, Surviving Corporation Common Stock. (b) CANCELLATION OF PARENT-OWNED STOCK. Each share of Company Common Stock that is owned by Parent or Sub immediately prior to the Effective Time shall automatically be canceled and retired and shall cease to exist, without payment of any consideration in respect thereof. (c) CONVERSION OF COMPANY COMMON STOCK. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with Section 2.01(b) and any Dissenting Shares) shall automatically be canceled and converted into the right to receive the Merger Consideration from the Surviving Corporation, and all such shares of Company Common Stock shall no longer be outstanding and shall cease to exist. Each holder of a certificate that immediately prior to the Effective Time represented any such shares (a "CERTIFICATE") shall cease to have any rights with 7 respect thereto, except the right to receive the Merger Consideration upon the surrender of such Certificate as provided in Section 2.03. SECTION 2.02. DISSENTERS' RIGHTS. (a) Notwithstanding any provision of Section 2.01 to the contrary, any shares of Company Common Stock which are issued and outstanding immediately prior to the Effective Time and which are held by a Shareholder who has not voted such shares of Company Common Stock in favor of the Merger and who has properly exercised, preserved and perfected dissenters' rights with respect to such shares of Company Common Stock in accordance with the MBCA (including Sections 302A.471 and 302A.473 thereof) and, as of the Effective Time, has neither effectively withdrawn nor otherwise lost for any reason its right to exercise such dissenters' rights ("DISSENTING SHARES"), will not be converted into or represent a right to receive the Merger Consideration pursuant to Section 2.01(c). The holders of Dissenting Shares will be entitled to only such rights as are granted by Section 302A.471 of the MBCA. (b) Notwithstanding the provisions of Section 2.01(c), if any holder of shares of Company Common Stock who demands dissenters' rights with respect to its shares of Company Common Stock under the MBCA effectively withdraws or otherwise loses for any reason (including failure to perfect) its dissenters' rights, then as of the Effective Time or the occurrence of such event, whichever later occurs, such Shareholder's shares of Company Common Stock will automatically be cancelled and converted into and represent only the right to receive the Merger Consideration as provided in Section 2.01(c), without interest thereon, upon surrender of the certificate or certificates formerly representing such shares of Company Common Stock. (c) The Company shall give Parent (x) prompt notice of any written intent to demand payment of the fair value of any shares of Company Common Stock, withdrawals of such demands and any other instruments delivered pursuant to the MBCA in respect of shares of Company Common Stock or the Merger received by the Company and (y) the opportunity to control and resolve all negotiations and proceedings with respect to dissenters' rights under the MBCA. The Company may not voluntarily make any payment with respect to any exercise of dissenters' rights and may not, except with the prior written consent of Parent, settle or offer to settle any such dissenters' rights. SECTION 2.03. EXCHANGE OF CERTIFICATES. (a) PAYING AGENT. Prior to the Effective Time, Sub or Parent shall designate, or shall cause to be designated, a bank or trust company reasonably acceptable to the Company to act as agent for the payment of the Merger Consideration upon surrender of Certificates in accordance with Section 2.03(b) (the "PAYING AGENT"). From time to time after the Effective Time, Parent shall provide, or cause the Surviving Corporation to provide, to the Paying Agent funds in such amounts and at such times as are necessary for the payment of the Merger Consideration pursuant to Section 2.01(c), and any payments that holders of Dissenting Shares become entitled to under Section 2.01(d), in each case upon surrender of the applicable Certificates in accordance herewith, it being understood that any and all interest or income earned on funds made available to the Paying Agent pursuant to this Agreement shall be for the benefit of, and shall be paid to, Parent. 8 (b) EXCHANGE PROCEDURE. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record of shares of Company Common Stock entitled to receive the Merger Consideration pursuant to Section 2.01(c) (i) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates representing such shares shall pass, only upon proper delivery of such Certificates to the Paying Agent and shall be in customary form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of such Certificates pursuant to such letter of transmittal. Upon surrender of a Certificate for cancellation to the Paying Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for the shares represented thereby, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock that is not registered in the stock transfer books of the Company, the proper amount of cash may be paid in exchange therefor to a person other than the person in whose name the relevant surrendered Certificate is registered if (x) such Certificate shall be properly endorsed, or otherwise be in proper form for transfer, to the person requesting such payment and (y) the person requesting such payment shall have paid any transfer or other taxes required by reason of the payment of Merger Consideration to a person other than the registered holder of such Certificate or shall have established to the satisfaction of Parent that such taxes have been paid or that no such taxes are applicable. No interest shall be paid or shall accrue on the cash payable upon surrender of any Certificate. (c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger Consideration paid upon the surrender of a Certificate in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock formerly represented by such Certificate. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Paying Agent for transfer or any other reason, they shall be canceled and exchanged for Merger Consideration as provided in this Article II. (d) NO LIABILITY. To the fullest extent permitted by applicable law, none of Parent, Sub, the Surviving Corporation or the Paying Agent shall be liable to any Shareholder or other person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificate shall not have been surrendered prior to two years after the Effective Time (or immediately prior to such earlier date on which any Merger Consideration would otherwise escheat to or became the property of any Governmental Entity), any such Merger Consideration in respect thereof shall, to the fullest extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interests of any person previously entitled thereto. (e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event that any Certificate shall have been lost, stolen or destroyed, the Surviving Corporation or Paying Agent shall pay in 9 exchange for such lost, stolen or destroyed Certificate, upon the making of an affidavit of that fact by the holder thereof in form and substance satisfactory to the Surviving Corporation or Paying Agent, as the case may be, the Merger Consideration in respect of the shares of Company Common Stock evidenced thereby; PROVIDED, HOWEVER, that the Surviving Corporation may, in its discretion and as a condition precedent to the payment of such Merger Consideration, require the owner of such lost, stolen or destroyed Certificate to deliver a bond in such sum as the Surviving Corporation may reasonably direct as indemnity against any claim that may be made against the Surviving Corporation or the Paying Agent with respect to such Certificate. (f) WITHHOLDING RIGHTS. Parent, the Surviving Corporation or the Paying Agent shall be entitled to deduct and withhold, from the consideration otherwise payable pursuant to this Agreement to any Shareholder, such amounts as Parent, the Surviving Corporation or the Paying Agent reasonably believes that it is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the "CODE"), or any provision of state, local or foreign tax law. To the extent that amounts are so withheld and paid over to the appropriate taxing authority by Parent, the Surviving Corporation or the Paying Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent, the Surviving Corporation or the Paying Agent (as applicable). SECTION 2.04. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of Sub, Parent and the Company will take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Agreement as promptly as possible. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all the assets, properties, rights, privileges, powers, immunities and franchises of the Company and Sub, the officers and directors of the Company and Sub immediately prior to the Effective Time are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As an inducement to Parent and Sub to enter into this Agreement, the Company represents and warrants to Parent and Sub that the statements contained in this Article III are true and correct as of the date hereof. Unless otherwise specified, no information contained in any particular numbered section of the Company Disclosure Schedule shall be deemed to be contained in any other numbered section of the Company Disclosure Schedule unless it is reasonably apparent that it should be included therein (by cross-reference or otherwise). (a) ORGANIZATION, STANDING AND POWER. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority to 10 own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Company and its Subsidiaries 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 failures to be so qualified or licensed or in good standing that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has made available to Parent true and complete copies of its articles of incorporation and by-laws, in each case as amended to the date of this Agreement. Such articles of incorporation and by-laws are in full force and effect and the Company is not in violation or breach of any of the provisions of its articles of incorporation or by-laws. (b) SUBSIDIARIES. A true and complete list of all the Subsidiaries of the Company, together with the jurisdiction of incorporation of each such Subsidiary and the percentage of the outstanding capital stock of each Subsidiary owned by the Company and each other Subsidiary thereof, is set forth in SECTION 3.01(b) OF THE COMPANY DISCLOSURE SCHEDULE. Except as set forth in SECTION 3.01(b) OF THE COMPANY DISCLOSURE SCHEDULE, there are no outstanding options, warrants or other securities or subscription, preemptive or other rights convertible into or exchangeable or exercisable for any shares of capital stock of or other equity or voting interests in any Subsidiary of the Company and there are no "phantom stock" rights, stock appreciation rights or other similar rights with respect to any Subsidiary of the Company. Except as set forth in SECTION 3.01(b) OF THE COMPANY DISCLOSURE SCHEDULE, as of the date hereof, the Company does not directly or indirectly own any equity interest in, or any interest convertible into or exchangeable or exercisable for any equity interest in, any corporation, partnership or other entity. The Company has made available to Parent true and complete copies of the articles of incorporation, the by-laws or equivalent organizational documents of each Subsidiary of the Company, in each case together with all amendments thereto. Such articles of incorporation and by-laws (or, if applicable, such equivalent organizational documents) are in full force and effect. No Subsidiary of the Company is in violation or breach of any of the provisions of its articles of incorporation or by-laws (or, if applicable, its equivalent organizational documents). (c) CAPITAL STRUCTURE. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Company Common Stock (of which, as of July 21, 2000, 32,757,155 shares were issued and outstanding) and (ii) 10,000,000 shares of preferred stock, par value $0.01 per share (of which no shares are issued and outstanding). No other capital stock of the Company is authorized or issued and outstanding. SECTION 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE sets forth (u) all plans or agreements (the "STOCK PLANS") pursuant to which the Company or any of its Subsidiaries has granted or committed to grant any option or right to acquire stock or any other award payable in or based upon Company Common Stock; (v) the number of shares of Company Common Stock reserved for issuance under the Stock Plans, as of July 21, 2000, (w) the number of shares of Company Common Stock subject to outstanding stock options, as of July 21, 2000 (the "STOCK OPTIONS"); (x) the grant dates and exercise prices of each such Stock Option and the names of the holders thereof; (y) the number of shares of Company Common Stock subject to restrictions based on satisfaction of performance criteria (the "RESTRICTED STOCK") and the names of the holders thereof; and (z) all other rights to purchase or receive Company Common Stock under the Stock Plans. Except as set forth in SECTION 11 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE, there are no outstanding options, warrants or other securities or subscription, preemptive or other rights convertible into or exchangeable or exercisable for any shares of capital stock or other equity or voting interests of the Company and there are no "phantom stock" rights, stock appreciation rights or other similar rights with respect to the Company. No shares of Company Common Stock are owned by any Subsidiary of the Company. During the period from July 21, 2000 to the date of this Agreement, (A) there have been no issuances by the Company of shares of capital stock of, or other equity or voting interests in, the Company, other than issuances of shares of Company Common Stock pursuant to the exercise of Stock Options outstanding on such date as required by their terms as in effect on such date and (B) there have been no issuances by the Company of options, warrants or other rights to acquire shares of capital stock or other equity or voting interests from the Company. All outstanding shares of Company Common Stock are, and all shares of Company Common Stock that may be issued pursuant to the Option Plans or rights or agreements set forth in SECTION 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE will be when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of the Company or any of its Subsidiaries, and no securities or other instruments or obligations of the Company or any of its Subsidiaries, the value of which is in any way based upon or derived from any capital or voting stock of the Company or any such Subsidiary or having the right to vote (or convertible into, or exchangeable or exercisable for, securities having the right to vote) on any matters on which the Shareholders or the shareholders of any such subsidiary may vote. Except as set forth above or in SECTION 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE or as specifically permitted under Section 4.01(a), there are no Contracts of any kind to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, obligating the Company or any of its Subsidiaries to issue, deliver, grant or sell, or cause to be issued, delivered, granted or sold, additional shares of capital stock of, or other equity or voting interests in, or options, warrants or other securities or subscription, preemptive or other rights convertible into, or exchangeable or exercisable for, shares of capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries, or any "phantom stock" right, stock appreciation right or other similar right with respect to the Company or any of its Subsidiaries, or obligating the Company or any of its Subsidiaries to enter into any such Contract. There are no Contracts obligating the Company or any of its Subsidiaries to (x) repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interests in, the Company or any of its Subsidiaries or (y) vote or dispose of any shares of the capital stock of, or other equity or voting interests in, any of its Subsidiaries. To the knowledge of the Company, as of the date of this Agreement, there are no irrevocable proxies and no voting agreements with respect to any shares of the capital stock or other voting securities of the Company or any of its Subsidiaries. Except as set forth in SECTION 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE, each outstanding share of capital stock of each Subsidiary of the Company is duly authorized, validly issued, fully paid and nonassessable, and each such share is owned by the Company or another Subsidiary of the Company free and clear of all liens, rights of first refusal or other contractual transfer restrictions, agreements and limitations on the Company's or any of its Subsidiaries' voting rights of any nature whatsoever. 12 (d) AUTHORITY; NONCONTRAVENTION. The Company has the requisite corporate power and authority to execute and deliver this Agreement and, subject only to, if required by law, approval of the Merger by an affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock (the "SHAREHOLDER APPROVAL"), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized on the part of the Company by the Committee and the Company Board and, other than the Shareholder Approval (if such approval is required by law) and the filing of the Articles of Merger in compliance with the MBCA, no other corporate proceedings on the part of the Company are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Sub, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company Board at a meeting duly held and in accordance with the MBCA, has adopted and consented to the Recommendation and the Committee at a meeting duly held and in accordance with the MBCA has made the Committee Approval. Except as set forth on SECTION 3.01(d) OF THE COMPANY DISCLOSURE SCHEDULE, the execution and delivery of this Agreement by the Company does not, and the consummation of the transactions contemplated by this Agreement will not, (i) conflict with, or result in any violation or breach of, any provision of the articles of incorporation or by-laws (or, if applicable, equivalent organizational documents) of the Company or any of its Subsidiaries, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, debenture, guarantee, lease, contract or other agreement, document, commitment, arrangement, understanding, undertaking, permit, concession, franchise, license, instrument or obligation, whether oral or written (each, a "CONTRACT"), to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation of or issued by any Governmental Entity (a "LAW") applicable to the Company or any of its Subsidiaries or any of its or their properties or assets, except in the case of clauses (ii) and (iii) above for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations, losses, consents or waivers that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Except as set forth on SECTION 3.01(d) OF THE COMPANY DISCLOSURE SCHEDULE, no consent, approval, order or authorization of, or registration, declaration or filing with, any domestic or foreign (whether national, federal, state, provincial, local or otherwise) government or political subdivision thereof or any court, administrative agency or commission or other governmental or regulatory authority or agency (whether domestic, foreign or supranational), or any arbitrator or arbitral tribunal (a "GOVERNMENTAL ENTITY"), is required by the Company or any Subsidiary of the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby or compliance with the provisions hereof, except for any such consents, approvals, orders, authorizations, registrations, declarations and filings that if not made or obtained, as the case may be, would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect or to 13 prevent or materially delay the consummation of the Offer or the Merger or otherwise materially impair or delay the Company's performance of its obligations under this Agreement. (e) SEC DOCUMENTS. The Company has filed with the SEC all forms, reports, schedules, statements and other documents required to be filed with the SEC by the Company since December 31, 1997 (together with and giving effect to, any amendments, supplements and exhibits thereto and any information incorporated therein by reference, the "SEC DOCUMENTS"). No Subsidiary of the Company is required to file any form, report, schedule, statement or other document with the SEC. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents as of the date of the filing thereof. Except to the extent that information contained in any SEC Document has been revised or superseded by a later filed SEC Document, none of the SEC Documents contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements (including the related notes) included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments). Except as set forth in the SEC Documents and in SECTION 3.01(e) OF THE COMPANY DISCLOSURE SCHEDULE, the Company and its Subsidiaries have no liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise), other than (i) other liabilities and obligations that were incurred since April 29, 2000 in the ordinary course of business, consistent with past practices and (ii) liabilities and obligations that, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (f) ABSENCE OF CERTAIN CHANGES OR EVENTS. From April 29, 2000 through the date of this Agreement, except as set forth in SECTION 3.01(f) OF THE COMPANY DISCLOSURE SCHEDULE, or as expressly contemplated by this Agreement, (a) the Company and its Subsidiaries in all material respects have conducted their businesses only in the ordinary course and in a manner consistent with past practice, (b) there has not been any Material Adverse Effect and (c) there has not been (i) any declaration, setting aside or payment of any dividend of other distribution with respect to its capital stock, (ii) any split, combination or reclassification of any of the Company's capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for any shares of the Company's capital stock, (iii) any granting by the Company or any of its Subsidiaries to any director or executive officer of the Company of any increase in compensation, other than in the ordinary course of business consistent with past practice, (iv) any granting by the Company or any of its Subsidiaries to any director or employee of any increase in severance or termination pay, (v) any entry by the Company or any of its Subsidiaries into any employment, severance or termination agreement 14 with any director or executive officer of the Company or any Subsidiary thereof or (vi) except insofar as may be required by a change in GAAP, any change in accounting methods, principles or practices by the Company. (g) LITIGATION. Except as disclosed in the SEC Documents and as set forth in SECTION 3.01(g) OF THE COMPANY DISCLOSURE SCHEDULE, there is (i) no pending and (ii) to the knowledge of the Company there is no threatened litigation, suit, claim, action, investigation or proceeding against or affecting the Company or any Subsidiary of the Company or any of their respective assets that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or prevent or materially delay consummation of the Offer or the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement. There is not any statute, law, ordinance, rule, regulation, judgment, order, injunction or decree of any Governmental Entity or arbitrator outstanding against, or, to the knowledge of the Company, any investigation, proceeding, notice of violation, order of forfeiture or complaint by any Governmental Entity involving, the Company or any Subsidiary of the Company or any of their respective assets that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or to prevent or materially delay consummation of the Offer or the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement. (h) CONTRACTS. SECTION 3.01(h) OF THE COMPANY DISCLOSURE SCHEDULE, together with SEC Documents, sets forth a true and complete list of the following Contracts (together with any Contract that is an Exhibit to the SEC Documents, "MATERIAL CONTRACTS"): (i) Contracts relating to or evidencing any indebtedness for borrowed money of the Company or any Subsidiary thereof in excess of $5,000,000; (ii) Any Contract providing for payments to or from the Company or any Subsidiary thereof of (A) in the case of the Assessments and Testing Services business segment (as such term is used in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (the "FORM 10-K")), $10,000,000 or more per year; (B) in the case of the NCS Services business segments (as such term is used in the Form 10-K), $10,000,000 or more per year; (C) in the case of the International business segment (as such term is used in the Form 10-K), $10,000,000 or more per year; (D) in the case of the Educational Software and Services business segment (as such term is used in the Form 10-K), $5,000,000 or more per year; and (E) in the case of the Data Collection Systems business segment (as such term is used in the Form 10-K), $5,000,000 or more per year, other than purchase orders entered into in the ordinary course of business consistent with past practice; (iii) any material distribution agreement granted to or held by the Company or any Subsidiary thereof; (iv) any Contract that limits the freedom of the Company or any Subsidiary thereof to compete in any line of business or with any Person or in any geographical area or which could so limit the freedom of the Company or any Subsidiary thereof so to compete after the Effective Time; 15 (v) any Shareholders', investors' or similar agreement known to the Company; and (vi) any Contract relating to the future disposition or acquisition of any assets or properties material to the business, other than dispositions or acquisitions in the ordinary course of business consistent with past practice. Except as disclosed on SECTION 3.01(h) OF THE COMPANY DISCLOSURE SCHEDULE, none of the Company or any Subsidiary thereof is in violation of or default (with or without notice or lapse of time or both) under, or has waived or failed to enforce any rights or benefits under, any Material Contract to which it is a party or by which it or any of its properties or assets is bound, and, to the knowledge of the Company or such Subsidiary, no other party to any of its Material Contracts is in violation or default (with or without notice or lapse of time or both) under, or has waived or failed to enforce any rights or benefits under, and there has occurred no event giving to others any right of termination, amendment or cancellation of, with or without notice or lapse of time or both, any such Contract, except, in each case, for violations, defaults, waivers or failures to enforce benefits that, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect. The Company has furnished or made available to Parent true and complete copies of each Contract (including any amendments thereto) listed on SECTION 3.01(h) OF THE COMPANY DISCLOSURE SCHEDULE. (i) COMPLIANCE WITH LAWS. Except as set forth in SECTION 3.01(i) OF THE COMPANY DISCLOSURE SCHEDULE, the Company and its Subsidiaries and their relevant personnel and operations are in compliance in all material respects with all statutes, laws, ordinances, rules, regulations, judgments, orders and decrees of any Governmental Entity applicable to their businesses or operations, except for violations or possible violations that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. None of the Company or any Subsidiary of the Company has received a notice or other written communication alleging or relating to a possible violation of any statute, law, ordinance, rule, regulation, judgment, order or decree of any Governmental Entity applicable to its businesses or operations, except for violations or possible violations that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. The Company and its Subsidiaries have in effect all material permits, licenses, variances, exemptions, authorizations, franchises, orders, registrations and approvals of all Governmental Entities (collectively, "PERMITS"), necessary or advisable for them to own, lease or operate their properties and assets and to carry on their businesses as now conducted, and there has occurred no violation of, default (with or without notice or lapse of time or both) under, or event giving to others any right of termination, amendment or cancellation of, with or without notice or lapse of time or both, any such Permit, except for such failings that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. No suspension or cancellation of any of the Permits is pending or to the knowledge of the Company threatened, except for such suspensions or cancellations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (j) LABOR MATTERS. The Company and its Subsidiaries have not been engaged in any unfair labor practice and there are no unfair labor practice complaints against the 16 Company or any Subsidiary pending before any Governmental Entity, except where such unfair labor practice or unfair labor practice complaint, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Except as disclosed in the SEC Documents, there is no labor dispute, strike, work stoppage or lockout, or, to the knowledge of the Company, threat thereof, by or with respect to any employee of the Company or any Subsidiary, except where such dispute, strike, work stoppage or lockout individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary thereof is a party to any collective bargaining or similar agreements. (k) ENVIRONMENTAL MATTERS. Except as disclosed in the SEC Documents and except for such inconsistencies with the following clauses (i) through (v) that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect: (i) each of the Company and its Subsidiaries possesses all Environmental Permits necessary to conduct its businesses and operations as currently conducted; (ii) each of the Company and its Subsidiaries is in compliance with all Environmental Laws and all Environmental Permits; (iii) there are no Environmental Claims pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries; (iv) there have been no Releases of any Hazardous Materials that would reasonably be expected to form the basis of any Environmental Claim against the Company or any of its Subsidiaries; and (v) neither the Company, its Subsidiaries, nor to the Company's knowledge, any predecessor of the Company or any of its Subsidiaries has transported or arranged for the treatment, storage, handling, disposal, or transportation of any Hazardous Substance to any off-site location which is an Environmental Clean-up Site. (l) EMPLOYEE COMPENSATION AND BENEFIT PLANS. SECTION 3.01(l) OF THE COMPANY DISCLOSURE SCHEDULE lists all compensation or benefits plans, programs or arrangements (including, but not limited to, those subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), employment agreements, cash or equity-based bonus or incentive arrangements, severance arrangements and vacation policies) sponsored, maintained or contributed to by the Company or any Subsidiary of the Company or to which the Company or any Subsidiary of the Company is a party (the "BENEFIT PLANS"), documentation for which has been delivered or made available to Parent. Each Benefit Plan has been maintained and operated in material compliance with its terms and all applicable laws, and each Benefit Plan intended to qualify under Section 401(a) of the Code has at all times so qualified or, to the extent the law has changed, the plan is still within the remedial amendment period in which amendments may be adopted. No Benefit Plan (i) is a "defined benefit plan" within the meaning of Section 3(35) of ERISA, or (ii) provides or provided post-retirement health or death benefit coverage (other than as required under Part 6 of Subtitle B of Title I of ERISA or Section 4980B of the Code), and no such plan was terminated at any time during the six year period prior to the date hereof. The Company is not now, and at no time has been, a member of a "controlled group" within the meaning of Section 412(n)(6)(B) of the Code with any entity other than a Subsidiary of the Company, and there are no circumstances pursuant to which the Company or any Subsidiary of the Company could have been liable (either directly, secondarily, jointly or contingently) under Title IV of ERISA or Sections 4971 through 4980E of the Code or under Section 502(i) or (l) of ERISA. The consummation of the transactions contemplated by this Agreement, either alone or in conjunction with any other event, will not (i) result in a violation of ERISA, or (ii) except as 17 set forth in SECTION 3.01(l) OF THE COMPANY DISCLOSURE SCHEDULE, trigger any payment or benefit under any Benefit Plan, or accelerate the timing thereof. The tax deductibility of any amount payable under any Benefit Plan will not be limited by operation of Sections 162(m) or 280G of the Code. Except as disclosed in the SEC Documents or in SECTION 3.01(L) OF THE COMPANY DISCLOSURE SCHEDULE, since December 31, 1999, no Benefit Plan has been adopted, entered into, terminated or materially modified, and there has not been an increase in compensation, bonus or other benefits payable to directors, officers or employees of the Company or any Subsidiary of the Company thereof other than, in the ordinary course of business consistent with past practice. (m) TAXES. (i) (A) Each of the Company and its Subsidiaries has duly and timely filed all domestic and foreign (whether national, federal, state, provincial, local or otherwise) tax returns and reports required to be filed by it and each such return or report is true and correct, except, in each case, for failures to file or failures to file truly and correctly that, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect; (B) each of the Company and its Subsidiaries has timely paid all Taxes owed by it, whether or not shown on such returns and reports, except, in each case, for failures to timely pay that, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect; and (C) the most recent financial statements contained in the SEC Documents reflect an adequate reserve for all current Taxes payable by the Company and each of its Subsidiaries (in addition to any reserve for deferred Taxes established to reflect timing differences between book and Tax items) for all taxable periods and portions thereof through the date of such financial statements. (ii) No material domestic or foreign (whether national, federal, state, provincial, local or otherwise) tax return or report of the Company or any Subsidiary of the Company is under audit or examination by any taxing authority, and no written or, to the knowledge of the Company, unwritten notice of such an audit or examination or other inquiry or questionnaire has been received by the Company or any Subsidiary of the Company. The Company has received no notice of deficiency, proposed adjustment or matter in controversy or other similar notice with respect to any material amount of Taxes due and owing by the Company or any Subsidiary of the Company. Except as set forth in SECTION 3.01(m)(ii) OF THE COMPANY DISCLOSURE SCHEDULE, each deficiency in Taxes resulting from any completed audit or examination by any taxing authority or any concluded litigation has been timely paid. The United States federal income tax returns of the Company Affiliated Group have been examined by the Internal Revenue Service and settled or have closed by virtue of the expiration of the relevant statute of limitations for all years through January 31, 1994. (iii) Except as set forth in SECTION 3.01(m)(iii) OF THE COMPANY DISCLOSURE SCHEDULE, with respect to the Company and each of its Subsidiaries, there is no currently effective agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes, and no power of attorney with respect to any Taxes has been executed or filed with any taxing authority. Except as set forth in SECTION 3.01(m)(iii) OF THE COMPANY DISCLOSURE SCHEDULE, neither the Company nor any Subsidiary of the Company is the beneficiary of any extension of time to file any tax return or report that has not been filed. 18 (iv) No liens for Taxes exist upon any assets or properties of the Company or any Subsidiary of the Company, except for statutory liens for Taxes not yet due and payable and liens for Taxes that the Company or Subsidiary of the Company is contesting in good faith and for which adequate reserves have been established. (v) None of the Company or any Subsidiary of the Company is a party to or bound by any tax sharing agreement, tax indemnity obligation or other agreement or arrangement with respect to Taxes (including any advance pricing agreement, closing agreement, gain recognition agreement or other material agreement relating to Taxes with any taxing authority). (vi) None of the Company or any Subsidiary of the Company was, at any time during a period specified in Section 897(c)(1)(A)(ii) of the Code, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code. (vii) None of the Company or any Subsidiary of the Company has at any time since January 31, 1990 been a member of any Affiliated Group other than the Company Affiliated Group and, other than the several liability for federal income taxes of the Company and those of its Subsidiaries that file federal income tax returns as members of the Company Affiliated Group, none of the Company or any Subsidiary of the Company has any liability for Taxes of any other person under Treasury Regulation Section 1.1502-6 (or comparable provisions of foreign, state or local law), as a transferee or successor, by contract or otherwise. (viii) Except as set forth in SECTION 3.01(m)(viii) OF THE COMPANY DISCLOSURE SCHEDULE, none of the Company or any Subsidiary of the Company has constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock qualifying or intended to qualify for tax-free treatment under Section 355 of the Code in the two years prior to the date of this Agreement. (ix) Neither the Company nor any Subsidiary of the Company has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code. Each of the Company and its Subsidiaries has proper receipts, within the meaning of Treasury Regulation Section 1.905-2, for any foreign Tax that has been or in the future may be claimed as a foreign tax credit for United States federal income tax purposes. No foreign Subsidiary of the Company has, or at any time has had, an investment in "United States property" within the meaning of Section 956(c) of the Code. No foreign Subsidiary of the Company is, or at any time has been, a passive foreign investment company within the meaning of Section 1297 of the Code, and neither the Company nor any Subsidiary of the Company is a shareholder, directly or indirectly, in a passive foreign investment company. No foreign Subsidiary of the Company is, or at any time has been, engaged in the conduct of a trade or business within the United States within the meaning of Section 864(b) or Section 882(a) of the Code, or treated as or considered to be so engaged under Section 882(d) or Section 897 of the Code or otherwise. No foreign Subsidiary of the Company holds, or at any time has held, a United States real property interest within the meaning of Section 897(c)(1) of the Code. Neither the Company nor any Subsidiary of the Company is, or at any time has been, subject to (i) the dual consolidated loss provisions of Section 1503(d) of the Code, (ii) the overall foreign loss provisions of Section 904(f) of the Code or (iii) the recharacterization provisions of Section 952(c)(2) of the Code. Neither the Company 19 nor any Subsidiary of the Company has any "non-recaptured net Section 1231 losses" within the meaning of Section 1231(c)(2) of the Code. (x) As used in this Agreement, (A) "TAXES" shall include all (x) domestic and foreign (whether national, federal, state, provincial, local or otherwise) income, franchise, property, sales, excise, employment, payroll, social security, value-added, ad valorem, transfer, withholding, license, severance, stamp, premium, environmental, customs, duties, capital stock, unemployment, disability, registration, estimated, alternative or add-on minimum and other taxes, including taxes based on or measured by gross receipts, profits, sales, use or occupation, tariffs, levies, impositions, assessments, liabilities under abandoned property, escheat or similar Law or governmental charges of any nature whatever, whether disputed or not, including any interest, penalties or additions with respect thereto, (y) liability for the payment of any amounts of the type described in clause (x) as a result of being a member of an affiliated, consolidated, combined, unitary or similar group and (z) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the types described in clause (x) or (y); (B) "AFFILIATED GROUP" shall mean each group of which the Company or any Subsidiary of the Company is or has been a member during a period for which the group filed a tax return or report on an affiliated, combined, consolidated, unitary or similar basis; and (C) "COMPANY AFFILIATED GROUP" means the consolidated group for federal income tax purposes of which the Company is the common parent corporation. (n) INTELLECTUAL PROPERTY. (i) For the purposes of this Section 3.01(n), the term the "Company" shall mean the Company and all of its Subsidiaries and other relevant Affiliates and the following terms shall have the following meanings: "COMPANY LICENSED INTELLECTUAL PROPERTY" means all registered patents and patent applications, registered trademarks and trademark applications, copyright registrations, domain name registrations and Third Party Software used by the Company pursuant to license agreements. "INTELLECTUAL PROPERTY" means United States and international: (A) patents, patent applications and statutory invention registrations, including reissues, divisions, continuations, continuations in part, extensions and reexaminations thereof, and all rights therein provided by international treaties or conventions, (B) inventions, processes, formulae, industrial models, designs, specifications, data, technology, methodologies, and all related technical information, manufacturing, engineering, technical drawings, and know-how, (C) trademarks, service marks, trade dress, logos, trade names, corporate names, and other source identifiers (whether or not registered) including all common law rights, and registrations and applications for registration thereof, all rights therein provided by international treaties or conventions, and all extensions and renewals of any of the foregoing, (D) copyrightable works, copyrights (whether or not registered) and registrations and applications for registration thereof, and all rights therein provided by international treaties or conventions, (E) confidential and proprietary information, whether or not subject to statutory registration, (F) Software and Third Party Software, (G) 20 coded values, formats, data, historical or current databases, whether or not copyrightable and (H) URLs, domain names, Internet web sites or identities used or held for use exclusively by the Company. "SOFTWARE" means all computer software owned by the Company including source code, object code, comments, user interfaces, menus, buttons and icons, and all files, data, manuals, design notes and other items and documentation related thereto or associated therewith, but excluding Third Party Software. "THIRD PARTY SOFTWARE" means all computer software used by the Company and owned by a third party (including source code, object code, comments, user interfaces, menus, buttons and icons and all files, data, manuals, design notes and other items and documentation related thereto or associated therewith), but excluding commercially available shrink-wrapped software. (ii) Except as set forth in SECTION 3.01(n)(ii) OF THE COMPANY DISCLOSURE SCHEDULE, the Company owns exclusively or has the licensed right to use all Intellectual Property and commercially available shrink-wrapped software that is material and necessary to the operation of the business of the Company as it is conducted currently. SECTION 3.01(n)(ii) OF THE COMPANY DISCLOSURE SCHEDULE sets forth a true and complete list of (a) all registered patents and patent applications, registered trademarks and trademark applications, copyright registrations and domain name registrations owned by the Company (the "COMPANY OWNED INTELLECTUAL PROPERTY"). (iii) Except as set forth in SECTION 3.01(n)(iii) OF THE COMPANY DISCLOSURE Schedule, to the Company's knowledge, the Company's use of the Company Owned Intellectual Property and the Company Licensed Intellectual Property in the operation of the business as currently conducted, do not infringe upon the Intellectual Property rights of any third party, and no written claim has been asserted to the Company which is currently pending or to the Company's knowledge, is threatened that the use of such Company Owned Intellectual Property or Company Licensed Intellectual Property does or may infringe upon the Intellectual Property rights of any third party. (iv) Subject to any prior right of the U.S. government, the Company is the exclusive owner of the entire right, title and interest in and to all the Company Owned Intellectual Property and is entitled to use all the Company Owned Intellectual Property and the Company Licensed Intellectual Property in the continued operation of its business in a manner consistent in all material respects with past practice. Except as set forth in SECTION 3.01(n)(iv) OF THE COMPANY DISCLOSURE SCHEDULE, to the Company's knowledge, no third party is engaging in any activity that infringes upon the Company Owned Intellectual Property. (v) Except as set forth in SECTION 3.01(n)(v) OF THE COMPANY DISCLOSURE SCHEDULE, to the Company's knowledge, the consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the Company Owned Intellectual Property or the Company Licensed Intellectual Property, or any license or other agreement relating thereto. 21 (vi) The Company is not in breach of, or default under, any material term of any license or sublicense of the Company Owned Intellectual Property or the Company's Licensed Intellectual Property and, to the Company's knowledge, no other party to such license or sublicense is in breach thereof or default thereunder. (vii) All of the products, services, operations and businesses of the Company sold or offered for sale after January 1, 1996 are free of any "YEAR 2000 PROBLEM" such that such products, services, operations and businesses do not and will not, without requiring any modifications, experience any malfunctions, premature cancellation or deletion of data or invalid or incorrect results, or abnormally cease to function, or exhibit any other problems in connection with, (i) the year 2000 (and all subsequent years to 2020) as distinct from 1900s years, (ii) the date February 29, 2000 and all subsequent leap years to 2020 or (iii) any other calendar date. (o) PROPERTY. SECTION 3.01(o) OF THE COMPANY DISCLOSURE SCHEDULE (together with Item 2 of the Form 10-K) contains a true and complete list, as of the date hereof, of all real property owned or material real property leased by the Company or any of its Subsidiaries. The Company and each of its Subsidiaries has good and marketable title or valid leasehold interests to all its real and personal property, free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except (i) liens for current taxes, payments of which are not yet delinquent, (ii) such imperfections in title and easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present use of the property subject thereto or affected thereby, or otherwise materially impair the Company's business operations, (iii) as disclosed in SEC Documents, or (iv) such matters, which individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All leases under which the Company or any of its Subsidiaries leases any material real property are in good standing, valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event which with notice or lapse of time or both would become a default by the Company or, to the Company's knowledge, any other party thereto, which would reasonably be expected individually or in the aggregate to have a Material Adverse Effect on the Company. There are no pending or, to the knowledge of the Company, threatened condemnation proceedings against or affecting any material real property owned by the Company or its Subsidiaries. (p) STATE TAKEOVER STATUTES. The Company Board and the Committee have approved the Offer, the Merger, this Agreement and the transactions contemplated hereby and, assuming the accuracy of Parent's and Sub's representation in Section 3.02(c) and as a result of such approvals, the Offer, the Merger, this Agreement and the transactions contemplated hereby, will not be impeded by provisions of Sections 302A.671, 302A.673 and 302A.675 of the MBCA. No other "fair price," "merger moratorium," "control share acquisition" or other anti-takeover statute or similar statute or regulation (other than Section 302A.553 of the MBCA and Chapter 80B of the Minnesota Statutes) applies or purports to apply to the Merger, this Agreement, the Offer or any of the transactions contemplated hereby or thereby. 22 (q) BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor, finder or other similar person, other than Salomon Smith Barney Inc., the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has delivered to Parent true and complete copies of all Contracts under which any such fees or expenses are payable and all indemnification and other Contracts related to the engagement of the persons to whom such fees are payable. (r) OPINION OF FINANCIAL ADVISOR. The Company Board has received the opinion of Salomon Smith Barney Inc., to the effect that, as of the date of this Agreement, the consideration to be received in the Offer and the Merger by the Shareholders is fair from a financial point of view to the Shareholders (other than Parent and its Affiliates). A true and complete copy of such opinion shall be delivered to Parent. (s) RIGHTS AGREEMENT. The Company Board has taken all necessary action to authorize, and the Company has taken, or will take promptly, and notwithstanding any other provision of this Agreement will continue to take promptly, all necessary action to (i) render the Rights Agreement inapplicable with respect to the Offer and the Merger and (ii) ensure that (A) neither Parent or Sub nor any of their Affiliates (as defined in the Rights Agreement) or Associates (as defined in the Rights Agreement) is considered to be an Acquiring Person or an Adverse Person (as defined in the Rights Agreement) and (B) the provisions of the Rights Agreement, including the occurrence of a Distribution Date (as defined in the Rights Agreement), are not and shall not be triggered by reason of the announcement or consummation of the Offer or the Merger. SECTION 3.02. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. As an inducement to the Company to enter into this Agreement, Merger Sub and the Parent represent and warrant to the Company that the statements contained in this Section 3.02 are true and correct as of the date hereof. (a) ORGANIZATION. Each of Parent and Sub is a corporation duly incorporated or organized, validly existing and, to the extent applicable, in good standing under the laws of the jurisdiction in which it is incorporated or organized and has all requisite corporate power and authority to carry on its business as now being conducted. (b) AUTHORITY; NONCONTRAVENTION. Parent and Sub have the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub and, other than filing of the Articles of Merger in compliance with the MBCA, no other corporate proceedings on the part of Parent or Sub are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Sub, as applicable, and, assuming the due authorization, execution and delivery hereof by the Company, constitutes a valid and binding obligation of Parent and Sub, as applicable, 23 enforceable against Parent and Sub, as applicable, in accordance with its terms. The execution and delivery of this Agreement by Parent and Sub does not, and the consummation of the transactions contemplated by this Agreement will not, (i) conflict with or result in any violation or breach of, any provision of the articles of incorporation or bylaws of Parent or Sub, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any Contract to which Parent or Sub is a party or by which either of them or any of their properties or assets may be bound, or (iii) conflict with or violate any Law applicable to Parent or Sub or any of their properties or assets, except in the case of (ii) and (iii) for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations, losses, consents or waivers that are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. Except as set forth on SECTION 3.02(b) OF THE PARENT DISCLOSURE SCHEDULE, no consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by Parent or Sub in connection with the execution and delivery of this Agreement by Parent or Sub or the consummation by Parent or Sub of the transactions contemplated hereby or compliance with the provisions hereof, except for any such consents, appeals, orders, authorizations, registrations, declarations or filings that if not made or obtained, as the case may be, would not reasonably be expected, individually or in the aggregate, to prevent or materially delay the consummation of the Offer or the Merger or otherwise impair or delay the performance by Parent or Sub of its obligations under this Agreement. (c) OWNERSHIP OF SHARES. Neither Parent nor any of its Affiliates or associates, individually or in the aggregate, has Beneficial Ownership (as such term is defined in Section 302A.011 of the MBCA) of more than 5% of the outstanding capital stock of the Company. (d) FUNDS. Parent or Sub at the expiration date of the Offer and at the Effective Time, will have the funds necessary to consummate the Offer and the Merger, respectively, and to pay all associated costs and expenses of the transactions contemplated hereby. Without prejudice to the fact that this Agreement does not provide for any financing condition or contingency, Parent and Sub will use commercially reasonable efforts (i) to obtain any financing necessary to consummate the Offer and the Merger as promptly as practicable and (ii) to consummate the Offer as promptly as practicable upon obtaining the financing referred to in Section 1.01(a)(C). ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS SECTION 4.01. CONDUCT OF BUSINESS. (a) CONDUCT OF BUSINESS BY THE COMPANY. During the period from the date of this Agreement to the Effective Time, except (i) as consented to in writing by Parent, (ii) as specifically contemplated by this Agreement or (iii) as disclosed on SECTION 4.01(a) OF THE COMPANY DISCLOSURE SCHEDULE (with specific reference to the subsection of this Section 4.01 to which the information stated in such disclosure relates and 24 such other subsections of this Section 4.01 to the extent a matter is disclosed in such a way as to make its relevance to the information called for by such other subsection readily apparent), the Company shall, and shall cause its Subsidiaries to, carry on their respective businesses in the ordinary course consistent with past practice and use their commercially reasonable efforts to comply with all applicable laws, rules and regulations and, to the extent consistent therewith, use their commercially reasonable efforts to preserve their assets and technology and preserve their relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them in all material respects. Without limiting the generality of the foregoing, but subject to clauses (i), (ii) and (iii) above, the Company shall not, and shall not permit any of its Subsidiaries to: (i) (w) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any of its capital stock except for cash dividends payable to the Company or a Subsidiary of the Company by a Subsidiary of the Company, (x) purchase, redeem or otherwise acquire any shares of capital stock or any other securities of the Company or its Subsidiaries (except in connection with and consistent with the terms of the Stock Plans or the Benefit Plans, as in effect on the date hereof) or any options, warrants, calls or rights to acquire any such shares or other securities, (y) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or any of its other securities or (z) liquidate, merge or consolidate with any other person; (ii) issue, deliver, sell, pledge, dispose of, grant, encumber or otherwise transfer or authorize the issuance, delivery, sale, pledge, disposition, grant or encumbrance of any shares of its or any of its Subsidiaries' capital stock, any other equity or voting interests or any securities convertible into, or exchangeable for, or any options, warrants, calls or rights to acquire, any such shares, voting securities or convertible securities or any stock appreciation rights or other rights (other than the issuance of shares of Company Common Stock upon the exercise of Stock Options and the other rights and agreements set forth in SECTION 3.01(c) OF THE COMPANY DISCLOSURE SCHEDULE that are in existence on the date of this Agreement); (iii) amend or propose to amend its or any of its Subsidiaries' articles of incorporation or by-laws (or similar organizational documents); (iv) directly or indirectly acquire or agree to acquire (A) by merging or consolidating with, or by purchasing all or a substantial portion of the assets or stock of, or in any other manner, any assets constituting a business or any corporation, partnership, joint venture or association or other entity or division thereof, or any direct or indirect interest in any of the foregoing, or (B) any assets other than purchases of assets (including, subject to clause (vii) below, capital assets) in the ordinary course of business consistent with past practice; (v) directly or indirectly sell, lease, license, sell and lease back, mortgage or otherwise encumber or subject to any lien or otherwise dispose of any of its properties or assets or any interest therein, except (i) sales of assets or any interest therein in the ordinary course of business consistent with past practice, (ii) pledges or encumbrances pursuant 25 to existing borrowing arrangements or (iii) any such transaction not otherwise permitted with an aggregate value not to exceed $5,000,000; (vi) (x) repurchase, accelerate, prepay or incur any indebtedness or guarantee any indebtedness of another person or issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of the Company or any of its Subsidiaries, guarantee any debt securities of another person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing (PROVIDED that the Company may incur indebtedness for borrowed money under its existing credit facilities up to an aggregate amount of $30,000,000), (y) make any loans, advances or capital contributions to, or investments in, any other person, other than the Company or any direct or indirect wholly-owned Subsidiary of the Company, or (z) enter into any hedging agreement or other financial agreement or arrangement designed to protect the Company against fluctuations in interest rates, commodities prices, currency exchange rates or otherwise, except, in the cases of clauses (x), (y) and (z) above, agreements or arrangements entered into in the ordinary course of business consistent with past practice; (vii) incur or commit to incur any capital expenditures in an aggregate amount exceeding $10,000,000; (viii) pay, discharge, settle or satisfy any litigation, claims (including claims of Shareholders), liabilities or obligations (whether absolute, accrued, asserted or unasserted, contingent or otherwise) in an aggregate amount exceeding $5,000,000, other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or as required by their terms as in effect on the date of this Agreement of claims, liabilities or obligations reflected, reserved against or otherwise disclosed in the most recent audited financial statements (or the notes thereto) of the Company included in the SEC Documents (for amounts not in excess of such reserves or as otherwise disclosed) or incurred since the date of such financial statements in the ordinary course of business consistent with past practice, or waive, release, grant or transfer any right of material value, other than in the ordinary course of business consistent with past practice, or waive any material benefits of, or agree to modify in any material adverse respect, or fail to enforce, or consent to any matter with respect to which its consent is required under, any confidentiality, standstill or similar agreement to which the Company or any Subsidiary of the Company is a party; (ix) (A) grant to any employee, officer, director, consultant or independent contractor of the Company or any Subsidiary of the Company any increase in cash compensation or pay any bonus, other than in the ordinary course of business consistent with past practice, (B) grant to any employee, officer, director, consultant or independent contractor of the Company or any Subsidiary of the Company any increase in severance or termination pay, (C) establish, adopt, enter into or amend in any material respect any collective bargaining agreement or Benefit Plan, (D) take any action to accelerate any rights or benefits, take any action to fund or in any other way secure the payment of compensation or benefits under any Benefit Plan, or make any material determinations not in the ordinary course of business consistent with past practice, under any collective bargaining agreement or Benefit Plan, other 26 than pursuant to the provisions of Section 5.04 hereof, including any payment of cash pursuant thereto or (E) amend or modify or grant any Stock Option, in each case above other than (i) changes that are required by applicable law or (ii) to satisfy obligations existing as of the date hereof; (x) fail to maintain existing insurance at levels substantially comparable to current levels; (xi) transfer or license to any person or entity or otherwise extend, amend or modify any rights to the Intellectual Property rights of the Company and its Subsidiaries other than in the ordinary course of business consistent with past practice; PROVIDED that in no event shall the Company license on an exclusive basis or sell any Intellectual Property rights of the Company or its Subsidiaries; (xii) enter into or amend any agreements pursuant to which any person is granted exclusive marketing, manufacturing or other rights with respect to any material Company product, process or technology, other than in the ordinary course of business consistent with past practice; (xiii) except insofar as may be required by a change in GAAP or generally accepted accounting principles of the applicable jurisdiction or changes in applicable law, make any changes in accounting methods, principles or practices; (xiv) take any action that could reasonably be expected to result in (A) any representation and warranty of the Company set forth in this Agreement that is qualified as to materiality becoming untrue, (B) any such representation and warranty that is not so qualified becoming untrue in any material respect or (C) any condition to the Offer or the Merger not being satisfied except as provided in Section 4.02(b); (xv) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures; (xvi) amend, modify or consent to the termination of any Material Contract, or amend, waive, modify or consent to the termination of the Company's or any of its Subsidiaries material rights thereunder; (xvii) commence any material litigation; or (xviii) authorize any of, or commit, resolve or agree to take any of, the foregoing actions. (b) CERTAIN TAX MATTERS. During the period from the date of this Agreement to the Effective Time, the Company shall, and shall cause each of its Subsidiaries to, (i) timely file all tax returns and reports ("POST-SIGNING RETURNS") required to be filed by each such entity; (ii) timely pay all Taxes due and payable in respect of such Post-Signing Returns that are so filed; (iii) accrue a reserve in the books and records and financial statements of any such entity in 27 accordance with past practice for all Taxes payable by such entity for which no Post-Signing Return is due prior to the Effective Time; (iv) promptly notify Parent of any suit, claim, action, investigation, proceeding or audit (collectively, "ACTIONS") pending against or with respect to the Company or any Subsidiary of the Company in respect of any Tax and not settle or compromise any such Action without Parent's consent; and (v) not make any material Tax election without Parent's consent, which consent shall not be unreasonably withheld. SECTION 4.02. NO SOLICITATION. (a) The Company shall not, nor shall it permit any of its Affiliates to, nor shall it authorize or permit any Affiliate, director, officer or employee of the Company or any such Affiliate or any investment banker, financial adviser, attorney, accountant or other advisor or representative of the Company or any such Affiliate to, directly or indirectly, (i) solicit, seek, initiate or encourage (including by way of furnishing information), or take any other action to facilitate the submission of any inquiries or the making of any proposal or offer that constitutes, or would be reasonably likely to constitute or lead to, a Takeover Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations (including by way of furnishing information), or otherwise cooperate in any way with, or assist, participate in, facilitate or encourage, any effort or attempt by any person to submit or otherwise act in furtherance of, a Takeover Proposal, (iii) agree to, approve or recommend any Takeover Proposal, or (iv) take any other action inconsistent with the obligations and commitments of the Company contained in this Section 4.02 provided that nothing herein shall prohibit the presentation of a Takeover Proposal to the Company Board which was not obtained or received in violation of this Section 4.02. Notwithstanding the foregoing, in the event that the Company Board determines in good faith after consultation with outside counsel that the failure to do so would constitute a breach of the Company Board's fiduciary duties to the Shareholders under applicable law, the Company Board may, in response to (A) a Superior Proposal or (B) a bona fide Takeover Proposal that the Company Board determines in good faith is reasonably likely to lead to a Superior Proposal (a "LIKELY SUPERIOR PROPOSAL") at any time prior to the acceptance for payment of shares of Company Common Stock pursuant to the Offer (the "SPECIFIED DATE"), that in each case was unsolicited and did not otherwise result from a breach of this Section 4.02, and subject to compliance with Section 4.02(c): (x) furnish information with respect to the Company and its Subsidiaries to the person making such Superior Proposal or Likely Superior Proposal (and its representatives) pursuant to an appropriate and customary confidentiality and standstill agreement that is no less restrictive than the Confidentiality Agreement between Pearson Education, Inc. and the Company, dated June 14, 2000 (the CONFIDENTIALITY AGREEMENT") and (y) participate in discussions or negotiations with the person making such Superior Proposal or Likely Superior Proposal (and its representatives) regarding such Superior Proposal or Likely Superior Proposal. For purposes of this Agreement, "SUPERIOR PROPOSAL" means any bona fide written offer made by a third party to consummate a tender offer, exchange offer, merger, consolidation or similar transaction that would result in such third party (or its shareholders) owning, directly or indirectly, more than 50% of the shares of Company Common Stock then outstanding (or of the surviving entity in a merger) or all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, and that is otherwise on terms and conditions which the Company Board determines in good faith (after consultation with a financial advisor of nationally recognized reputation) to provide consideration to the holders of Company Common Stock with 28 a greater value than the Merger Consideration after taking into account (i) the amount and type of consideration offered, (ii) any changes to the terms of this Agreement proposed in writing by Parent in response to such Superior Proposal or otherwise, (iii) the likelihood of consummation of such transaction and (iv) the identity of the Person making the proposal; PROVIDED, HOWEVER, that no such offer shall constitute a Superior Proposal unless (A) such offer is first received by the Company after the date hereof and (B) such offer is unsolicated and does not otherwise result from a breach of Section 4.02. For purposes of this Agreement, "TAKEOVER PROPOSAL" means any inquiry, proposal or offer from any person relating to (i) any direct or indirect purchase, lease, pledge or other acquisition of 10% or more of the assets of the Company and its Subsidiaries, taken as a whole, or 10% or more (on either an issued and outstanding or a fully-diluted basis) of any class or series of capital stock of the Company or any Subsidiary of the Company, (ii) any tender offer or exchange offer that if consummated would result in any person (or group of related persons) beneficially owning 10% or more (on either an issued and outstanding or a fully-diluted basis) of any class or series of capital stock of the Company or any Subsidiary of the Company, or (iii) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any Subsidiary of the Company, in each case other than the transactions to be effected pursuant to this Agreement. (b) Neither the Company Board nor any committee thereof (including the Committee) shall (i) withdraw (or modify in a manner adverse to Parent or Sub) or propose to withdraw (or modify in a manner adverse to Parent or Sub) the Recommendation and the Committee Approval, (ii) adopt, approve or recommend, or propose to adopt, approve or recommend, any Takeover Proposal, (iii) cause or permit the Company to enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or other Contract other than a confidentiality agreement as required by Section 4.02(a) (each, an "ACQUISITION AGREEMENT") constituting or related to, or which is intended to or is reasonably likely to lead to, any Takeover Proposal, or (iv) agree or resolve to take any of the actions contemplated by clause (i), (ii) or (iii) of this sentence; PROVIDED, HOWEVER, that the Company Board or any committee thereof may take any of such actions if (and only if) each of the following conditions has been satisfied: (w) the Company Board or such committee thereof (as applicable) shall have determined in good faith, after consultation with outside counsel, that failure to do so would constitute a breach of its fiduciary duties to the Shareholders under applicable Law; (x) no breach of any of the Company's obligations under paragraph (a) or (c) of this Section 4.02 shall have occurred; (y) the Company shall have given Parent three business days' prior written notice of its intention to take such action and if such action is being taken in connection with a Superior Proposal or a Takeover Proposal which may lead to a Superior Proposal, Parent shall not have proposed changes to the terms of this Agreement which would have the effect of causing the Takeover Proposal in question no longer to constitute a Superior Proposal or otherwise cause the condition set forth in clause (w) above no longer to be satisfied; and (z) the Company shall have terminated this Agreement and, prior to such termination, the Company has paid the Termination Fee to Parent. (c) In addition to the obligations of the Company set forth in paragraphs (a) and (b) of this Section 4.02, the Company shall promptly (and in any event within 24 hours or, in 29 the case of any action described in clause (x) or (y) of Section 4.02(a), not less than 48 hours prior to taking any such action) (i) advise Parent orally and in writing of any request for information that the Company reasonably believes could lead to or contemplates a Takeover Proposal or of any Takeover Proposal or of any inquiry the Company reasonably believes could lead to any Takeover Proposal, the terms and conditions of any such request, Takeover Proposal or inquiry (including any subsequent amendment or other modification to such terms and conditions) and the identity of the person making any such request, Takeover Proposal or inquiry and (ii) keep Parent informed in all material respects of the status and details (including amendments or proposed amendments) of any such request, Takeover Proposal or inquiry and of any discussions or negotiations with respect thereto. (d) Nothing contained in this Section 4.02 or elsewhere in this Agreement shall prohibit the Company from (i) taking and disclosing to the Shareholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or (ii) making any disclosure to the Shareholders if, in the good faith judgment of the Company Board, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; PROVIDED, HOWEVER, that, except as expressly permitted by Section 4.02(b), in no event shall the Company Board or any committee thereof withdraw or modify, or propose to withdraw or modify, its position with respect to this Agreement, the Offer or the Merger or adopt, approve or recommend, or propose to adopt, approve or recommend, any Takeover Proposal. Article V ADDITIONAL AGREEMENTS SECTION 5.01. PREPARATION OF THE PROXY STATEMENT; SHAREHOLDERS MEETING; OFFERING CIRCULAR. (a) If the approval of this Agreement by the Shareholders is required by law, the Company and Parent shall, as promptly as practicable following the expiration of the Offer, prepare and file with the SEC a proxy statement or information statement relating to the Shareholder Approval (as amended or supplemented from time to time, the "PROXY STATEMENT") and the Company shall use its commercially reasonable efforts to have the Proxy Statement promptly cleared by the SEC and to cause the Proxy Statement to be mailed to the Shareholders as promptly as practicable following the expiration of the Offer in accordance with the provisions of the MBCA. The Company shall promptly notify Parent upon the receipt of any comments from the SEC or its staff or any request from the SEC or its staff for amendments or supplements to the Proxy Statement and shall provide Parent with copies of all correspondence between the Company and its representatives, on the one hand, and the SEC and its staff, on the other hand. Notwithstanding the foregoing, prior to filing or mailing the Proxy Statement (or any amendment or supplement thereto) or responding to any comments of the SEC with respect thereto, the Company (i) shall provide Parent a reasonable opportunity to review and comment on such document or response, (ii) shall include in such document or response all comments reasonably proposed by Parent and (iii) shall not file or mail such document or respond to the SEC prior to receiving Parent's approval, which approval shall not be unreasonably withheld or delayed. 30 (b) If the approval of this Agreement by the Shareholders is required by law, the Company shall, as promptly as practicable following the expiration of the Offer, establish a record date (which will be as promptly as reasonably practicable following the expiration of the Offer) for, duly call, give notice of, convene and hold a meeting of the Shareholders (the "SHAREHOLDERS MEETING") for the purpose of obtaining the Shareholder Approval. Subject to Section 4.02(b), the Company shall, through the Company Board, declare advisable and recommend to its Shareholders that they adopt this Agreement, and shall include the Recommendation and disclosure regarding the Committee Approval in the Proxy Statement. Without limiting the generality of the foregoing, the Company agrees that its obligations pursuant to the first sentence of this Section 5.01(b) shall not be affected by (i) the commencement, public proposal, public disclosure or communication to the Company or any other person of any Takeover Proposal or (ii) the withdrawal or modification by the Board of Directors of the Company or any committee thereof of such Board's or committee's approval or recommendation of the Offer, the Merger or this Agreement. (c) The Company represents and warrants that the information (other than information with respect to Parent and Sub which is supplied by Parent and Sub in writing to the Company specifically for use in the Proxy Statement) contained in the Proxy Statement will not, at the date of mailing to the Shareholders or at the date of such Shareholders Meeting, contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact required to be stated therein or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for such Shareholders Meeting. The Company represents and warrants that the Proxy Statement will comply as to form in all material respects with the Exchange Act and the rules and regulations of the SEC thereunder. Parent and Sub represent and warrant that the information supplied by Parent and Sub in writing to the Company specifically for use in the Proxy Statement will not, at the date of mailing to the Shareholders or at the date of the Shareholders Meeting, contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact required to be stated therein or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Shareholders Meeting. (d) Notwithstanding Section 5.01(a), (b) or (c), in the event that Parent, Sub or any other Subsidiary of Parent acquires, directly or indirectly, at least 90% of the outstanding shares of Company Common Stock pursuant to the Offer or otherwise, the parties hereto will take all necessary and appropriate action to cause the Merger to become effective in accordance with Section 302A.621 of the MBCA without a meeting of the Shareholders as soon as practicable after the acceptance for payment and purchase of the shares of Company Common Stock by Parent pursuant to the Offer. SECTION 5.02. ACCESS TO INFORMATION. Except as otherwise required by applicable law, the Company shall, and shall cause its Subsidiaries and the officers, directors, employees, auditors and agents of the Company and its Subsidiaries to, afford to Parent, and to Parent's officers, employees, investment bankers, attorneys, accountants and other advisors and representatives, reasonable and reasonably prompt access during normal business hours during the period prior to the Effective Time or the termination of this Agreement to all their respective 31 properties, assets, books, contracts, commitments, directors, officers, employees, attorneys, accountants, auditors, other advisors and representatives and records and, during such period, the Company shall, and shall cause each of its Subsidiaries to, make available to Parent on a prompt basis (a) a copy of each report, schedule, form, statement and other document filed or received by it during such period pursuant to the requirements of domestic or foreign (whether national, federal, state, provincial, local or otherwise) laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request (including access to, but not copies of, the work papers of Ernst & Young LLP). SECTION 5.03. COMMERCIALLY REASONABLE EFFORTS; NOTIFICATION. (a) Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions that are necessary, proper or advisable to consummate and make effective the Offer, the Merger and the other transactions contemplated by this Agreement, including using all commercially reasonable efforts to accomplish the following: (i) the taking of all commercially reasonable acts necessary to cause the conditions to the Offer and the Merger to be satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from Governmental Entities and the making of all necessary registrations, declarations and filings, including the making of all filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the "HSR ACT") and the relevant foreign antitrust laws as promptly as reasonably practicable, and in any event, within five business days after the date hereof, and (iii) the obtaining of all necessary consents, approvals or waivers from third parties. In connection with and without limiting the foregoing, the Company and the Company Board shall, if any state takeover statute or similar statute or regulation is or becomes applicable to this Agreement, the Offer, the Merger or any of the other transactions contemplated hereby or thereby, use its commercially reasonable efforts to ensure that the Offer, the Merger and the other transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such statute or regulation on this Agreement, the Offer, the Merger and the other transactions contemplated hereby or thereby. The Company and Parent shall keep the other apprised of the status of matters relating to the completion of the transactions contemplated hereby and work cooperatively in connection with obtaining any such waivers, consents, approvals, orders and authorizations, including, without limitation: (i) promptly notifying the other of, and if in writing, furnishing the other with copies of (or, in the case of material oral communications, advise the other orally of) any communications from or with any Governmental Entity with respect to the Offer, the Merger or any of the other transactions contemplated by this Agreement, (ii) permitting the other party to review and discuss in advance, and considering in good faith the views of one another in connection with, any proposed written (or material proposed oral) communication with any Governmental Entity, (iii) not participating in any meeting with any Governmental Entity unless it consults with the other party in advance and to the extent permitted by such Governmental Entity gives the other party the opportunity to attend and participate there at, (iv) furnishing the other party with copies of all correspondence, filings and communications (and memoranda setting forth the substance thereof) between it and any Governmental Entity with respect to this Agreement, the Offer and the Merger, and (v) furnishing the other party with such necessary information and reasonable assistance as such 32 other party may reasonably request in connection with its preparation of necessary filings or submissions of information to any Governmental Entity. The Company and Parent may, as each deems advisable and necessary, reasonably designate any competitively sensitive material provided to the other under this Section as "outside counsel only." Such materials and the information contained therein shall be given only to the outside legal counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, or directors of the recipient unless express permission is obtained in advance from the source of the materials (the Company or Parent, as the case may be) or its legal counsel. (b) The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect, (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, or (iii) any change or event having, or that is reasonably likely to have, a Material Adverse Effect on the notifying party or on the truth of their respective representations and warranties or the ability of the conditions contained in this Agreement to be satisfied; PROVIDED that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. SECTION 5.04. STOCK OPTIONS AND OTHER EQUITY BASED AWARDS. (a) STOCK OPTIONS. Prior to the Effective Time, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary, and shall use commercially reasonable efforts to obtain any necessary consents, so that each Stock Option outstanding immediately prior to the Effective Time is fully vested and canceled at the Effective Time in exchange for a right to receive a cash payment from the Company, payable as soon as practicable after such cancellation, equal to the product of (x) the excess, if any, of (A) the Merger Consideration over (B) the exercise price per share of Company Common Stock subject to such Stock Option, MULTIPLIED BY (y) the number of shares of Company Common Stock issuable pursuant to the unexercised portion of such Stock Option, less any tax withholding required by applicable law. Notwithstanding the foregoing, at the request of Parent, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary, and shall use commercially reasonable efforts to obtain any necessary consents, so that each Stock Option outstanding immediately prior to the first purchase of shares of Company Common Stock pursuant to the Offer is fully vested and canceled at such time in exchange for the right to receive such payment. (b) RESTRICTED STOCK. Prior to or as soon as practicable following the date of this Agreement, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary, and shall use commercially reasonable efforts to obtain any necessary consents, so that the Merger Consideration received in respect of each share of Restricted Stock pursuant to Section 2.01(c) shall be held in custody by the Company and distributed to the holder of such Restricted Stock only upon satisfaction of the performance criteria contained in the Restricted Stock Award Agreement related thereto. 33 (c) EARNOUT SHARES. Prior to or as soon as practicable following the date of this Agreement, the Company shall take any action (including the giving of notice to the Accredited Sellers (as such term is defined in the Macro Agreement)) as is required by the Macro Agreement and the Macro Side Letters so that, in accordance with the terms of the Macro Agreement and the Macro Side Letters, the right to receive a share of Company Common Stock under the Macro Agreement and the Macro Side Letters shall be converted into the right to receive the Merger Consideration when and if such shares of Company Common Stock become issuable to the Accredited Sellers pursuant to the terms of the Macro Agreement and the Macro Side Letters. (d) PHANTOM STOCK AWARDS. Prior to or as soon as practicable following the date of this Agreement, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary, and shall use commercially reasonable efforts to obtain any necessary consents, so that all phantom stock awards (including, for this purpose, any award payable in cash in an amount based in whole or in part on the value of a share of Company Common Stock) outstanding under any Stock Plan are cancelled as of the Effective Time. As soon as practicable after such cancellation, Parent shall cause a payment to be made with respect to each such award granted on March 2, 1998 under the 1997 Long-Term Incentive Plan and listed on Section 5.04(d) of the Company Disclosure Schedule (by name of holder and number of phantom shares) equal to the product of (i) the number of phantom shares so awarded, and (ii) $38.125, less any tax withholding required by applicable law. No cash payments shall be made directly or indirectly in respect of any award of phantom shares granted on March 2, 1999 or March 7, 2000. Immediately following the Effective Time, Parent shall cause payment to be made of the remaining, unpaid, portion of the award granted on March 3, 1997 under the Long-Term Incentive Plan and which would have been due and payable, absent this Agreement, in 2001. (e) EMPLOYEE STOCK PURCHASE PLAN. Prior to or as soon as practicable following the date of this Agreement and contingent on the closing of the transaction contemplated by this Agreement, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary, and shall use commercially reasonable efforts to obtain any necessary consents, to suspend or to terminate the Company's Employee Stock Purchase Plan so that, with regard to employee contributions withheld from pay after the date hereof, no additional shares of Company Common Stock may be purchased thereunder if those shares would be subject to direct or indirect purchase under this Agreement. (f) EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the Effective Time and contingent on the closing of the transaction contemplated by this Agreement, the Company (acting, where appropriate, through the Company Board or a committee thereof) shall take all action as may be necessary so that the accounts of all employees under the Company's Employee Stock Ownership Plan are fully vested as of the Effective Time. (g) TERMINATION. Prior to the Effective Time, the Company Board (or, if appropriate, any committee administering the Stock Plans) shall take or cause to be taken such actions as are required (x) to cause the Stock Plans to terminate as of the Effective Time, (y) to 34 cause the provisions in any other Benefit Plan providing for the issuance, transfer or grant of any capital stock of the Company or any interest on or following the Effective Time in respect of any capital stock of the Company to be deleted as of the Effective Time, and (z) modify or cancel any award outstanding thereunder so that no shares of Company Common Stock are outstanding or are issuable under such award after the Effective Time. SECTION 5.05. INDEMNIFICATION, EXCULPATION AND INSURANCE. (a) The parties hereto agree that all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Effective Time now existing in favor of the current or former directors or officers of the Company and its Subsidiaries as provided in their respective articles of incorporation or by-laws (or similar organizational documents) shall be assumed by the Surviving Corporation in the Merger, without further action, at the Effective Time and shall survive the Merger and shall continue in full force and effect in accordance with their terms. (b) In the event that the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all its properties and assets to any person, then, and in each such case, Parent shall cause proper provision to be made so that the successors and assigns of the Surviving Corporation assume the obligations set forth in this Section 5.05. (c) For not less than six years after the Effective Time, Parent shall maintain in effect the Company's current directors' and officers' liability insurance covering each person currently covered by the Company's directors' and officers' liability insurance policy for acts or omissions occurring prior to the Effective Time on terms with respect to coverage and amounts that are no less favorable in any material respect to such directors and officers than those of such policy as in effect on the date of this Agreement; PROVIDED, HOWEVER, that (i) Parent may substitute therefor policies of a reputable insurance company the material terms of which, including coverage and amount, are no less favorable in any material respect to such directors and officers than the insurance coverage otherwise required under this Section 5.05(c) and (ii) in no event shall Parent be required to pay aggregate premiums for insurance under this Section 5.05(c) in excess of 200% of the amount of the aggregate premiums paid by the Company in respect of such coverage for the calendar year 1999; PROVIDED FURTHER, HOWEVER, that Parent shall nevertheless be obligated to provide such coverage as may be obtained for such 200% amount. (d) The provisions of this Section 5.05 are intended to be for the benefit of, and will be enforceable by, each indemnified party, his or her heirs and his or her representatives. SECTION 5.06. FEES AND EXPENSES. (a) Except as provided in Section 5.06(b), all fees and expenses incurred in connection with this Agreement, the Offer, the Merger and the other transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses, whether or not the Merger is consummated. (b) In the event that: 35 (i) (A) a Takeover Proposal shall have been made (whether to the Company, any Subsidiary thereof, the Shareholders or otherwise) or become publicly known or any person shall have publicly proposed or publicly announced an intention (whether or not conditional and whether or not withdrawn) to make a Takeover Proposal, (B) thereafter this Agreement is terminated by either Parent or the Company pursuant to Section 7.01(b)(i) and (C) within 12 months after such termination, the Company or any Subsidiary of the Company enters into any Acquisition Agreement with respect to, or otherwise consummates the transaction contemplated by, any Takeover Proposal; or (ii) this Agreement is terminated by Parent pursuant to Section 7.01(c), 7.01(d)(i) or 7.01(g) or by the Company pursuant to Section 7.01(f); then, in each case, the Company shall pay Parent a fee equal to $98,000,000 (the "TERMINATION FEE") by wire transfer of same day funds to an account designated by Parent. In the event that such payment is being made as a result of any event referred to in Section 5.06(b)(i)(C) such payment shall be made not later than the date of such event and, in the event that such payment is being made as a result of any event referred to in Section 5.06(b)(ii), such payment shall be made no later than the date of such termination (and in the case of a termination by the Company, as the condition to such termination). For purposes of Section 5.06(b)(i),"Takeover Proposal" shall have the meaning assigned to such term in Section 4.02(b), except that references to "10%" in such definition shall in each case be deemed to be references to "50%". The parties acknowledge that the agreements contained in this Section 5.06(b) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the parties would not enter into this Agreement; accordingly, if the Company fails promptly to pay any amount due pursuant to this Section 5.06(b) and, in order to obtain such payment, Parent commences a suit that results in a judgment against the Company for such amounts, the Company shall pay to Parent interest on such amount at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made. SECTION 5.07. POST-CLOSING EMPLOYEE BENEFITS. (a) GENERALLY. Following the Closing Date, and allowing for such period of time thereafter as may be administratively advisable in order to effect the transition from the Benefit Plans, Parent shall provide, or cause to be provided, the employees of the Surviving Corporation and its Subsidiaries with employee benefits (other than bonuses and severance benefits to the extent covered by subsections (b) and (c) of this Section 5.07) that are no less favorable in the aggregate than those made available by Parent to its similarly situated employees, PROVIDED that after the Closing Date, Parent shall retain the right to amend or terminate any of such benefits to the extent permitted by applicable Law and consistent with this Agreement. To the extent that service is relevant for eligibility and vesting under any retirement plan or employee benefit plan, program or arrangement established or maintained for the benefit of the employees of the Surviving Corporation and its Subsidiaries, such plan, program or arrangement shall credit such employees for service on or prior to the Closing Date with the Company or any of its Subsidiaries, except where such credit would result in a duplication of benefits or unintended windfall or with respect to any benefit where, as to similarly situated employees of Parent, only future service is taken into account. 36 (b) SEVERANCE. With respect each employee of the Company who is listed in SECTION 5.07(b)(1) OF THE COMPANY DISCLOSURE SCHEDULE (the "LEVEL 1 EMPLOYEES"), Parent shall cause the Change in Control Agreement or Severance Agreement to which such employee is a party and is in effect at the Effective Date to be honored in accordance with its terms, PROVIDED, HOWEVER, that the reference, if any, to "two times" contained in the definition of "Applicable Incentive Amount" in any Change in Control Agreement shall be disregarded. With respect to each employee of the Company who is listed IN SECTION 5.07(b)(2) OF THE COMPANY DISCLOSURE SCHEDULE (the "LEVEL 2 EMPLOYEES"), Parent shall cause each such employee whose employment is terminated by Parent or its Affiliates (or by the employee if (and only if) on account of a reduction in the employee's base pay or annual target bonus percentage under the Company's Management Incentive Plan or a relocation of the employee's primary work site of more than 40 miles) within the one year period following the Closing Date to receive over a 15 month period such percentage of such employee's annual base pay as is equal to 125% plus 100% of such employee's annual target bonus percentage. With respect to each employee of the Company who is not a Level 1 Employee or a Level 2 Employee (the "LEVEL 3 EMPLOYEES"), Parent shall cause each such employee whose employment is terminated by Parent or its Affiliates within the one year period following the Closing Date to receive severance payments equal to those payable pursuant the Company's Severance Pay Plan as in effect on the date hereof (the "SEVERANCE PLAN") and shall not exercise any retained right to amend or to terminate the Severance Pay Plan and shall not exercise any right to issue a "severance pay award" under the Severance Pay Plan for the purpose of diminishing the entitlement to these payments. For up to 12 months following a termination of employment entitling a Level 2 or Level 3 Employee to severance payments, Parent shall subsidize such employee's COBRA continuation coverage in an amount that allows such employee to continue to participate in the Company's medical program on the same basis as similarly situated active employees. Notwithstanding the foregoing, no Level 2 or Level 3 Employee shall be entitled to severance benefits if (i) such employee's employment is terminated by Parent or its Affiliates for any reason set forth in Section 3.3 of the Severance Plan or by reason of death or disability or (ii) such employee fails to execute a release of claims in favor of Parent and its Affiliates in a form that is reasonably acceptable to Parent. (c) ANNUAL BONUS AWARDS. Parent shall cause the annual bonus opportunities with respect to the Company's fiscal year ending February 3, 2001 under the Company's Management Incentive Plan and 2000 Long-Term Incentive Program to remain in place, subject to such reasonable adjustments in the performance targets as Parent determines are necessary to reflect consummation of the transactions contemplated by this Agreement. SECTION 5.08. PUBLIC ANNOUNCEMENTS. Promptly after the date hereof, Parent and the Company will develop a joint communications plan and each party will ensure that all press releases and other public statements with respect to the transactions contemplated by this Agreement shall be consistent with such joint communications plan. Parent and the Company will consult with each other before issuing any press release or otherwise making any written public statement with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such written public statement prior to such consultation, except as either party may determine is required by applicable law or by obligations pursuant to any listing agreement with any securities exchange or national trading system. The parties agree 37 that the initial press release to be issued with respect to the transactions contemplated by this Agreement shall be in the form theretofore agreed to by the parties. ARTICLE VI CONDITIONS PRECEDENT SECTION 6.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The obligation of each party to effect the Merger is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) SHAREHOLDER APPROVAL. The Shareholder Approval shall have been obtained, if required by applicable law. (b) ANTITRUST. The waiting periods (and any extension thereof) applicable to the transactions contemplated hereby under the HSR Act and any applicable foreign antitrust and competition laws shall have been terminated or shall have expired, and any necessary consents or approvals with respect to such transactions under any applicable foreign antitrust and competition laws shall have been obtained. (c) NO INJUNCTIONS OR LEGAL RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order or decree issued by any court of competent jurisdiction or other legal restraint or prohibition (collectively, "LEGAL RESTRAINTS") that has the effect of preventing the consummation of the Merger shall be in effect. (d) PURCHASE OF SHARES IN THE OFFER. Sub shall have previously accepted for payment and paid for the shares of Company Common Stock pursuant to the Offer. SECTION 6.02. CONDITIONS TO PARENT'S AND SUB'S OBLIGATIONS TO EFFECT THE MERGER. The obligation of Parent and Sub to effect the Merger will be subject to the fulfillment at or prior to the Closing Date (or such other date as may be specified below) of the additional condition that the Company shall have performed in all material respects its covenants contained in Section 1.03 of this Agreement required to be performed on or prior to the Closing Date. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER SECTION 7.01. TERMINATION. This Agreement may be terminated, and the Offer and the Merger contemplated hereby may be abandoned, at any time prior to the Effective Time whether before or after the Shareholder Approval has been obtained: (a) by mutual written consent of Parent and the Company; (b) by either Parent or the Company: 38 (i) if Sub shall not have accepted for payment any shares of Company Common Stock pursuant to the Offer prior to December 31, 2000; PROVIDED that the right to terminate this Agreement pursuant to this Section 7.01(b)(i) shall not be available to any party whose breach of this Agreement has been a principal reason the Offer has not been consummated by such date; (ii) if any Governmental Entity shall have issued an order, injunction or other decree or ruling or taken any other action (a "RESTRAINT") permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for the Company Common Stock pursuant to the Offer or the Merger and such order, injunction, decree or ruling or other action shall have become final and nonappealable; (c) by Parent, if the Company Board shall have failed to confirm the Recommendation to the Shareholders that they accept the Offer and give the Shareholder Approval within four business days after a written request by Parent that it do so if such request is made following the making of a Takeover Proposal; (d) by Parent (i) if the Company shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach, individually or in the aggregate with other such breaches, would give rise to the failure of a condition set forth in paragraph (d) or (e) of Exhibit A and has not been or is incapable of being cured by the Company within 20 business days after its receipt of written notice thereof from Parent, or (ii) if any suit, action or proceeding described in paragraph (a) of Exhibit A shall have prevailed and become final and nonappealable; (e) by the Company, if any of Parent or Sub shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement except for such failures to be true and correct that, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on Parent's or Sub's ability to consummate the transactions contemplated hereby, which breach or failure to perform has not been or is incapable of being cured by Parent within 20 business days after its receipt of written notice thereof from the Company; (f) by the Company, in accordance with Section 4.02(b), subject to compliance by the Company with the notice provisions therein and the Termination Fee provisions of Section 5.06; or (g) by Parent, if there is any material breach of the obligations set forth in Section 4.02 or (i) if the Company Board (A) withdraws or modifies in any manner adverse to Parent or Sub the Recommendation, (B) accepts, approves or recommends any Takeover Proposal or (C) resolves or publicly discloses any intention to do any of the foregoing or (ii) the Committee (A) withdraws or modifies in any manner adverse to Parent or Sub the Committee Approval, (B) approves a Takeover Proposal or (C) resolves or publicly discloses any intention to do any of the foregoing. 39 (h) EFFECT OF TERMINATION. In the event of termination of this Agreement by either the Company or Parent as provided in Section 7.01, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Parent, Sub or the Company, other than the provisions of Section 5.06, this Section 7.01 and Article VIII; PROVIDED, HOWEVER, that no such termination shall relieve any party hereto from any liability or damages resulting from a breach by such party of any of its representations, warranties or covenants set forth in this Agreement, except that payment of the Termination Fee shall be liquidated damages and shall discharge any liability of the Company relating to this Agreement other than in the case of a willful breach of any representation, warranty or covenant set forth in this Agreement. SECTION 7.02. AMENDMENT. This Agreement may be amended by the parties hereto at any time, whether before or after the Shareholder Approval has been obtained; PROVIDED that, after the purchase of shares of Company Common Stock pursuant to the Offer, no amendment shall be made which decreases the Merger Consideration and, after the Shareholder Approval has been obtained, there shall be made no amendment that by law requires further approval by the Shareholders or shareholders of the parties without the further approval of such Shareholders or shareholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Following the election or appointment of Sub's designees pursuant to Section 1.03 and prior to the Effective Time, the affirmative vote of a majority of the Independent Directors then in office shall be required by the Company to (i) amend or terminate this Agreement by the Company, (ii) exercise or waive any of the Company's rights or remedies under this Agreement or (iii) extend the time for performance of Parent and Sub's respective obligations under this Agreement. SECTION 7.03. EXTENSION; WAIVER. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions contained herein; PROVIDED that after the Shareholder Approval has been obtained, there shall be made no waiver that by law requires further approval by Shareholders or shareholders of the parties without the further approval of such Shareholders or shareholders. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure or delay by any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights nor shall any single or partial exercise by any party to this Agreement of any of its rights under this Agreement preclude any other or further exercise of such rights or any other rights under this Agreement. ARTICLE VIII GENERAL PROVISIONS SECTION 8.01. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement shall survive the Effective Time. This Section 40 8.01 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 8.02. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Parent or Sub: Pearson plc 3 Burlington Garden London W1X 1LE England Attention: General Counsel Telecopier: 44-207-411-2390 and Pearson Education, Inc. One Lake Street Upper Saddle River, New Jersey 07458 Attention: General Counsel Telecopier: 201-236-4675 with a copy to: Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Attention: Charles E. Engros, Jr. Telecopier: 212-309-6273 If to the Company: National Computer Systems, Inc. 11000 Prairie Lakes Drive Eden Prairie, Minnesota 55344 Attention: General Counsel Telecopier: 612-829-3066 with a copy to: Dorsey & Whitney LLP Pillbury Center South 220 South Sixth Street Minneapolis, Minnesota 55402 41 Attention: Michael Trucano and Jay L. Swanson Telecopier: 612-340-2868 SECTION 8.03. DEFINITIONS. (a) For purposes of this Agreement: (i) an "AFFILIATE" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; (ii) "COMPANY DISCLOSURE SCHEDULE" means the Disclosure Schedule of the Company attached to this Agreement as Schedule I. (iii) "ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or judicial actions, orders, decrees, suits, demands, demand letters, directives, claims, liens, investigations, proceedings or notices of noncompliance or violation by any Governmental Entity or other person alleging potential responsibility or liability (including potential responsibility or liability for costs of enforcement, investigation, cleanup, governmental response, removal or remediation, for natural resources damages, property damage, personal injuries or penalties or for contribution, indemnification, cost recovery, compensation or injunctive relief) arising out of, based on or related to (A) the presence, Release or threatened Release of, or exposure to, any Hazardous Materials at any location or (B) circumstances forming the basis of any violation or alleged violation of any Environmental Law or Environmental Permit. (iv) "ENVIRONMENTAL CLEAN-UP SITE" means any location which is listed or proposed for listing on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System, or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding, or investigation related to or arising from any alleged violation of any Environmental Law. (v) "ENVIRONMENTAL LAWS" means all applicable laws, rules, regulations, orders, decrees, common law, judgments or binding agreements issued, promulgated or entered into by or with any Governmental Entity relating to pollution or protection of the environment (including ambient air, surface water, groundwater, soils or subsurface strata) or protection of human health as it relates to Hazardous Materials, including laws and regulations relating to Releases or threatened Releases of Hazardous Materials or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, transport, handling of or exposure to Hazardous Materials. (vi) "ENVIRONMENTAL PERMITS" means all permits, licenses, registrations and other authorizations required under applicable Environmental Laws. (vii) "HAZARDOUS MATERIALS" means all hazardous, toxic, explosive or radioactive substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing material, polychlorinated biphenyls ("PCBS") or PCB- 42 containing materials or equipment, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. (viii) "KNOWLEDGE OF THE COMPANY", "the Company's knowledge" or any similar phrase mean the actual knowledge, after due inquiry, of the executive officers of the Company and the persons set forth on SECTION 8.04(a)(viii) OF THE COMPANY DISCLOSURE SCHEDULE, and shall not refer to the knowledge of any other Person. (ix) "MACRO AGREEMENT" means the Purchase and Sale Agreement dated January 21, 1997 between the Company and Robert E. Weathers, Dom Roguly, Raymond Funderburk, Gary Goff, Tom McGrew, The Berkus Trust dated September 17, 1993 and the Robert and Nonna Weathers, Charitable Remainder Unitrust dated January 13, 1997. (x) "MACRO SIDE LETTERS" mean the letters between the Company and the Accredited Sellers dated January 5, 2000 regarding the Contingent Debentures. (xi) "MATERIAL ADVERSE EFFECT" means any state of facts, change, development, effect, event, condition or occurrence that is materially adverse to the business, financial condition, results of operations of the Company and its Subsidiaries, taken as a whole; PROVIDED, HOWEVER, that none of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been or will be, a Material Adverse Effect: any state of facts, change, development, effect, event, condition or occurrence (i) to the extent attributable to the announcement of the Offer and the other transactions contemplated hereby or, (ii) attributable to conditions generally affecting the information services industry, the United States economy as a whole or foreign economies in any locations where the Company or any of its Subsidiaries has material operations or sales. (xii) "PARENT DISCLOSURE SCHEDULE" means the Disclosure Schedule of Parent attached to this Agreement as Schedule II. (xiii) "PERSON" or "PERSON" means an individual, corporation, partnership, joint venture, association, trust, limited liability company, Governmental Entity, unincorporated organization or other entity; (xiv) "RELEASE" means, with respect to any Hazardous Material, any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration of such Hazardous Materials into or through the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or within any building, structure, facility or fixture. (xv) a "SUBSIDIARY" of any person means any other person as to which (i) an amount of the voting securities, other voting ownership or voting partnership interests of such other person sufficient to elect at least a majority of its Board of Directors or other governing body or 50% or more of the equity interests in such other person is or are owned by such first person and its other Subsidiaries taken as a whole. 43 (b) The following terms have the meanings defined for such terms in the Sections set forth below.
TERM SECTION Acquisition Preamble Acquisition Agreement 4.02(b) Actions 4.01(b) Affiliated Group 3.01(m)(x) Articles of Merger 1.06 Benefit Plans 3.01(l) Certificate 2.01(c) Closing 1.05 Closing Date 1.05 Code 2.03(f) Committee 1.02(a) Committee Approval 1.02(a) Company Preamble Company Affiliated Group 3.01(m)(x) Company Board Preamble Company Common Stock Preamble Company Licensed Intellectual Property 3.01(n)(i) Company Owned Intellectual Property 3.01(n)(ii) Confidentiality Agreement 4.02(a) Contract 3.01(d) Dissenting Shares 2.02(a) Effective Time 1.06 ERISA 3.01(l) Exchange Act 1.01(a) Form 10-K 3.01(h) GAAP 3.01(d) Governmental Entity 3.01(d) HSR Act 5.03(a) Independent Directors 1.03 Intellectual Property 3.01(n)(i) Law 3.01(d) Legal Restraints 6.01(d) Level 1 Employees 5.07(b) Level 2 Employees 5.07(b) Level 3 Employees 5.07(b) Likely Superior Proposal 4.02(a) Material Contracts 3.01(h) MBCA Preamble Merger Preamble Merger Consideration Preamble 44 Minimum Tender Condition Exhibit A Offer Preamble Offer Documents 1.01(b) Parent Preamble Paying Agent 2.03(a) Permits 3.01(i) Post-Signing Returns 4.01(b) Proxy Statement 5.01(a) Recommendation 1.02(a) Restraint 7.01(b)(ii) Restricted Stock 3.01(c) Rights Preamble Rights Agreement Preamble Schedule TO 1.01(b) Schedule 14D-9 1.02(b) SEC 1.01(a) SEC Documents 3.01(e) Securities Act 3.01(e) Severance Plan 5.07(b) Shareholder Approval 3.01(d) Shareholders Preamble Shareholders Meeting 5.01(b) Software 3.01(n)(i) Specified Date 4.02(a) Stock Options 3.01(c) Stock Plans 3.01(c) Sub Preamble Sub Common Stock 2.01(a) Superior Proposal 4.02(a) Surviving Corporation 1.04(a) Surviving Corporation Common Stock 2.01(a) Takeover Proposal 4.02(a) Taxes 3.01(m)(x) Termination Fee 5.06(b) Third Party Software 3.01(n)(i) Year 2000 Problem 3.01(n)(vii)
SECTION 8.04. INTERPRETATION. When a reference is made in this Agreement to a Section, Schedule or subsection, such reference shall be to a Section or subsection of, or a Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words 45 "without limitation". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term "or" is not exclusive. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. Any agreement or instrument defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement or instrument as from time to time amended, modified or supplemented. References to a person are also to its permitted successors and assigns. SECTION 8.05. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 8.06. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement (a) constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement, other than the Confidentiality Agreement and (b) is not intended to confer upon any person other than the parties hereto (and their respective successors and assigns) any rights or remedies hereunder, except for the provisions of Sections 5.04, 5.05 and 5.07, which are intended for the benefit of the persons referred to therein. SECTION 8.07. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Minnesota, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 8.08. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, in whole or in part, except by operation of law, by any of the parties hereto without the prior written consent of the other parties hereto, except that Sub may assign, in its sole discretion, any of or all its rights, interests and obligations under this Agreement to Parent or to any direct or indirect wholly-owned Subsidiary of Parent, but no such assignment shall relieve Sub of any of its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. SECTION 8.09. ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Minnesota or in any Minnesota state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any court of the United States located in the State of Minnesota or of any Minnesota state court in the event any dispute arises out of this Agreement or the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (c) agrees that it will not bring any action relating to this Agreement or the 46 transactions contemplated by this Agreement in any court other than a court of the United States located in the State of Minnesota or a Minnesota state court. SECTION 8.10. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. [Signature page follows.] 47 IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. PEARSON PLC By: /s/ Marjorie Scardino --------------------- Name: Marjorie Scardino Title: Chief Executive PN ACQUISITION SUBSIDIARY INC. By: /s/ John Makinson ----------------- Name: John Makinson Title: President NATIONAL COMPUTER SYSTEMS, INC. By: /s/ Russell A. Gullotti ----------------------- Name: Russell A. Gullotti Title: Chairman, President and Chief Executive Officer SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER EXHIBIT A CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating to Sub's obligation to pay for or return tendered shares of Company Common Stock promptly after the termination or withdrawal of the Offer), to pay for any shares of Company Common Stock tendered pursuant to the Offer and may postpone the acceptance for payment or payment for any shares of Company Common Stock tendered, and, when permited by the Agreement, amend or terminate the Offer if (i) there shall not have been validly tendered and not withdrawn prior to the expiration of the Offer that number of shares of Company Common Stock which would represent at least a majority of the outstanding Company Common Stock (determined on a fully diluted basis for all outstanding stock options, convertible debentures and any other rights to acquire Company Common Stock on the date of purchase) (the "MINIMUM TENDER CONDITION"), and (ii) any requisite waiting period under the HSR Act (and any extension thereof) applicable to the purchase of shares of Company Common Stock pursuant to the Offer or to the Merger and any other requisite waiting periods under any other applicable material competition, merger, control, antitrust or similar law or regulation shall not have been terminated or shall not have expired. Furthermore, notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject as aforesaid, to pay for any shares of Company Common Stock not theretofore accepted for payment or paid for, and, subject to this Agreement, may terminate or amend the Offer, immediately prior to the applicable expiration of the Offer, if any of the following conditions exists: (a) there shall be pending or formally threatened in writing any suit, action or proceeding by any Governmental Entity having a reasonable likelihood of success on the merits (i) challenging the acquisition by Parent or Sub of any shares of Company Common Stock, seeking to restrain or prohibit consummation of the Offer or the Merger, or seeking to place limitations on the ownership of shares of Company Common Stock (or shares of common stock of the Surviving Corporation) by Parent or Sub, (ii) seeking to prohibit or limit the ownership or operation by the Company or Parent and their respective Subsidiaries of any material portion of the business or assets of the Company or Parent and their respective Subsidiaries taken as a whole, or to compel the Company or Parent and their respective Subsidiaries to dispose of or hold separate any material portion of the business or assets of the Company or Parent and their respective Subsidiaries taken as a whole, as a result of the Offer, the Merger or any of the other transactions contemplated by this Agreement, (iii) seeking to prohibit Parent or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company or Parent and Subsidiaries taken as a whole, or (iv) which otherwise is reasonably expected to have a Material Adverse Effect; (b) any Legal Restraint that has the effect of preventing the purchase of shares of Company Common Stock pursuant to the Offer or the Merger shall be in effect; (c) except as set forth in the Company Disclosure Schedule or in the SEC Documents, since April 29, 2000, there shall have been any state of facts, change, development, effect, event, condition or occurrence that, individually or in the aggregate, constitutes or would reasonably be expected to have, a Material Adverse Effect; (d) as of the date of the consummation of the Offer, the representation and warranty of the Company contained in Section 3.01(c) of this Agreement shall not be true and correct in all material respects, or the other representations and warranties of the Company contained in this Agreement shall not be true and correct (without giving effect to any limitation as to "materiality" or Material Adverse Effect set forth therein), as if such representations and warranties were made on the date thereof except for such failures to be true and correct that, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect; (e) the Company shall have failed to perform in any material respect any material obligation required to be performed by it under this Agreement at or prior to the Specified Date; (f) Parent shall not have obtained all consents, approvals, authorizations, qualifications and orders of all Governmental Entities legally required in connection with this Agreement and the transactions contemplated by this Agreement, other than any such consents, approvals, authorizations, qualifications and orders, the failure of which to obtain, individually and in the aggregate, would not reasonably be expected to have a Material Adverse Effect; (g) this Agreement shall have been terminated in accordance with its terms; (h) (i) the Company Board shall have (A) withdrawn or modified or changed, in any manner adverse to Parent or Sub, the Recommendation, (B) accepted, approved or recommended any Takeover Proposal, or (C) resolved or publicly disclosed any intention to do any of the foregoing or (ii) the Committee shall have (A) withdrawn or modified in any manner adverse to Parent or Sub, the Committee Approval, (B) approved a Takeover Proposal or (C) resolved or publicly disclosed any intention to do any of the foregoing; or (i) there shall have occurred (i) any general suspension of trading in or on the NASDAQ National Market or the London Stock Exchange in excess of 24 hours (other than a shortening of trading hours or any coordinated trading halt triggered solely as a result of a specified increase or decrease in a market index or a trading halt resulting from physical damage or interference with such market or exchange not related to market conditions), (ii) a decline of at least 25% in all of the Dow Jones Average of Industrial Stocks, the Standard & Poor's 500 Index and the Financial Times-Stock Exchange All Shares Index measured from the date hereof to the date on which the Offer has expired, (iii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or the United Kingdom, (iv) the imposition of any limitation (whether or not mandatory) by any government or Governmental Entity that materially adversely affects the extension of credit by banks or other lending institutions or (v) a commencement of a war or armed hostilities or any other national or international calamity directly or indirectly involving the United States or the United Kingdom; which, in the sole discretion of Sub or Parent, in any such case, and regardless of the circumstances giving rise to any such condition (including any action or inaction by Parent or any of its Affiliates), makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Sub and Parent and may be asserted by Sub or Parent regardless of the circumstances giving rise to such condition or may be waived by Sub and Parent in whole or in part at any time and from time to time in their sole discretion. The failure by Parent, Sub or any other Affiliate of Parent 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 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 terms in this Exhibit A that are defined in the attached merger agreement have the meanings set forth therein. EX-10.3 14 ex-10_3.txt EXHIBIT 10.3 Exhibit 10.3 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER Amendment No. 1 to Agreement and Plan of Merger, dated as of August 4, 2000 (this "AMENDMENT"), to the Agreement and Plan of Merger, dated as of July 30, 2000 (the "MERGER AGREEMENT") among Pearson plc, a public limited company registered in England and Wales, PN Acquisition Subsidiary Inc., a Minnesota corporation and National Computer Systems, Inc., a Minnesota corporation. WHEREAS, the parties desire to amend the Merger Agreement in certain respects. NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION 1. AMENDMENTS TO MERGER AGREEMENT. (a) The third sentence of Section 1.01(a) of the Merger Agreement is hereby deleted in its entirety and replaced with: "The initial expiration date of the Offer shall be the 23rd business day following the date on which the Offer is commenced." (b) Clause (C) of Section 1.01(a) of the Merger Agreement shall be deleted in its entirety and replaced with: "(C) extend the Offer for an aggregate period of not more than 17 business days beyond the initial expiration date of the Offer to the extent required by Parent to enable Parent and Sub to complete the financing of the purchase of shares of Company Common Stock tendered pursuant to the Offeror" SECTION 2. MISCELLANEOUS. Except as and to the extent expressly modified by this Amendment, the Merger Agreement (including all exhibits thereto) shall remain in full force and effect in all respects. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Minnesota. This Amendment may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. [SIGNATURE PAGE FOLLOWS.] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above by their respective officers thereunto duly authorized. PEARSON PLC By: /s/ Marjorie Scardino --------------------- Name: Marjorie Scardino Title: Chief Executive PN ACQUISITION SUBSIDIARY INC. By: /s/ Robert Dancy ---------------- Name: Robert Dancy Title: Vice President NATIONAL COMPUTER SYSTEMS, INC. By: /s/ Russell A. Gullotti ----------------------- Name: Russell A. Gullotti Title: Chairman, President and Chief Executive Officer Signature page to Amendment No. 1 to Agreement and Plan of Merger EX-10.4 15 ex-10_4.txt EXHIBIT 10.4 Exhibit 10.4 SERVICE AGREEMENT THIS AGREEMENT is made _________, _____ BETWEEN (1) PEARSON plc whose registered office is at 3 Burlington Gardens, London, W1X 1LE ("Pearson"); and (2) PEARSON INC., a Delaware Corporation whose executive office is at 30 Rockefeller Plaza, 50th Floor, New York, NY 10112-5095 ("the Company"); and (3) _______________________________________________________________________ ____________. IT IS AGREED as follows:- 1. DEFINITIONS In this Agreement: (a) "Group Company" means any of (i) Pearson and (ii) any subsidiary or associate for the time being of Pearson and these shall have the meanings attributed to them under the Companies Act 1985 or any amending legislation thereafter; (b) "Effective Date" means ______________; (c) "the Board" means the board of directors of Pearson; (d) "the Employment" means the employment established by this Agreement; (e) "the Remuneration means the Remuneration Committee Committee" of the board of directors of Pearson. 2. EMPLOYMENT 2.1 The Company shall employ the Executive and the Executive shall serve Pearson with the title of 2.2 The Employment may be terminated by the Executive giving to the Company not less than 6 months' written notice and by the Company giving to the Executive not less than 12 months' written notice. -1- 3. DUTIES 3.1 The Executive shall report to _______________ of Pearson on his conduct of the business or affairs of Pearson providing such explanations as may be required in connection therewith. 3.2 The Executive shall perform such duties as may from time to time be assigned to him by or under the authority of the Board and shall comply with all reasonable directions made by or under the authority of the Board. The Executive may be required in pursuance of his Employment to be engaged not only on work on behalf of Pearson but also on work on behalf of any other Group Company. 3.3 During the Employment the Executive shall well and faithfully serve Pearson and use his utmost endeavours to promote its interests, and shall devote such of his time, attention and abilities to the affairs of any Group Company on behalf of which he may be required to be engaged hereunder, as shall be necessary. 3.4 The Executive shall at all times conduct business in an ethical manner as approved by Pearson and shall abide by all internal rules and regulations which Pearson may issue from time to time to its employees. 3.5 The Executive shall, if called upon to do so and without any further remuneration other than is herein mentioned, perform his duties hereunder either at the offices of Pearson plc or at the offices of any other Group Company inside the United Kingdom as Pearson may in its reasonable discretion from time to time require. 4. SALARY 4.1 The Executive's salary during the Employment shall be (pound)_______ per annum payable monthly in arrears by credit transfer directly into the Executive's bank account on the 27th day of each month or the last preceding working day. This salary shall be inclusive of any fees payable to the Executive either as a director of a Group Company or any other company or otherwise arising by virtue of the Employment and shall be deemed to accrue from day to day. 4.2 The Executive's salary will be reviewed by the Remuneration Committee annually on 1st January, commencing 1st January, _____. 5. BONUS 5.1 The Executive shall participate in the Pearson executive bonus plan in its present form or as subsequently amended and approved by the Remuneration Committee from time to time. As at the Effective Date, the maximum bonus payable is 50% of salary. 6. LONG-TERM INCENTIVE PLANS 6.1 The Executive shall be eligible to participate in such long-term incentive plans as Pearson may establish subject to the rules applicable to such plans or as -2- amended or varied from time to time at the direction of the Remuneration Committee. 7. EXPENSES 7.1 Pearson (or another Group Company) shall reimburse the Executive any reasonable travelling, hotel, entertainment and other out-of-pocket expenses properly and necessarily incurred by him on or about the performance of his duties under this Agreement in accordance with the relevant rules of Pearson from the time being in force and provided that he provides reasonable evidence of his expenditure to Pearson. 8. HOLIDAYS 8.1 The Executive shall be entitled in each calendar year to 26 working days holiday with full salary (in addition to statutory holidays) to be taken at such reasonable time or times as may be approved by the Managing Director of Pearson. The entitlement to holiday and, on termination of the Employment, holiday pay in lieu of holiday shall accrue pro rata throughout each calendar year of the Employment. 9. TERMINATION 9.1 The Employment may be terminated by either party by notice given in accordance with clause 2.2 or the Company may, at its sole discretion, terminate the Employment forthwith at any time by paying salary and any other entitlements accruing to the Executive in lieu of any required period of notice or part thereof. 9.2 Notwithstanding the other provisions of this Agreement, the Company shall be entitled to terminate the Employment forthwith (but without prejudice to the rights and remedies of the Company for any breach of this Agreement and to the Executive's continuing obligations under sub-clause 9.5 and clause 10) in any of the following cases, namely:- (a) if the Executive is guilty of dishonesty or serious or persistent misconduct, in all cases whether or not in connection with or referable to the Employment; or (b) if the Executive becomes bankrupt or has a receiving order made against him or makes any general composition with his creditors. In the event of the Employment being terminated by the Company pursuant to this sub-clause 9.2, the Executive shall not be entitled to receive any payment from the Company in respect of any part of his annual holiday entitlement hereunder which he may not have taken prior to the date of such termination, nor to receive any other payment from the Company except in respect of salary and bonus accrued to the date of such termination. 9.3 Without prejudice to any rights or remedies available to the Executive under the general law in relation to any breach by the Company of this Agreement it is -3- understood and agreed that if the Company commits any material breach of the provisions of this Agreement, the Executive shall be entitled to treat himself as discharged from further performance of the Agreement. For the purposes of this clause 9.3, material breach shall include:- (a) the termination by the Company of the Agreement other than in accordance with clause 9.2 or 9.4; (b) the failure by the Company to provide work for the Executive which is consistent with the duties described in clause 3.1. 9.4 If the Executive (owing to illness or otherwise) becomes unable to perform his duties hereunder for a period or periods totalling six calendar months in any period of twelve consecutive calendar months, the Company shall (without prejudice to any other provisions hereof) be entitled by written notice to the Executive (given at the expiry of such period or periods or at any time thereafter during such inability):- (a) to terminate the Employment forthwith; or (b) to suspend or reduce any bonus payable under clause 5 with effect from the date of such notice (or such later date as may be specified in such notice) and for so long as such illness or disability shall continue. 9.5 Upon termination of the Employment the Executive shall deliver to Pearson all books, documents, papers, materials, credit cards and other property relating to the business of or belonging to Pearson (or any other Group Company) which may then be in his possession or under his power or control. 9.6 If the Company terminates this Agreement forthwith or by notice otherwise than in accordance with clause 9.1 or 9.4 and in circumstances where the Executive has grounds for making a contractual claim for damages against the Company the Company shall reimburse any reasonable legal costs incurred by the Executive in connection either with the pursuit of a successful claim against the Company in respect of such action by the Company or with any negotiation and settlement of such a claim, subject to the Company's maximum liability under this clause 9.6 not exceeding (pound)15,000. 10. RESTRAINT ON ACTIVITIES OF EXECUTIVE 10.1 During the period of Employment, the Executive shall not (without Pearson's prior written consent, which will not be unreasonably withheld in the case of an engagement, concern or interest which is not of a similar nature to nor competitive with the business of Pearson or any Group Company and which does not require the Executive's time or attention during Pearson's normal working hours) be directly or indirectly engaged or interested in any capacity in any other business, trade or occupation whatsoever otherwise than in the performance of his duties hereunder. -4- 10.2 The Executive shall keep secret and shall not at any time (whether during the Employment or after the termination of the Employment) use for his own or another's advantage, or reveal to any person, firm, company or organisation, and shall use his best endeavours to prevent the publication or disclosure of, any of the trade secrets, business methods, computer systems or information which the Executive knew or ought reasonably to have known to be confidential concerning the business or affairs of (i) Pearson, or (ii) any other Group Company, (iii) any joint venture in which it or they may participate or (iv) any of its or their customers, so far as they shall have come to his knowledge during the Employment. The restrictions contained in this clause shall not apply:- (a) to any disclosure or use authorised by the Board or required by law or by the Employment; or (b) so as to prevent the Executive from using his own personal skill in any business in which he may be lawfully engaged (subject to sub-clause 10.6 below) after the Employment is ended. 10.3 None of the restrictions in this clause 10 shall prevent the Executive from having an interest (as defined by the provisions of the Companies Act 1985) in any securities (such term to include any stocks, shares and debentures) unless they are securities to which both conditions (a) and (b) below apply, namely:- (a) the company which issued the securities carries on, or is the holding company of a company carrying on, a business which is similar to or competitive with any business for the time being carried on by the Company or any Group Company; and (b) the securities were acquired at a cost greater than (pound)50,000 and are not listed or quoted on a Stock Exchange (excluding, for the avoidance of doubt, the Unlisted Securities Market or any over-the-counter market) or, if they are so listed or quoted, they exceed 3 per cent in nominal value or (in the case of securities not having a nominal value) in number of a class of securities which are so listed or quoted. 10.4 For a period of 6 months after termination of the Employment, the Executive shall not endeavour (whether on his own account or for any other person, firm, company or organisation) to entice away from Pearson or any other Group Company situated in the United Kingdom or elsewhere, any employee employed in an executive capacity at the date of termination of the Employment or at any time within a period of six months prior to that date and with whom the Executive has worked or with whom he has had personal contact as part of the Employment. 10.5 For a period of 6 months after termination of the Employment, the Executive shall not directly or indirectly (and whether on his own account or for any other person, firm, company or organisation) solicit or endeavour to entice away from Pearson, or any other Group Company any person, firm, company or organisation who or which in the preceding 12 months shall have been a customer of or in the habit -5- of dealing with (i) Pearson, or (ii) any other Group Company, and with whom the Executive has had direct dealings or personal contact as part of the Employment, so as to harm the goodwill of Pearson or any other Group Company or so as to compete with Pearson or any other Group Company. 10.6 For a period of 6 months after termination of the Employment, the Executive shall not be engaged or interested (whether as principal, servant, agent, consultant or otherwise) in any trade or business in which the Executive has been involved or with which the Executive has been concerned as part of the Employment and which is similar to, and by virtue of its location competes with, any trade or business being carried on at the date of termination of the Employment by (i) Pearson or (ii) any other Group Company. 10.7 The covenants given by the Executive in this clause 10 are given by the Executive to Pearson on its own behalf and as agent for each of the other Group Companies. 10.8 The Executive shall not, at any time after termination of the Employment for whatever reason, represent himself as being in any way connected with the business of the Company or that of any other Group Company. 11. INTELLECTUAL PROPERTY 11.1 The Executive shall not, during the Employment use intellectual property to which any former employer or third party has or may have an interest and the Executive agrees to indemnify Pearson in respect of any breach of this provision. 11.2 Any discovery, invention, improvement, design or other copyright work discovered, invented, developed or devised by the Executive during the Employment (and whether or not in conjunction with a third party) relating to the business of Pearson or any other Group Company, or capable of being used or adapted for use by Pearson (or any other Group Company), shall be disclosed to Pearson and, subject to such rights as the Executive may have under the Patents Act 1977, shall belong to and be the absolute property of Pearson or the relevant Group Company. 11.3 The Executive hereby assigns to Pearson or the relevant Group Company all rights in the works referred to in 11.1 above free of charge. 11.4 The Executive will at the expense of Pearson (whether during or after cessation of the Employment) apply for and execute all such documents as may be necessary to vest all rights, title and interest in the works referred to in 11.2 above in Pearson or the relevant Group Company absolutely. 11.5 The Executive irrevocably appoints Pearson to nominate an attorney in the Executive's name and on his behalf, to execute any documents and generally to act and use the Executive's name for the purpose of giving the Company or any other Group Company the full benefit of the provisions of this clause 11. -6- 12. MISCELLANEOUS 12.1 This Agreement and the Schedule hereto constitute the entire agreement and understanding between the parties as to its subject matter and the Executive acknowledges that he has not entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set out in this Agreement or referred to in this Agreement as forming part of the contract of employment of the Executive. 12.2 The various provisions of this Agreement are severable and if any provision is held to be invalid or unenforceable by any court of competent jurisdiction then such invalidity or unenforceability shall not affect the remaining provisions of this Agreement. 12.3 Notices by either party shall be given in writing and may be delivered personally or sent by letter addressed to the other party at its registered office for the time being or the last known address. Any such notice given by letter shall be deemed to have been given at the time at which the letter would be delivered in the ordinary course of post if sent by post and on the date of delivery if delivered personally. 12.4 Any reference in this Agreement to an Act of Parliament shall be deemed to include any statutory modification or re-enactment thereof whenever made. The headings shall be disregarded in construing this Agreement. 12.5 The Schedule hereto forms an integral part of this Agreement. AS WITNESS whereof the parties have hereunto set their hands the day and year first before written. -7- THE SCHEDULE Particulars of Terms of Employment In accordance with the Employment Protection (Consolidation) Act 1978 the following terms of the Employment apply from the Effective Date as provided in the Agreement:- (a) JOB TITLE See clause 2.1 (b) SALARY See clause 4. (c) HOURS OF WORK The Executive shall work such hours as may be necessary or appropriate from time to time to carry out his duties properly and effectively. (d) HOLIDAYS See clause 8. (e) COMPANY CAR The Company will provide the Executive with a company car, the type and model to be agreed by the Managing Director of Pearson, within limits established by the Remuneration Committee. (f) SICKNESS OR INJURY If the Executive is absent from work because of illness or injury his salary will continue to be paid for at least 180 days in any one calendar year subject to submission of a doctor's or self-certification certificate for each period of absence. The Company reserves the right to seek a separate medical report from the Company's doctor at any time. If absence exceeds 180 days (or if shorter periods of absence in total exceed 180 days) within any period of a calendar year, the Company will consider whether or not circumstances justify the continued payment of salary in whole or in part. If the Executive is totally incapacitated, his salary will continue to be paid by the Company for the first six months of his absence. All the foregoing is subject to clause 9.4. (g) MEDICAL INSURANCE The Company will provide free family coverage for the Executive under the Pearson Group Health Care Scheme. Coverage will be continued into retirement. (h) PENSION AND LIFE ASSURANCE The Executive will be eligible to join the Pearson Group Pension Plan, details of which -8- will be advised separately, together with any special arrangements which may apply. (i) NOTICE See clauses 2.2 and 9.1. (j) DISCIPLINARY PROCEDURES The Executive will be subject to the disciplinary procedures of the Company in force from time to time, save in so far as they are modified by clause 9.2. The attention of the Executive is drawn to the fact that as a director of Pearson he is subject to such terms and conditions contained in the articles of association of Pearson as are applicable to directors and to the duties and obligations placed on him by the UK Companies Acts and other legislation and also, where appropriate, Stock Exchange regulations, including rules governing share dealings by directors and other employees adopted by the Board (the "Rules"), a copy of which has been handed to the Executive. The Executive may neither buy nor sell shares or loan stock of Pearson without first receiving clearance from another director in accordance with the Rules. The Executive may also neither buy nor sell securities of any other company the market price of which, as a result of unpublished information obtained by him by virtue of his employment with Pearson or the Company, he believes may be affected by action of Pearson or any of its subsidiaries. These restrictions are equally applicable to dealings by the Executive's spouse, children under the age of eighteen and other connected persons. The attention of the Executive is drawn to the further restrictions on "insider dealing" contained in the Criminal Justice Act 1993 in relation to the shares and loan stock of Pearson which apply throughout his employment and six months thereafter. (k) GRIEVANCE PROCEDURE If the Executive has a grievance in connection with his employment he should raise the matter in the first instance with the Managing Director of Pearson. -9- SIGNED by ) for and on behalf of Pearson ) plc, in the presence of:- ) SIGNED by ) for and on behalf of Pearson Inc. ) in the presence of:- ) SIGNED by ) in the presence of:- ) -10- EX-21 16 ex-21.txt EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES
NAME COUNTRY OF INCORPORATION PERCENTAGE INTEREST/ /RESIDENCE VOTING POWER ---------------------------------- --------------------------- Pearson Inc............................. United States 100 Pearson AG ............................. Switzerland 100 Whitehall Electric Investments Limited .............................. England and Wales 100 Whitehall Trust ........................ England and Wales 100 Rycade Capital Corporation Inc.......... United States 100 Financial Times Limited................. England and Wales 100 FT Group Limited........................ England and Wales 100 Prentice Hall Inc....................... United States 100 Pearson Business Services Inc........... United States 100 Data Broadcasting Corporation........... United States 60
EX-23.1 17 ex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 [LETTERHEAD OF PRICEWATERHOUSECOOPERS] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in the Registration Statement on Form F-1 of Pearson plc., of our report which is dated 6 March 2000, except for the information presented in Notes 31 and 34 for which the date is 12 May 2000, relating to the consolidated financial statements of Pearson plc, which are included in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers PricewaterhouseCoopers London, England 7 August 2000 -----END PRIVACY-ENHANCED MESSAGE-----