-----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, OYaIF+vGThVLQe3z1w4+0tWtc8SxhaiXbwVmbEIYdzuj7fsET5SWUEAshFKXcyOy olVKIk9cfnxF1z4CqsHTEw== 0001156973-04-000604.txt : 20040507 0001156973-04-000604.hdr.sgml : 20040507 20040507135924 ACCESSION NUMBER: 0001156973-04-000604 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEARSON PLC CENTRAL INDEX KEY: 0000938323 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-16055 FILM NUMBER: 04788306 BUSINESS ADDRESS: STREET 1: 3 BURLINGTON GARDENS STREET 2: BANK OF NEW YORK CITY: LONDON ENGLAND STATE: X0 ZIP: W1X 1LE BUSINESS PHONE: 4420744120 MAIL ADDRESS: STREET 1: 3 BURLINGTON GARDENS CITY: LONDON ENGLAND STATE: X0 ZIP: W1X 1LE 20-F 1 u47265e20vf.txt FORM 20-F AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 2004 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission file number 1-16055 PEARSON PLC (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ENGLAND AND WALES (JURISDICTION OF INCORPORATION OR ORGANIZATION) 80 STRAND LONDON, ENGLAND WC2R 0RL (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Securities registered or to be registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- --------------------- *Ordinary Shares, 25p par value New York Stock Exchange American Depositary Shares, each Representing One Ordinary Share, 25p per Ordinary Share New York Stock Exchange
--------------------- * Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC. --------------------- Securities registered or to be registered pursuant to Section 12(g) of the Act: None --------------------- Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None --------------------- Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock at the close of the period covered by the annual report: Ordinary Shares, 25p par value.............................. 802,388,000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 X Item 18 ___ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- Introduction.................................... iii Forward-Looking Statements...................... iii PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.................................................. 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.......... 1 ITEM 3. KEY INFORMATION.................................. 1 Selected Consolidated Financial Data............ 1 Dividend Information............................ 3 Exchange Rate Information....................... 4 Risk Factors.................................... 4 ITEM 4. INFORMATION ON THE COMPANY....................... 6 Pearson......................................... 6 Overview of Operating Divisions................. 6 Our Strategy.................................... 6 Operating Divisions............................. 7 Pearson Education.......................... 7 The FT Group............................... 8 The Penguin Group.......................... 10 Competition..................................... 11 Intellectual Property........................... 11 Raw Materials................................... 11 Government Regulation........................... 11 Licenses, Patents and Contracts................. 12 Recent Developments............................. 12 Organizational Structure........................ 12 Property, Plant and Equipment................... 12 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..... 13 General Overview................................ 14 Results of Operations........................... 19 Liquidity and Capital Resources................. 32 Accounting Principles........................... 34 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....... 36 Directors and Senior Management................. 36 Compensation of Senior Management............... 38 Share Options of Senior Management.............. 43 Share Ownership of Senior Management............ 46 Employee Share Ownership Plans.................. 46 Board Practices................................. 47 Employees....................................... 47 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................................. 48 ITEM 8. FINANCIAL INFORMATION............................ 48 Legal Proceedings............................... 48 ITEM 9. THE OFFER AND LISTING............................ 49 ITEM 10. ADDITIONAL INFORMATION........................... 49 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 57 Introduction.................................... 57 Interest Rates.................................. 58 Currency Exchange Rates......................... 58
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PAGE ---- Forward Foreign Exchange Contracts.............. 58 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES................................................ 59 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................. 60 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS............................... 60 ITEM 15. CONTROLS AND PROCEDURES.......................... 60 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.................. 60 ITEM 16B. CODE OF ETHICS.................................... 60 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES............ 60 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES................................................ 61 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES...................................... 61 PART III ITEM 17. FINANCIAL STATEMENTS............................. 62 ITEM 18. FINANCIAL STATEMENTS............................. 62 ITEM 19. EXHIBITS......................................... 62
ii INTRODUCTION In this Annual Report on Form 20-F (the "Annual Report") references to "Pearson" or the "Group" are references to Pearson plc, its predecessors and its consolidated subsidiaries, except as the context otherwise requires. "Ordinary Shares" refer to the ordinary share capital of Pearson of par value 25p each. "ADSs" refer to American Depositary Shares which are Ordinary Shares deposited pursuant to the Deposit Agreement dated March 21, 1995, amended and restated as of August 8, 2000 among Pearson, The Bank of New York as depositary (the "Depositary") and owners and holders of ADSs (the "Deposit Agreement"). ADSs are represented by American Depositary Receipts ("ADRs") delivered by the Depositary under the terms of the Deposit Agreement. We have prepared the financial information contained in this Annual Report in accordance with generally accepted accounting principles in the United Kingdom, or UK GAAP, which differs in certain significant respects from generally accepted accounting principles in the United States, or US GAAP. We describe these differences in "Item 5. Operating and Financial Review and Prospects -- Accounting Principles", and in Note 34 to our consolidated financial statements included in "Item 17. Financial Statements" of this Annual Report. Unless we indicate otherwise, any reference in this Annual Report to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report. We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this Annual Report: - references to "sterling", "pounds", "pence" or "L" are to the lawful currency of the United Kingdom, - references to "euro" or "E" are to the euro, the lawful currency of the participating Member States in the Third Stage of the European Economic and Monetary Union of the Treaty Establishing the European Commission, and - references to "US dollars", "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 = $1.78, 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 December 31, 2003. We do not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. FORWARD-LOOKING STATEMENTS You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled "Item 3. Key Information -- Risk Factors", "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects", 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, - funding needs and financing resources, - expected financial position, - market risk, - currency risk, - US federal and state spending patterns, iii - 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 "Item 3. Key Information -- Risk Factors", which may cause actual events 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. iv PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION SELECTED CONSOLIDATED FINANCIAL DATA The table below shows selected consolidated financial data for each of the years in the five-year period ended December 31, 2003. The selected consolidated profit and loss account data for the years ended December 31, 2003, 2002 and 2001 and the selected consolidated balance sheet data as at December 31, 2003 and 2002 have been derived from our consolidated financial statements included in "Item 17. Financial Statements" in this Annual Report, which have been audited by PricewaterhouseCoopers LLP, independent auditors. The selected consolidated profit and loss account data for the years ended December 31, 2000 and 1999, and the selected consolidated balance sheet data as at December 31, 2001, 2000 and 1999 have been derived from our audited consolidated financial statements for those periods and as of those dates, which are not included in this Annual Report. Our consolidated financial statements have been prepared in accordance with UK GAAP, which differs from US GAAP in certain significant respects. See "Item 5. Operating and Financial Review and Prospects -- Accounting Principles" and Note 34 to our consolidated financial statements. The consolidated financial statements contain a reconciliation to US GAAP of profit/loss for the financial year, shareholders' funds and certain other financial data. The selected consolidated financial information should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations. 1 For convenience, we have translated the 2003 amounts into US dollars at the rate of L1.00 = $1.78, the noon buying rate in The City of New York on December 31, 2003.
YEAR ENDED DECEMBER 31 ------------------------------------------------------- 2003 2003 2002 2001 2000 1999 ------ ----- ------- ------- ----- ----- $ L L L L L (IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS) UK GAAP INFORMATION: CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA STATUTORY MEASURES Total sales............................ 7,205 4,048 4,320 4,225 3,874 3,332 Total sales from continuing operations(1)........................ 7,205 4,048 4,320 4,225 3,689 2,977 Profit/(loss) after taxation........... 137 77 (89) (403) 173 341 Profit/(loss) for the financial year... 98 55 (111) (423) 174 335 Total operating profit/(loss).......... 402 226 143 (47) 209 330 Basic earnings/(loss) per equity share(2)............................. 12.3C 6.9P (13.9)p (53.2)p 23.9p 49.0p Diluted earnings/(loss) per equity share(3)............................. 12.3C 6.9P (13.9)p (53.2)p 23.4p 48.3p CONSOLIDATED BALANCE SHEET DATA Total assets (Fixed assets plus Current assets).............................. 11,383 6,395 6,852 8,241 8,990 5,529 Net assets............................. 5,602 3,147 3,530 3,973 4,398 1,527 Long-term obligations(4)............... 2,401 1,349 1,737 2,616 2,715 2,286 Capital stock.......................... 358 201 200 200 199 153 Number of equity shares outstanding (millions of ordinary shares)........ 802 802 802 801 798 613
YEAR ENDED DECEMBER 31 --------------------------------------------------------- 2003 2003 2002 2001 2000 1999 ------ ------ ------ -------- ------ ----- $ L L L L L (IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS) US GAAP INFORMATION(5): Profit/(loss) for the financial year(6)............................. 326 183 198 (1,500) 1,362 198 Profit/(loss) from continuing operations for the financial year (1)................................. 331 186 257 (475) (30) 177 (Loss)/profit from discontinued operations(1)....................... -- -- (37) (40) 1,403 21 Loss on disposal of discontinued operations(1)....................... (5) (3) (1) (985) -- -- Basic earnings/(loss) per equity share............................... 40.9C 23.0P 24.9p (188.6)p 187.2p 28.9p Diluted earnings/(loss) per equity share(3)............................ 40.9C 23.0P 24.9p (188.6)p 185.0p 28.7p Basic earnings/(loss) from continuing operations per equity share(1)...... 41.7C 23.4P 32.3p (59.7)p (4.1)p 25.8p Diluted earnings/(loss) from continuing operations per equity shares(1)(3)........................ 41.7C 23.4P 32.3p (59.7)p (4.1)p 25.6p Basic (loss)/earnings per share from discontinued operations(1).......... (0.7)C (0.4)P (4.8)p (128.9)p 192.8p 3.1p Diluted (loss)/earnings per share from discontinued operations(1).......... (0.7)C (0.4)P (4.8)p (128.9)p 190.6p 3.1p Total assets.......................... 11,358 6,381 6,767 8,280 10,066 6,104 Shareholders' funds................... 5,967 3,352 3,708 4,155 6,018 2,615
- --------------- (1) Discontinued operations under UK GAAP comprise the results of the RTL Group for 2002, 2001 and 2000. Before the formation in July 2000 of the RTL Group, in which Pearson had an equity interest, Pearson's television operations were wholly owned subsidiaries. Discontinued operations under US GAAP comprise the results of the Forum Corporation for 2003 and both the Forum Corporation and the RTL Group for 2002, 2001 and 2000. 2 (2) Basic earnings/loss per equity share is based on profit/loss for the financial period and the weighted average number of ordinary shares in issue during the period. (3) Diluted earnings/loss per equity share is based on diluted earnings/loss for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings/loss comprise earnings/loss 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. Under UK GAAP in 2002 and 2001 the Group made a retained loss for the financial year, consequently the effect of share options is anti-dilutive and there is no difference between the basic loss per share and the diluted loss per share. (4) 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. (5) See Note 34 to the consolidated financial statements included in this Annual Report entitled "Summary of principal differences between United Kingdom and United States of America generally accepted accounting principles". (6) The loss of L1,500 million in 2001, profit of L1,362 million in 2000 and profit of L198 million in 1999 are after charging goodwill amortization of L527 million, L288 million and L171 million respectively. Since 2002, goodwill has no longer been subject to amortization under US GAAP. See Note 34 in "Item 17. Financial Statements." The 2002 profit also incorporates a post-tax charge of L21 million in respect of the cumulative effect of a change in accounting principle. See Note 34 in "Item 17. Financial Statements." DIVIDEND INFORMATION 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 July or August of each year to be paid in October or 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 May or June, subject to shareholders' approval at our annual general meeting. At our annual general meeting on April 30, 2004 our shareholders approved a final dividend of 14.8p per ordinary share for the year ended December 31, 2003. 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. The final dividend for the 2003 fiscal year will be paid in May 2004.
FISCAL YEAR INTERIM FINAL TOTAL INTERIM FINAL TOTAL - ----------- -------- ------ ------ -------- ------ ------ (PENCE PER ORDINARY SHARE) (CENTS PER ORDINARY SHARE) 2003......................................... 9.4 14.8 24.2 16.7 26.4 43.1 2002......................................... 9.1 14.3 23.4 14.7 23.0 37.7 2001......................................... 8.7 13.6 22.3 12.6 19.7 32.3 2000......................................... 8.2 13.2 21.4 13.3 18.7 32.0 1999......................................... 7.7 12.4 20.1 12.6 18.7 31.3
Future dividends will be dependent on our future earnings, financial condition and cash flow, as well as other factors affecting us. 3 EXCHANGE RATE INFORMATION The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in 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. On December 31, 2003, the noon buying rate for sterling was L1.00 = $1.78.
MONTH HIGH LOW - ----- ----- ----- April 2004.................................................. $1.86 $1.77 March 2004.................................................. $1.87 $1.79 February 2004............................................... $1.90 $1.82 January 2004................................................ $1.85 $1.79 December 2003............................................... $1.78 $1.72 November 2003............................................... $1.72 $1.67
YEAR ENDED DECEMBER 31 AVERAGE RATE - ---------------------- ------------ 2003........................................................ $1.63 2002........................................................ $1.51 2001........................................................ $1.45 2000........................................................ $1.52 1999........................................................ $1.62
RISK FACTORS You should carefully consider the risk factors described below, as well as the other information included in this Annual Report. Our business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that we presently cannot identify. 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 delivered through a variety of media, including newspapers, books and the internet. 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 United States and the United Kingdom, 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. 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 and book publishing businesses operate in highly competitive markets. These markets continue to change in response to technological innovations and other factors. In recent years, some of the markets in which we operate have experienced significant consolidation. Further consolidation could place us at a competitive disadvantage with respect to scale, resources and our ability to develop and exploit new media technologies. 4 WE MAY NOT BE ABLE TO ACHIEVE CONTINUED GROWTH IN OUR OPERATIONS OR STRENGTHEN OUR FINANCIAL POSITION DUE TO ECONOMIC AND POLITICAL FORCES BEYOND OUR CONTROL. Political and economic factors beyond our control can inhibit the growth of our operations or weaken our financial position. These factors include a significant weakening of the global advertising environment, particularly in financial advertising, US state and federal government spending patterns for educational materials, the US economy and heightened political tensions affecting the United Kingdom and the United States, foreign currency exchange rate risks, trade protection measures, tax and regulatory or other economic conditions. In particular, during 2003, the ongoing weak advertising environment caused by a general decline in corporate earnings and an uncertain economic environment resulted in a continuing decline in advertising revenue. For additional information about this decline, please see "Operating and Financial Review and Prospects -- Results of Operations -- Year ended December 31, 2003 compared to year ended December 31, 2002", pages 19 - 25. The deterioration in the fiscal position of many US states, due to the recent weak economic environment, has resulted in expenditure reductions as the US states attempt to eliminate projected fiscal deficits for 2004 and beyond. There is a risk that any further expenditure cuts in education will lead to either delayed adoptions or lower expenditure on our textbooks or testing services. While we believe our education businesses will benefit from various US federal education programs including the "No Child Left Behind" initiative, reduced expenditures by US states for educational materials could adversely affect the financial performance of Pearson Education. WE OPERATE IN MARKETS WHICH ARE DEPENDENT ON INFORMATION TECHNOLOGY SYSTEMS AND TECHNOLOGICAL CHANGE. All our businesses, to a greater or lesser extent, are dependent on technology either as a provider of software or internet services or as a user of complex information technology systems and products to support our business activities, particularly in back-office processing and infrastructure. We face several technological risks associated with software product development in our educational businesses, Information Technology security (including virus and hacker attacks), e-commerce, Enterprise Resource Planning system implementations and upgrades and business continuity in the event of a major disaster in a key data center. WE OPERATE IN SEVERAL MARKETS WITH RISKS WHICH ARE INHERENTLY GREATER THAN OUR PUBLISHING AND NEWSPAPER BUSINESS AND WHICH, IF UNMANAGED, COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS AND POTENTIALLY DAMAGE OUR REPUTATION. With the previous acquisition and continued growth of Pearson NCS and our acquisition of London Qualifications in 2003, we have moved into new markets and products, some of which are inherently riskier than our traditional publishing and newspaper businesses. Where larger contracts are involved, this may result in our risk profile becoming more concentrated on certain key contracts. Within Pearson NCS, Pearson Government Solutions provides outsourcing services to the US government and other third parties. Services range from call center operations to complete administrative functions. Contract values vary significantly, from a few million to several hundred million pounds sterling over the term of the contract, which typically run for three to five years in length. As in any long-term contracting business, there are inherent risks associated with the bidding process, operational performance, contract compliance (including penalty clauses), indemnification (if available) and contract re-bidding. Substantially all US Government contracts are subject to audit after completion by the contracting government entity, and audits can result in delays in payment and, in certain circumstances, reductions in the payment received by a supplier. An inherent risk in our schools testing and assessment business is a student grading failure due to control breakdown in our testing and assessment products and processes. 5 WE GENERATE A SUBSTANTIAL PROPORTION OF OUR REVENUE IN FOREIGN CURRENCIES, PARTICULARLY THE US DOLLAR, AND FOREIGN EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR EARNINGS. We generate a substantial proportion of our revenue in US dollars (65% in 2003). Our earnings could be materially and adversely affected by foreign exchange rate fluctuations, particularly if the value of the US dollar continues to decline compared to sterling. We estimate that a five cent change in the average exchange rate between the US dollar and sterling during any year could affect our earnings per share by approximately 1 pence. ITEM 4. INFORMATION ON THE COMPANY PEARSON Pearson is a global publishing company with its principal operations in the education, business information and consumer publishing markets. We have significant operations in the United States, where we generate over 65% of our revenues, and in the United Kingdom and continental Europe. 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 and internet services. We increasingly offer services as well as content, from test processing to training. Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company and re-registered as a public limited company in 1981. We conduct our operations primarily through our subsidiaries and other affiliates. Our principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 (0) 20 7010 2000). OVERVIEW OF OPERATING DIVISIONS Although our businesses increasingly share markets, brands, processes and facilities, they break down into three core operations: PEARSON EDUCATION is a global leader in educational publishing and services. We are a leading international publisher of textbooks, supplementary materials and electronic education programs for elementary and secondary school, higher education and business and professional markets worldwide. We also play a major role in the testing and certification of school students and professionals, mainly in the US but increasingly in the UK. 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 both in newspaper and internet formats. THE PENGUIN GROUP is one of the premier English language publishers in the world, with brand imprints such as Penguin, Putnam, Berkley, Viking and Dorling Kindersley ("DK"). We publish an extensive portfolio of fiction, non-fiction, reference and illustrated works. We publish the works of many authors, including Maeve Binchy, Tom Clancy, Patricia Cornwell, Nick Hornby, Jamie Oliver, Nora Roberts and Amy Tan. OUR STRATEGY Since 1998 we have reshaped Pearson by divesting a range of non-core interests and investing over $7 billion in education, consumer publishing and business information companies. Today our portfolio transformation is largely complete and each one of our businesses aims to benefit from educating, informing and entertaining people in an increasingly knowledge-based economy. Our strategy is: - to focus on businesses which provide "education" in the broadest sense of the word. - to provide a combination of publishing, both in print and online, and related services that make our publishing more valuable and take us into new, faster-growing markets. 6 - to continue to invest in the growth of our businesses, including: - extending our lead in education publishing, investing in new programs for students in School and Higher Education and in testing and software services that help educators to personalise the learning process, both in the US and around the world; - developing our fast-growing contracting businesses, which provide testing and other services to corporations and government agencies; - building the international reach of the Financial Times -- both in print through its four editions worldwide and online through FT.com -- and enhancing the market positions of our network of national business newspapers around the world; and - growing our position in consumer publishing, balancing our investment across our stable of best-selling authors, new talent and our own home-grown content. - to foster a collaborative culture which facilitates greater productivity and innovation by sharing processes, costs, technology, talent and assets across our business. - to capitalize on the growth prospects in our markets and on our leaner operations to improve profits, cash flows and returns on invested capital. 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. With federal and state governments under pressure to measure academic progress against clear objective standards, the market for educational testing services in the United States has grown significantly. Pearson Assessments & Testing enables us to combine testing and assessment with our traditional educational curriculum services and products to form one of the world's leading integrated education companies. Pearson Assessments & Testing provides the entire spectrum of educational services -- from educational curriculum to testing and assessment to data management. We report Pearson Education's performance along the lines of the three markets it serves: School, Higher Education and Professional. In 2003, Pearson Education had sales of L2,451 million or 61% of Pearson's total sales (64% in 2002). School In the United States, our School business includes publishing, testing and software operations. Outside of the United States, we have a growing English Language Teaching business and we also publish school materials in local languages in a number of countries. In the US we publish for kindergarten through 12th grade, with a comprehensive range of textbooks, supplementary materials and electronic education programs. Pearson Education's premier elementary school imprint, Pearson Scott Foresman, and premier secondary school imprint, Pearson Prentice Hall, publish high quality programs covering subjects such as reading, literature, math, science and social studies. We also publish supplementary teaching aids for both elementary and secondary schools and teacher-written activity books. We are a leading publisher in online assessment and digital courseware through Pearson Education Technologies and the Waterford Early Reading Program. Through LessonLab, we provide professional development for teachers in kindergarten through 12th grade with the use of the latest technologies and software tools to improve classroom teaching. Pearson's Assessments & Testing operations make us a leading player in the markets for test processing and scoring and the provision of enterprise software solutions to schools. We score and process some 40 million student tests across the United States every year. 7 With over 90% of education spending for kindergarten through 12th grade in the United States financed at the state or local level, the School division's major customers are state education boards and local school districts. In the United States, 20 states, which account for over 50% of the total kindergarten through 12th grade US school population of some 53 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. At present our open territory state revenues exceed those from adoption states, although we anticipate a more even split in 2005 due to the stronger adoption calendar. Higher Education Pearson Education is the United States' largest publisher of textbooks and related course materials for colleges and universities based on sales. We publish across all of the main fields of study with imprints such as Pearson Prentice Hall, Pearson Addison Wesley, Pearson Allyn & Bacon and Pearson Benjamin Cummings. Our sales force markets primarily to college professors, who choose the texts to be purchased by their students. Over 1,330 of Pearson Education's college textbooks have an interactive companion website with online study guides to reinforce text concepts, chat rooms and bulletin boards to facilitate interaction between students and faculty. An increasing number of our programs incorporate online course management systems that provide a powerful set of easy-to-use tools that allow professors to create sophisticated web-based courses. In addition, our custom publishing business works with professors to produce textbooks specifically adapted for their particular course. Professional We publish text, reference, and interactive products for IT industry professionals, graphics and design users of all types, and consumers interested in software applications and certification, professional business books, and strategy guides for those who use PC and console games. Publishing imprints in this area include Addison Wesley Professional, Prentice Hall PTR, and Cisco Press (our three high end imprints), Peachpit Press and New Riders Press (our graphics and design imprints), Que/Sams (consumer and professional imprint), Prentice Hall Financial Times (professional business imprint) and BradyGames (software game guides imprint). We also generate revenues through our own website -- InformIt. We also provide services to professional markets. We manage significant commercial contracts to implement and execute qualification and assessment systems for individual professions, including IT professionals and nurses. Our Government Solutions group manages and processes student loan applications on behalf of the US Department of Education and has a number of education, testing-related contracts with various government departments. We also provide a range of data collection and management services, including the sale of scanners, to a wide range of customers. We also provide corporate training courses to professionals. In 2003, our professional testing business entered into two significant contracts. In November 2003, we were awarded a seven-year contract with the Driving Standards Agency (DSA) of Great Britain and the Driver Vehicle Testing Agency (DVTA) of Northern Ireland. Pearson Assessments & Testing will administer and process the results of the driving theory section of the driving licence examination, beginning in September 2004. Candidates will take the computerized theory test at more than 150 examination centers throughout England, Scotland, Wales and Northern Ireland. In December 2003, we were selected as the prime contractor for a seven-year contract to develop and administer the Graduate Management Admission Test (GMAT) worldwide. Commencing in January 2006, the GMAT will be available at more than 400 Pearson test centers in 96 countries. THE FT GROUP The FT Group, one of the world's leading business information companies, aims to provide a broad range of business information, analysis and services to an audience of internationally-minded business people. In 2003, the FT Group had sales of L757 million, or 19% of Pearson's total sales (17% in 2002). The FT Group's business is 8 global, producing a combination of news, data, comment, analysis and context. In addition to professional and business consumers, individuals worldwide are demanding such strategic business information. We believe that the FT Group is well positioned to supply information and benefit from these trends. The Financial Times Newspaper The Financial Times is a leading international daily business newspaper. Its average daily circulation of 447,552 copies in December 2003, as reported by the Audit Bureau of Circulation, gives the Financial Times the second largest circulation of any English language business daily in the world. The Financial Times derived approximately 65% of its revenue in 2003 from advertising and approximately 35% from circulation. The geographic distribution of the Financial Times average daily circulation in 2003 was: United Kingdom/Republic of Ireland.......................... 31% Continental Europe, Africa and Middle East.................. 32% Americas.................................................... 30% Asia........................................................ 7%
The Financial Times is printed on contract in 21 cities around the world and our sales mix is becoming increasingly international. The newspaper draws upon an extensive network of international correspondents to produce unique, informative and timely business information. 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. The Financial Times is distributed through independent newsagents and direct delivery to homes and institutions. The FT seeks to make its content available both in print and online, through FT.com, its internet service, and sales of electronic content to third parties. FT.com charges subscribers to access detailed industry news, comment and analysis, whilst providing general news and market data to a wider audience. The business earns revenues by selling content directly, selling advertising and through its subscription program. At the end of January 2004, FT.com had 74,000 paying subscribers. According to figures independently audited by ABCE, the site has 3.5 million unique monthly users and 58.8 million page views. Financial Times Publishing Our other business publishing interests include France's leading business newspaper, Les Echos with circulation of 116,400 and lesechos.fr, its internet service. FT Business produces specialist information on the retail, personal and institutional finance industries and publishes the UK's premier personal finance magazine, Investors Chronicle, together with Money Management, Financial Advisor and The Banker for professional advisers and financial sector professionals. Recoletos We own a 79% stake in Recoletos, a publicly quoted Spanish media group that we built with its Spanish founding shareholders over several years. Recoletos' publishing businesses in Spain, Portugal and Latin America include Marca, a leading sports newspaper for the region with an average daily circulation of 391,000 in 2003, Expansion, Spain's leading business newspaper and website, Actualidad Economica, a weekly business magazine, and Telva, a monthly women's magazine. Recoletos is also developing its internet activities as it seeks to extend the reach of its print-based products. Interactive Data Corporation Through our 61% interest in Interactive Data Corporation ("Interactive Data"), we are one of the world's leading global providers of financial and business information to financial institutions and retail investors. Interactive Data supplies time-sensitive pricing, dividend, corporate action, and descriptive information for more than 3.5 million securities traded around the world, including hard-to-value instruments. Customers subscribe to Interactive Data's services and use the company's analytical tools in support of their trading, analysis, portfolio 9 management, and valuation activities. In February 2003, Interactive Data acquired S&P ComStock, Inc. ("ComStock") from The McGraw-Hill Companies, Inc., allowing us to provide real-time information regarding securities traded around the world to our institutional clients. Joint Ventures and Associates The FT Group also has a number of other associates and joint ventures, including: A 50% interest in FT Deutschland, launched in February 2000, in partnership with Gruner + Jahr, is our German language newspaper with a fully integrated online business news, analysis and data service. Its circulation grew by 9% in 2003 to 92,000 copies. A 50% interest in The Economist Group, which publishes the world's leading weekly business and current affairs magazine. A 50% interest in FTSE International, a joint venture with the London Stock Exchange, which, among other things, publishes the FTSE index. A 32% interest in MarketWatch.com, Inc., a publicly traded financial media company. In early 2004, our shareholding was reduced to 23% following MarketWatch's issuance of shares to acquire Pinnacor Inc. A 33% interest in Vedomosti, a leading Russian business newspaper and a partnership venture with Dow Jones and Independent Media. A 50% interest in Business Day and Financial Mail, publishers of South Africa's leading financial newspaper and magazine. THE PENGUIN GROUP Penguin is one of the premier English language publishers in the world. We publish an extensive backlist and frontlist of titles, including some of 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 publish 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 consumer publishers, based upon sales, in all major English speaking markets -- the United States, the United Kingdom, Australia, New Zealand, Canada, India and South Africa. Penguin publishes under many imprints including, in the adult market, Allen Lane, Avery, Berkley Books, Dorling Kindersley, Dutton, Hamish Hamilton, Michael Joseph, Plume, Putnam, Riverhead and Viking. Our leading children's imprints include Puffin, Ladybird, Warne and Grosset & Dunlap. In 2003, Penguin's US imprints placed 110 titles on The New York Times bestseller list. In the United Kingdom, 60 Penguin titles featured on the Nielsen Bookscan top fifteen bestseller list. Our illustrated reference business, Dorling Kindersley, or DK, is the leading global publisher of high quality illustrated reference books. DK has built a unique graphic style that is now recognized around the world. It produces books for children and adults covering a huge variety of subjects including childcare, health, gardening, food and wine, travel, business and sports. Not only does DK's "lexigraphic" design approach make its books easily translatable across cultures, but it has also formed the basis of a library of 2.5 million wholly-owned images which have many applications -- in print or online. In 2003, Penguin had sales of L840 million representing 21% of Pearson's total sales (19% in 2002). Revenues are balanced between frontlist and backlist titles, reducing 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, and acting as a book distributor for a number of smaller publishing houses. 10 We sell directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. We also sell online through third parties such as Amazon.com. The Penguin Group's gateway internet site, Penguin.com, provides access to its focused websites in the United States, Canada, United Kingdom and Australia. Websites have also been developed to target certain niche audiences. For example, Penguinclassics.com has an entire online service for the classics, with anthologies, original essays, interviews and discussions and links to other classics sites. During 2004, we intend to launch three new imprints in the United States, Penguin Press and Sentinel and a new teenage imprint, Razorbill. 2004 will also see us trial a US direct to consumer sales channel, expected to launch in the final quarter. Penguin TV was incorporated into the Penguin Group during 2003, created from the former Pearson Broadband Television Group. Penguin TV will specialize in two areas: factual, non-fiction documentary programming and children's programming. COMPETITION All of Pearson's businesses operate in highly competitive environments. Pearson Education competes with other publishers and creators of educational materials and services. These companies include some small niche players and some large international companies, such as McGraw-Hill, Reed Elsevier, Houghton Mifflin and Thomson. Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the school boards, educators and government officials making purchasing decisions. The FT Group's newspapers and magazines compete with newspapers and other information sources, such as The Wall Street Journal, by offering timely and expert journalism. It 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 efficiency of its cost base is also a competitive factor. The Penguin Group competes with other publishers of fiction and non-fiction books. Principal competitors include Random House and HarperCollins. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers. Our scale is also a source of competitive strength. INTELLECTUAL PROPERTY Our principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly the Financial Times and the various imprints of Penguin and Pearson Education, as well as all copyrights in our content and our patents held in the testing business in the name of Pearson NCS. We believe we have taken all appropriate available legal steps to protect our intellectual property in all relevant jurisdictions. RAW MATERIALS Paper is the principal raw material 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 United States. 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. In the event of a sharp increase in paper prices, we have a number of alternatives to minimize the impact on our operating margins, including modifying the grades of paper used in production. 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 11 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 us. 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. LICENSES, PATENTS AND CONTRACTS We are not dependent upon any particular licenses, patents or new manufacturing processes that are material to our business or profitability. Likewise, we are not materially dependent upon any contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature. RECENT DEVELOPMENTS In February 2003, Interactive Data completed its acquisition of ComStock from The McGraw-Hill Companies for $116 million in cash. ComStock focuses on providing real-time information to institutional customers by providing coverage for over 1.8 million securities in virtually all asset classes traded worldwide. In May 2003, we announced an agreement with Edexcel to modernize examination marking and processing in the UK. London Qualifications was formed to take responsibility for all Edexcel's courses and Higher Education qualifications including GCSEs, GCE A and AS levels, GNVQs, NVQs and BTEC Higher national certificates and diplomas. We own 75% of London Qualifications with the Edexcel Foundation owning the remaining 25%. In December 2003, we filed an application with the Indian government seeking approval for a 13.7% investment in Business Standard, a leading Indian business newspaper. Approval is still pending but is expected to be received in the first half of 2004. ORGANIZATIONAL STRUCTURE Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates 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.
PERCENTAGE NAME COUNTRY OF INCORPORATION/ RESIDENCE INTEREST/ VOTING POWER - ---- ----------------------------------- ---------------------- PEARSON EDUCATION Pearson Education Inc. ...................... United States (Delaware) 100% Pearson Education Ltd. ...................... England and Wales 100% NCS Pearson Inc. ............................ United States (Minnesota) 100% FT GROUP The Financial Times Limited.................. England and Wales 100% Financial Times Business Ltd. ............... England and Wales 100% Interactive Data Corporation................. United States (Delaware) 61% Recoletos Grupo de Comunicacion SA........... Spain 79% Les Echos SA................................. France 100% THE PENGUIN GROUP Penguin Group (USA) Inc. .................... United States (Delaware) 100% The Penguin Publishing Co Ltd. .............. England and Wales 100% Dorling Kindersley Holdings Ltd. ............ England and Wales 100%
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 United Kingdom and the United States. 12 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, USA 510,000 Warehouse.................................... LaPorte, Indianapolis, USA(1) 437,000 Warehouse.................................... Kirkwood, New York, USA 409,000 Offices...................................... Iowa City, Iowa, USA 310,000 Offices...................................... Old Tappan, New Jersey, USA 211,900 Warehouse/office............................. Cedar Rapids, Iowa, USA 205,000 Offices...................................... Reading, Massachusetts, USA(1) 158,527 Offices...................................... London, UK 152,986 Printing/Processing.......................... Owatonna, Minnesota, USA 128,000 Printing/Processing.......................... Columbia, Pennsylvania, USA 121,400 Offices...................................... Eagan, Minnesota, USA 109,500 Offices...................................... Mesa, Arizona, USA 96,000
- --------------- (1) Held for sale. We lease the following principal properties:
GENERAL USE OF PROPERTY LOCATION AREA IN SQUARE FEET - ----------------------- -------- ------------------- Warehouses/Offices........................... Lebanon, Indiana, USA 1,091,400 Warehouse/Offices............................ Cranbury, New Jersey, USA 886,700 Warehouse.................................... Indianapolis, Indiana, USA 737,850 Warehouse/Offices............................ Rugby, UK 476,000 Offices...................................... Upper Saddle River, New Jersey, USA 474,801 Offices...................................... Hudson St., New York, USA 302,000 Offices...................................... London, UK 273,000 Warehouse/Offices............................ Austin, Texas, USA 226,100 Warehouse.................................... Scoresby, Victoria, Australia 215,280 Offices...................................... Bloomington, Minnesota, USA 151,056 Offices...................................... Parsippany, New Jersey, USA 143,800 Offices...................................... Avenue of the Americas, New York, USA 101,000 Offices...................................... Harlow, UK 98,000 Offices...................................... Bedford, Massachusetts, USA 80,348 Offices...................................... Madrid, Spain 72,839 Offices...................................... Camberwell, Victoria, Australia 52,656
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 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 Annual Report. The financial statements have been prepared in accordance with UK GAAP, which differs in certain significant respects from US GAAP. Note 34 to our consolidated financial statements, included in "Item 17. 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. 13 GENERAL OVERVIEW INTRODUCTION Sales declined from L4,320 million in 2002 to L4,048 million in 2003, a decrease of 6%. Increased sales in the book businesses could not offset the absence of the one-off Transportation Security Administration, or TSA, contract to recruit 64,000 security personnel for US airports, which contributed over L250 million to sales in 2002. This contract was awarded in March 2002 and was substantially completed by the end of 2002. Sales were also adversely affected by adverse trading conditions for the advertising and technology-related businesses. The impact of the sales decline was offset by cost reductions and, together with a reduced charge for goodwill amortization, this resulted in a 58% increase in operating profit from L143 million in 2002 to L226 million in 2003. A L152 million profit before taxation in 2003 compares to a loss before taxation of L25 million in 2002. The increase of L177 million reflects the improved operating profit performance of L83 million, a reduction in losses on sale of businesses and investments of L43 million and a fall in net finance costs of L51 million. The improved operating profit was mainly driven by the reduced charge for goodwill amortization and the absence of any goodwill impairments in 2003. The goodwill amortization charge fell by L66 million in 2003 mainly due to Family Education Network and our investment in Marketwatch.com, where the final amortization charges were incurred in the first half of 2003. Losses on the sale of businesses and investments in 2002, principally on the sale of the Forum business, were not repeated in 2003 and finance costs benefited from the reduction in average net debt and a general fall in interest rates. Net finance costs also fell in 2003 compared to 2002 as the previous year charge included L37 million for cancellation of certain swap contracts and the early repayment of debt following the re-balancing of the Group's debt portfolio on the receipt of proceeds from the RTL disposal at the start of that year. Net cash inflow from operating activities declined from L529 million in 2002 to L359 million in 2003. Two significant factors adversely affected an otherwise improved performance. Penguin's publishing schedule was particularly concentrated in the fourth quarter, pushing collections into 2004, and the TSA has not yet paid $151 million relating to 2002 sales. We are discussing the post-contract audit and payment with the TSA. We expect this process to be completed in 2004, and that we will receive payment of this outstanding amount, although the timing of the receipt remains uncertain. Capital expenditure was held below depreciation in 2003 and, on an average basis excluding the effect of the TSA contract, the use of working capital improved slightly from 2002. Cash spend on interest and tax reduced by L76 million from 2002. Cash outflow on acquisitions net of disposal proceeds was L11 million and, after dividends paid of L188 million and a favorable currency movement of L117 million, overall net borrowings (excluding finance leases) fell 3% from L1,408 million at the end of 2002 to L1,361 million at the end of 2003. OUTLOOK In 2004, we expect to make further progress in improving our earnings per share, cash flow and return on invested capital at constant 2003 exchange rates. At this stage the outlook for our major businesses is as follows: Pearson Education Revenues at Pearson Education's School business are expected to be broadly in line with 2003, as growth in testing and digital learning offset lower sales in US school publishing. School business publishing margins are expected to decline by 1 to 2 percentage points but progress is expected elsewhere in the School business. We are continuing to invest in our programs in key subjects and in 2005, based on the current state adoption schedule, we expect revenues at our School business to grow significantly with a margin recovery. Full implementation of No Child Left Behind from 2005 and improving state budgets in the US should benefit our testing and digital learning business. In 2004, we expect our US Higher Education sales to grow in the 4% to 6% range, gaining share with a strong publishing schedule, our online services and custom publishing. We expect our Professional businesses to show sales and profit growth in 2004, even as we invest in our new professional testing centers. 14 FT Group Advertising trends at our business newspapers have shown improvement in the first few months of 2004 with the rate of decline slowing. Forward bookings are running a little ahead of the comparative period in 2003 at all our business newspapers. Although the outlook for our business newspapers remains uncertain, we expect the cost actions we have taken to reduce the losses at the Financial Times in 2004 even without an advertising recovery. Recoletos has reported a pick-up in advertising revenues in April, following the impact of the Madrid bombings in March, and announced the launch of a network of Spanish-language newspapers in the United States. We expect Interactive Data to deliver another strong performance. The Penguin Group Penguin faces tough sales and profit comparisons after another record year in 2003, but we expect to grow faster than the consumer publishing market with another strong publishing schedule. In 2004, Penguin will increase investment in its publishing and in initiatives to reach new readers. We expect Penguin to deliver a good cash performance, even though its publishing schedule will again be concentrated in the fourth quarter. SALES INFORMATION BY OPERATING DIVISION The following table shows sales information for each of the past three years by operating division:
YEAR ENDED DECEMBER 31 ----------------------- 2003 2002 2001 ----- ----- ----- LM LM LM Pearson Education........................................... 2,451 2,756 2,604 FT Group.................................................... 757 726 801 The Penguin Group........................................... 840 838 820 ----- ----- ----- TOTAL....................................................... 4,048 4,320 4,225 ===== ===== =====
SALES INFORMATION BY GEOGRAPHIC MARKET SUPPLIED The following table shows sales information for each of the past three years by geographic region:
YEAR ENDED DECEMBER 31 ----------------------- 2003 2002 2001 ----- ----- ----- LM LM LM United Kingdom.............................................. 474 411 433 Continental Europe.......................................... 463 419 446 North America............................................... 2,742 3,139 2,975 Asia Pacific................................................ 255 249 241 Rest of World............................................... 114 102 130 ----- ----- ----- TOTAL....................................................... 4,048 4,320 4,225 ===== ===== =====
EXCHANGE RATE FLUCTUATIONS We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was $1.63 in 2003, $1.51 in 2002 and $1.44 in 2001. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. The Group generates approximately 65% of its sales in US dollars and a five cent change in the average exchange rate for the full year has an impact of approximately 1 pence on earnings per share. See "Item 11. Quantitative and Qualitative Disclosures About Market Risk" for more information. 15 CRITICAL ACCOUNTING POLICIES Our consolidated financial statements, included in Item 17. "Financial Statements", are prepared based on the accounting policies described in Note 1 to the consolidated financial statements which are in conformity with UK GAAP, which differs in certain significant respects from US GAAP. The preparation of our consolidated financial statements in conformity with UK GAAP, and the reconciliation of these financial statements to US GAAP as described in Note 34, requires management to make estimates and assumptions that affect the carrying value of assets and liabilities at the date of the consolidated financial statements and the reported amount of sales and expenses during the periods reported in these financial statements. Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. We believe that the following are our more critical accounting policies used in the preparation of our consolidated financial statements that could have a significant impact on our future consolidated results of operations, financial position and cash flows. Actual results could differ from estimates. Revenue Recognition Sales represent the amount of goods or services, net of value added tax and other sales taxes, and excluding any trade discounts and anticipated returns, provided to external customers and associates. Circulation and advertising revenue is recognized when the newspaper or other publication is published. Subscription revenue is recognized on a straight-line basis over the life of the subscription. Revenue from the sale of books is recognized when the goods are shipped, when persuasive evidence of an arrangement exists, when the fee is fixed and determinable, and when collectibility is probable. A provision for sales returns is made so as to allocate these returns to the same period as the original sales are recorded. The returns provision is an estimate based on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be under or over stated for a particular period. Revenue from long-term service contracts, such as contracts to process qualifying tests for individual professions and government departments, is recognized over the contract term as the services are delivered. The assumptions, risks, and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Losses on long-term services contracts are recognized in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. Changes in conditions may result in revisions to estimated costs and earnings during the course of the contract and the cumulative impact of such revisions are reflected in the accounting period in which the facts that require the revision became known. On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue. Pre-publication Costs Pre-publication costs represent direct costs incurred in the development of titles prior to their publication. Some of these pre-publication costs are expensed as incurred. Where the title has a useful life in excess of one year these costs are carried forward in stock. The costs are then amortized over estimated useful lives of five years or less, commencing upon publication of the title, with a higher proportion of the amortization taken in the earlier years to match the sales profile of the products. The assessment of useful life and the calculation of amortization involve a significant amount of estimation and management judgment, as management must estimate the sales cycle and life of a particular title. The overstatement of useful lives could result in excess amounts being carried forward in stock that would otherwise have been written off to the profit and loss account in an earlier period. Reviews are performed regularly to estimate recoverability of pre-publication costs. 16 Royalty Advances Advances of royalties to authors are included within debtors when the advance is paid less any provision required to bring the amount down to its net realizable value. The royalty advance is expensed at the contracted royalty rate as the related revenues are earned. The realizable value of royalty advances held within debtors is regularly reviewed by reference to anticipated future sales of books or subsidiary publishing rights but still relies on a degree of management judgment in determining the profitability of individual author contracts. If the estimated realizable value of author contracts is overstated then this will have an adverse effect on operating profits, as these excess amounts will be written-off. Defined Benefit Pensions The pension cost of the Group's defined benefit pension schemes, principally the UK-based scheme, is charged to the profit and loss account in order to apportion the cost of pensions over the service lives of the employees in the schemes. The determination of the pension costs, as well as the pension assets and obligation, depend on the selection of certain assumptions, which include the discount rate, expected long-term rate of return on scheme assets, and salary inflation rates, used by the actuaries to calculate such amounts. These assumptions are described in further detail in Note 10 to the consolidated financial statements. Although we believe the assumptions are appropriate, differences arising from actual experience or future changes in assumptions may materially affect the pensions costs recorded in the profit and loss accounts. In particular, a reduction in the realized long-term rate of return on scheme assets and a further reduction to the discount rates will result in higher pension costs in future periods. Deferred Tax Deferred tax assets and liabilities require management judgment in determining the amounts to be recognized, and in particular, the extent to which deferred tax assets can be recognized. Under Financial Reporting Standard 19 Deferred Tax, the UK generally accepted accounting principle which we adopted in 2002, we recognize a deferred tax asset in respect of tax losses and other timing differences. We recognize deferred tax assets to the extent that they are recoverable, based on the probability that there will be future taxable income against which these tax losses and other timing differences may be utilized. We regularly review our deferred tax assets to ensure that they are recoverable and have exercised significant judgments when considering the timing and level of future taxable income, our business plans and any future tax planning strategies in our assessment of recoverability. If a deferred tax asset is not considered recoverable, a valuation allowance is recorded to the extent that recoverability is not deemed probable. Amortization and Impairment of Goodwill In accordance with UK GAAP, capitalized goodwill is amortized over its estimated useful life, not exceeding 20 years. The 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. The estimated useful lives ascribed to goodwill range from 3 to 20 years. Goodwill relating to acquisitions in the more established book publishing businesses is typically written off over 20 years while goodwill relating to less established businesses, for example internet-related businesses, where there is no consistent record of profitability, are being written off over 3 to 5 years. The charge for goodwill amortization is a significant item in arriving at our operating profit in the financial statements, and the estimation of useful life can therefore have a material effect on the results. Under US GAAP, we ceased amortization of goodwill in 2002 and test goodwill for impairment at least annually. Under UK GAAP, the carrying value of 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 whereas under US GAAP it is tested at least annually. Changes in circumstances resulting in a more frequent impairment review may include, but are not limited to, a significant change in the extent or manner in which acquired assets are being used to support the business, continued operating losses and projection of future losses associated with the use of assets or businesses acquired, 17 significant changes in legal or regulatory environments affecting the use and value of the assets, and adverse economic or industry trends. If the carrying value of assets is deemed not recoverable, we will determine the measurement of any impairment charge on anticipated discounted future cash flows. Significant assumptions are selected by management which impact the calculation of the anticipated future cash flows, with the most critical assumptions being discount rates, the period utilized for the cash flows, and terminal values. Discount rates are generally based on our Group cost of capital adjusted for any inherent risk associated with the specific business. Terminal values incorporate management's estimate of the future life cycle of the business and of the cash flow for the period determined. Although we believe our assumptions to be appropriate, actual results may be materially different and changes to our assumptions and estimates may result in a materially different valuation of the assets. Our cash flow assumptions underlying these projections are also consistent with management's operating and strategic plans for these businesses. Under UK GAAP, impairments of goodwill will be evaluated on a discounted cash flow basis for each acquisition, where there is a triggering event to indicate a potential impairment or where there has been a previous impairment. Impairment evaluations under US GAAP will be prepared at a reporting unit level as defined by Statement of Financial Accounting Standards ("SFAS") No. 142 and will incorporate a two-stage impairment test. It is possible that an impairment may be required under one set of accounting principles and not the other. Investments Management reviews the carrying value of investments annually and records a charge to profit if an other-than-temporary decline in the carrying value is deemed to have arisen. To assess the recoverability of the carrying value of our investments and to determine if a write-down in carrying value is other-than-temporary, we consider several factors such as the investee's ability to sustain an earnings capacity which would justify the carrying amount, the current fair value (using quoted market prices, when available), the length of time and the extent to which the fair value has been below carrying value, the financial condition and prospects of the investees, and the overall economic outlook for the industry. The evaluation of such factors involves significant management judgment and estimates in determining when a decline in value is other-than-temporary and ascribing fair value where there is no quoted market value. Changes in such estimates could have a material impact on our financial position and results of operations. UK GAAP AND US GAAP We prepare our financial statements in accordance with UK GAAP, which differs in certain significant respects from US GAAP. Our profit for the financial year ended December 31, 2003 under UK GAAP was L55 million compared with a profit of L183 million under US GAAP for the same year. The loss for the financial year ended December 31, 2002 under UK GAAP was L111 million, compared with a profit of L198 million under US GAAP for the same year. The loss for the financial year ended December 31, 2001 under UK GAAP was L423 million compared with a loss of L1,500 million under US GAAP for the same year. Equity shareholders' funds at December 31, 2003 under UK GAAP were L2,952 million compared with L3,352 million under US GAAP. Equity shareholders' funds at December 31, 2002 under UK GAAP were L3,338 million compared with L3,708 million under US GAAP. The main differences between UK GAAP and US GAAP relate to goodwill and intangible assets, acquisition and disposal adjustments, derivatives, pensions and stock based compensation. These differences are discussed in further detail under "-- Accounting Principles" and in Note 34 to the consolidated financial statements. 18 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 CONSOLIDATED RESULTS OF OPERATIONS Sales Our total sales decreased by L272 million to L4,048 million in 2003, from L4,320 million in 2002. The decrease was mainly attributable to Pearson Education's Professional business where the shortfall was due to the absence of sales from the L250 million TSA contract and the effect of foreign currency exchange. The strength of sterling compared to the US dollar had a significant negative effect on sales, and we estimate that had the 2002 average rates prevailed in 2003, sales would have been higher by L181 million. In constant exchange rate terms the School and Higher Education businesses increased sales in 2003 by 8% and 6% respectively. The School business was helped by the acquisition of 75% of London Qualifications, the UK testing business, in the first half of 2003 that contributed additional sales of L89 million. Penguin saw a small increase in sales even after the adverse effect of foreign currency movements as the schedule of new titles enabled Penguin to grow ahead of the industry despite tough conditions for backlist publishing in the US. The FT Group sales were slightly ahead of last year mainly due to Interactive Data where sales increased for the fourth consecutive year in a difficult marketplace (even after excluding additional sales generated from the acquisition of ComStock at the beginning of 2003). Our business newspapers continued to suffer from the corporate advertising recession which have seen advertising volumes at the Financial Times newspaper fall almost two-thirds since their peak in 2000. Pearson Education, our largest business sector, accounted for 61% of our sales in 2003, compared to 64% in 2002. North America continued to be the most significant source of our sales although sales in the region decreased, as a proportion of total sales, to 67% in 2003, compared to 72% in 2002. Some of this decrease, however, reflects the comparative strength of sterling and the euro compared to the US dollar. Cost of Sales and Net Operating Expenses The following table summarizes our cost of sales and net operating expenses:
YEAR ENDED DECEMBER 31 ---------------- 2003 2002 ------ ------ LM LM COST OF SALES............................................... (1,910) (2,064) ====== ====== Distribution costs.......................................... (239) (233) Administration and other expenses........................... (1,724) (1,888) Other operating income...................................... 51 59 ------ ------ NET OPERATING EXPENSES...................................... (1,912) (2,062) ====== ======
Cost of Sales. Cost of sales consists of costs for raw materials, primarily paper, production costs and royalty charges. Our cost of sales decreased by L154 million, or 7%, to L1,910 million in 2003, from L2,064 million in 2002. The decrease mainly reflected the decrease in sales over the period with overall gross margins remaining consistent. Cost of sales as a percentage of sales improved slightly to 47% in 2002 from 48% in 2002. Distribution Costs. Distribution costs consist primarily of shipping costs, postage and packing. Administration and Other Expenses. Our administration and other expenses decreased by L164 million, or 9%, to L1,724 million in 2003, from L1,888 million in 2002. Administration and other expenses as a percentage of sales decreased to 43% in 2003, from 44% in 2002. Included within administration and other expenses is the charge for goodwill amortization and impairment relating to subsidiaries. Total goodwill amortization, including that relating to associates (L7 million in 2003; L48 million in 2002) decreased by L66 million to L264 million in 2003, from L330 million in 2002. The main reason for this decrease over last year is Family Education Network 19 and our interest in Marketwatch.com, where the final amortization charges were incurred in the first half of 2003. In 2002, we also took a goodwill impairment charge of L10 million relating to a subsidiary of Recoletos in Argentina while in 2003 no impairment charges were deemed necessary. Also included in administration and other costs are the one-off costs of integrating significant recent acquisitions into our existing businesses. The last of these significant acquisitions occurred in 2000 and the final costs of integration of L10 million relating to Pearson NCS and Dorling Kindersley were incurred in 2002 with no further charges in 2003. After excluding goodwill charges and integration costs, administration and other expenses were L1,467 million in 2003 compared to L1,586 million in 2002. The improvement of L129 million includes the beneficial effect of foreign currency exchange, the results of cost saving measures taken in 2002 and 2003 and a reduced spend on internet enterprises. Other Operating Income. Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased to L51 million in 2003 from L59 million in 2002 with the decrease coming at both Pearson Education and Penguin where distribution commissions we receive for distributing third parties' books has continued to decline. Operating Profit/Loss The total operating profit in 2003 of L226 million compares to a profit of L143 million in 2002. This increase was principally due to a L76 million reduction in the total goodwill charge and the absence of integration costs. Operating profit was adversely affected by the impact of reduced profits at Pearson Education's Professional business, due to the absence of the prior year TSA contract, but this was offset by growth in School and Higher Education, Interactive Data and Penguin. In addition there were reduced losses following disposals and rationalization of the FT Knowledge business. In 2003, operating profit was adversely affected by the weakening of the US dollar against sterling. We estimate that had the 2002 average rates prevailed in 2003, operating profit before goodwill charges would have been L27 million greater. Operating profit attributable to Pearson Education increased by L31 million, or 41%, to L106 million in 2003, from L75 million in 2002. The increase was due to a L37 million reduction in goodwill amortization, a L7 million reduction in integration costs, increases in profit reported by the School and Higher Education businesses of L12 million and L6 million respectively and the cessation of losses from FT Knowledge (a L12 million loss in 2002). Offsetting these favorable variances was the sharp reduction in profits in the Professional business of L43 million caused by both the absence of the prior year contribution from the TSA contract and further current year TSA contract close-out costs. Operating profit attributable to the FT Group increased by L45 million to L50 million in 2003, from L5 million in 2002. The increase was largely due to a L39 million reduction in goodwill amortization and impairment charges. In addition a strong performance from Interactive Data was enough to offset the increased losses at the Financial Times newspaper following a continuing decline of the business advertising market. Operating profit attributable to the Penguin Group increased by L4 million, or 6%, to L70 million in 2003, from L66 million in 2002. The profit increase reflected the continued growth in sales and improved margins. In 2003, we continued to integrate our book publishing operations around the world. In Australia and Canada, the first two markets where we combined Penguin and Pearson Education into one company, profits improved with operating profit growth in double digits for both companies. In the UK, we are shortly to move to a single shared warehouse and distribution center and, in the US, we continue to consolidate back office operations. Non-operating Items Profit before taxation on the sale of fixed assets, investments, businesses and associates was L6 million in 2003 compared to a loss of L37 million in 2002. In 2003 the principal item was a profit of L12 million on the sale of an associate investment in Unedisa by Recoletos. In 2002, the principal items were a profit of L18 million relating to the completion of the sale of the RTL Group and a provision of L40 million for the loss on sale of our Forum business, which completed in January 2003. Other items in 2002 included a loss on sale of PH Direct of 20 L8m, a profit of L3 million on finalization of the sale of the Journal of Commerce by the Economist and various smaller losses on investments and property. Net Finance Costs Net finance costs consist primarily of net interest expense related to our borrowings. Our total net interest payable decreased by L51 million, or 39%, to L80 million in 2003, from L131 million in 2002. Our average net debt decreased by L157 million from L1,891 million in 2002 to L1,734 million in 2003, while our year end indebtedness (excluding finance leases) decreased to L1,361 million in 2003 compared to L1,408 million in 2002 due to foreign exchange movements. Interest decreased as a result of the lower average net debt and the effect of a general fall in interest rates during the year. The weighted average three month London Interbank Offered ("LIBOR") rate, reflecting our borrowings in US dollars, euro and sterling, fell by 75 basis points, or 0.75%. The impact of these falls was dampened by our treasury policy in 2003 of having 40-65% of net debt at fixed interest rates. As a result, our net interest rate payable averaged approximately 4.6% in 2003, improving from 5.0% in 2002. During 2002 we took an additional one-off charge of L37 million for cancellation of certain swap contracts and the early repayment of debt following the re-balancing of the Group's debt portfolio on the receipt of the RTL Group proceeds. For a more detailed discussion of our borrowings and interest expenses see "-- Liquidity and Capital Resources -- Capital Resources" and "-- Borrowing" and "Item 11. Quantitative and Qualitative Disclosures About Market Risk". Taxation The overall taxation charge for 2003 was L75 million, compared to a charge of L64 million in 2002. In 2003 the Group recorded a total pre-tax profit of L152 million and the high rate of tax came about mainly because there was only very limited tax relief available for goodwill charged in the profit and loss account. The total tax charge in 2003 also included credits of L56 million relating to prior year items; these reflect a combination of settlements with the Inland Revenue authorities and changes to deferred tax balances. In 2002 there was a total pre-tax loss of L25 million, which was also the result of only very limited tax relief available for goodwill. In 2002 there was also a tax credit of L45 million attributable to the resolution of the tax position on the disposal in 1995 of the group's remaining interest in BSkyB. Minority Interests Minority interests principally consist of the public's 39% interest in Interactive Data and 21% interest in Recoletos. Profit for the Financial Year The profit for the financial year after taxation and equity minority interests in 2003 was L55 million compared to a loss in 2002 of L111 million. The overall change of L166 million was mainly due to the reduced goodwill amortization and impairment charges and lower interest payments. There was also a profit on the sale of fixed assets, investments, businesses and associates in 2003 compared to the loss in 2002. Earnings Per Ordinary Share The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 6.9 pence in 2003 compared to a loss of 13.9 pence in 2002 based on a weighted average number of shares in issue of 794.4 million in 2003 and 796.3 million in 2002. This increase was due to the return to profit for the financial year described above and was not significantly affected by the decrease in the weighted average number of shares. In 2003 the diluted earnings per ordinary share was also 6.9 pence as the effect of dilutive share options was not significant. The Group made a loss for the financial year in 2002 and the effect of share options was therefore anti-dilutive and a diluted loss per ordinary share was shown as being equal to the basic loss of 13.9 pence. 21 Exchange Rate Fluctuations The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2003 compared to 2002. We estimate that if the 2002 average rates had prevailed in 2003, sales would have been higher by L181 million and operating profit would have been higher by L27 million. See "Item 11. Quantitative and Qualitative Disclosures About Market Risk" for a discussion regarding our management of exchange rate risks. SALES AND OPERATING PROFIT BY DIVISION The following table summarizes our operating profit and results from operations for each of Pearson's divisions. Results from operations are included as they are a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under SFAS 131. Since 1998 we have reshaped the Pearson portfolio by divesting of non-core interests and investing in educational publishing and testing, consumer publishing and business information companies. During this period of transformation management have used results from operations to track underlying core business performance. An analysis of operating profit is included in the table below:
YEAR ENDED DECEMBER 31 -------------------------- 2003 2002 ----------- ----------- LM % LM % ---- --- ---- --- OPERATING PROFIT Pearson Education........................................... 106 47 75 51 FT Group.................................................... 50 22 5 4 The Penguin Group........................................... 70 31 66 45 ---- --- ---- --- CONTINUING OPERATIONS....................................... 226 100 146 100 ==== === ==== === COMPRISED OF: GOODWILL AMORTIZATION Pearson Education........................................... (207) (244) FT Group.................................................... (36) (65) The Penguin Group........................................... (21) (18) ---- ---- CONTINUING OPERATIONS....................................... (264) (327) ==== ==== GOODWILL IMPAIRMENT Pearson Education........................................... -- -- FT Group.................................................... -- (10) The Penguin Group........................................... -- -- ---- ---- CONTINUING OPERATIONS....................................... -- (10) ==== ==== INTEGRATION COSTS Pearson Education........................................... -- (7) FT Group.................................................... -- -- The Penguin Group........................................... -- (3) ---- ---- CONTINUING OPERATIONS....................................... -- (10) ==== ==== RESULTS FROM OPERATIONS Pearson Education........................................... 313 64 326 66 FT Group.................................................... 86 17 80 16 The Penguin Group........................................... 91 19 87 18 ---- --- ---- --- CONTINUING OPERATIONS....................................... 490 100 493 100 ==== === ==== ===
- --------------- (1) Discontinued operations contributed Lnil to both operating profit and results from operations in 2003. The equivalent figures in 2002 were Lnil and a loss of L3 million respectively. See Note 2. 22 Pearson Education Pearson Education's sales decreased by L305 million, or 11%, to L2,451 million in 2003 from L2,756 million in 2002, as good growth in our School and Higher Education businesses was reduced due to the effect of the weakening US dollar and the Professional business could not fill the gap left by the absence of the TSA contract. Pearson Education's 2003 sales comprised 61% of Pearson's total sales. Results from operations decreased by L13 million or 4% from L326 million in 2002 to L313 million in 2003. The decrease can be attributed to the reduction at the Professional business caused by both the absence of the prior year contribution from the TSA contract and further TSA contract close out costs recognized this year. Offsetting this were strong performances in School and Higher Education as margins improved and the cessation of losses at FT Knowledge following disposals and reorganization of that business. The School business sales increased by L25 million, or 2%, to L1,176 million in 2003, from L1,151 million in 2002 and results from operations increased by L12 million, or 10%, to L127 million in 2003 from L115 million in 2002. Both sales and results were adversely affected by the weakening US dollar and we estimate that had 2002 average rates prevailed in 2003 then sales would have been approximately L72 million higher than reported and results from operations L8 million higher than reported. In the US our textbook publishing business grew as our Pearson Scott Foresman and Pearson Prentice Hall imprints increased revenues ahead of the overall basal market growth. Our new elementary social studies program took a market share of more than 50% in adoption states, helping Pearson to take the leading position in new adoptions with a share of approximately 29%. Sales at our supplementary publishing business were lower than in 2002 as we discontinued some unprofitable product lines and were affected by industry-wide weakness in state budgets. Although the same pressures reduced sales at our School digital learning business, strong cost management enabled it to return to a small profit in 2003. In School testing, 2003 revenues were a little ahead of 2002, and we won more than $300 million worth of new multi-year contracts which we expect will boost sales from 2005, when the US Federal Government's No Child Left Behind accountability measures become mandatory. Outside the US, the School business sales increased with good growth in English Language Teaching and in our School publishing operations in Hong Kong, South Africa, the UK and Middle East. Our 75% owned UK testing business, London Qualifications, contributed sales of L89 million following its acquisition in the first half of 2003. The Higher Education business saw a decline in sales of L3 million, to L772 million in 2003, from L775 million in 2002. Results from operations increased by L6 million, to L148 million in 2003, from L142 million in 2002. Both sales and results were adversely affected by the weakening US dollar, and we estimate that had 2002 average rates prevailed in 2003 then sales would have been approximately L49 million higher than reported and results from operations L10 million higher than reported. Though the industry growth slowed a little in 2003, we expect the long-term fundamentals of growing enrolments, a boom in community colleges and a strong demand for post-secondary qualifications to more than offset the impact of state budget weakness and rising tuition fees. Our Higher Education business also benefited from a strong schedule of first editions including Faigley's Penguin Handbook in English Composition, Wood & Wood's Mastering World Psychology and Jones & Wood's Created Equal in American History. The use of technology continues to distinguish our learning programs, with almost one million students now following their courses through our paid-for online sites, an increase of 30% on last year, and a further 1.4 million using our free online services. Our market-leading custom publishing business, which creates personalized textbook and online packages for individual professors and faculties, grew revenues by 35%, with sales exceeding $100m for the first time. Outside the US, our Higher Education imprints saw strong growth in key markets including Europe and Canada, solid local publishing and the introduction of our custom publishing model. Sales and results from operations were significantly lower in our Professional business, caused by both the absence of the prior year contribution from the TSA contract and the further current year close out costs, together with the impact of the weakening US dollar. Sales decreased by L281 million, to L503 million in 2003, from L784 million in 2002. Results from operations decreased by L43 million, to L38 million in 2003, from L81 million in 2002. The $151 million receivable previously reported as outstanding from the TSA contract remains unpaid. 23 Like many federal government contracts, this is the subject of a government audit. The audit is continuing, we are providing back-up information to support its completion, and we are in discussions with the TSA about the audit and payment. We currently expect this process to be completed in 2004, and that we will receive payment of the $151 million, although the timing of the receipt of the receivable remains uncertain. TSA apart, our Government Solutions business grew by 39%, benefiting from new contracts with the Department of Health and the USAC. The Professional Testing business, which had revenues of approximately $100 million in 2003, 51% higher than in 2002 excluding TSA, won more than $600 million of new long-term contracts. These include testing learner drivers for the UK's Driving Standards Agency, business school applicants for the Graduate Management Admissions Test and securities professionals for the National Association of Securities Dealers. In 2004 we will invest in the expansion of our international network of testing centers to support these contracts, from which we expect to generate significant revenue and profit growth from 2005. Our worldwide technology publishing operations maintained margins despite a drop in revenues. After a severe three-year technology recession, in which our publishing revenues have fallen by 36%, the rate of decline now appears to be slowing, particularly in the US. FT Group Sales at the FT Group increased L31 million or 4%, from L726 million in 2002 to L757 million in 2003 and results from operations increased by L6 million, or 8%, from L80 million in 2002 to L86 million in 2003. The main contributors to the sales increase were Interactive Data and Recoletos. Interactive Data posted a 10% sales increase despite the negative impact of exchange as it benefited from the acquisition of ComStock, in February 2003. Recoletos sales growth resulted primarily from the strength of the euro, as the reported growth in sales of 14% would have been only 4 % if the average rate for the euro in 2002 had prevailed in 2003. For our business newspapers, 2003 was the third year of a corporate advertising recession which has seen advertising volumes at the Financial Times fall almost two-thirds since their peak in 2000. To compensate for this, we have reduced the FT's cost base by more than L100 million over the same period. Results from operations at the Financial Times ("FT") decreased by L9 million over 2002 as advertising revenues fell by L23m and we invested some L10m in the newspaper's continued expansion around the world. Advertising revenues were down 15% as industry conditions remained tough for the FT's key advertising categories of corporate finance, technology and business to business. The advertising declines were significantly worse immediately before and during the war in Iraq, but the rate of decline began to slow towards the end of the year, helped by growth in US, online and recruitment advertising. The newspaper's circulation in the six months ended January 31, 2004 was 433,000, 4% lower than in the same period last year, although FT.com's subscribers are some 50% higher at 74,000. The launch of our Asian edition in September 2003 completed the FT's global network of four regional newspaper editions, backed up by a single editorial, commercial and technology infrastructure and by FT.com. Results from operations at Les Echos decreased from 2002, reflecting continuing declines in advertising revenues and investment in the newspaper's relaunch. Average circulation for the year was down 4% to 116,400, but the September 2003 relaunch generated a positive response, with newsstand sales in the final quarter up 4% against a market decline of 6%. Despite a continued decline in the advertising market, FT Business posted profit growth, due to tight cost management. Results from operations at the FT's associates and joint ventures showed a profit of L3 million (L6 million loss in 2002) with good progress at FT Deutschland, our joint venture with Gruner + Jahr, and at the Economist Group, in which Pearson owns a 50% interest. FT Deutschland's average circulation for 2003 was 92,000, an increase of 9% on the previous year and advertising revenues increased in a declining market. The Economist Group increased its results from operations despite further revenue declines, reflecting additional measures to reduce costs. The Economist's circulation growth continued, with average weekly circulation 3% higher at 908,000. Sales at Recoletos, were up 4% (at constant exchange rates) as its consumer titles, including sports newspaper Marca, performed strongly, more than offsetting further advertising revenue decline at business 24 newspaper Expansion. Results from operations were 3% lower as Recoletos invested in existing and new titles. Average circulation at Marca increased 3% to 391,000, and at Expansion fell 3% to 46,000. Interactive Data grew its sales in a declining market for the fourth consecutive year. Sales increased by 10% and results from operations increased by 16%, despite continuing weakness in the market for financial services as institutions focused on containing costs. The performance was helped by strong institutional renewal rates, which continue to run at more than 95%, the addition of new asset classes to its core pricing services, the successful launch of new services and the acquisition of ComStock. Interactive Data continued to extend its range of services by marketing new products such as the Fair Value Information service, which has been installed in many leading financial institutions, as well as by enhancing existing products at CMS BondEdge with a new credit risk module and at eSignal with increased international exchange data. Interactive Data further enhanced its product offering with the acquisition of ComStock's real-time market data services. The Penguin Group The Penguin Group increased sales to L840 million in 2003 from L838 million in 2002 and increased its results from operations to L91 million in 2003 from L87 million in 2002. In the US, our largest market, accounting for around two-thirds of sales, our best ever schedule of new titles enabled Penguin to grow ahead of the industry despite tough conditions for backlist publishing. In the UK our backlist performed well, helped by the relaunch of Penguin Classics and BBC's The Big Read. Penguin's best-selling books included Sue Monk Kidd's debut novel The Secret Life of Bees (2.3 million copies sold), John Steinbeck's East of Eden (1.5 million), Al Franken's Lies and the Lying Liars Who Tell Them (1.1 million), Scott Berg's Kate Remembered (0.5 million), Paul Burrell's A Royal Duty (0.9 million), Madonna's The English Roses and Mr Peabody's Apples (1.2 million) and Michael Moore's Stupid White Men (0.8 million). Dorling Kindersley faced a tough backlist market but benefited from three major new titles: America 24/7, Tom Peters' Re-Imagine! and an e-Encyclopaedia published in association with Google. We increased spending on authors' advances as we invested in a number of new imprints including Portfolio (business books), Gotham (non-fiction), and The Penguin Press (non-fiction), which has already signed almost 100 authors, including Alexandra Fuller, Ron Chernow and John Berendt. We signed new multi-book deals with a number of our most successful authors including Catherine Coulter and Nora Roberts, whose books have spent a total of 71 weeks at number one on the New York Times bestseller list. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 CONSOLIDATED RESULTS OF OPERATIONS Sales Our total sales increased by L95 million to L4,320 million in 2002, from L4,225 million in 2001. The increase was mainly attributable to Pearson Education and in particular to strong performances in our Professional division and Higher Education division. The L152 million increase at Pearson Education and an L18 million increase at The Penguin Group was partially offset by the decline in FT Group revenues principally due the continuing advertising downturn. Sales were also adversely affected by the strength of sterling compared to the US dollar. We estimate that had the 2001 average rates prevailed in 2002, sales would have been higher by L163 million. Pearson Education, our largest business sector, accounted for 64% of our sales in 2002, compared to 62% in 2001. North America continued to be the most significant source of our sales and sales from the region continue to increase as a proportion of total sales, accounting for 73% of our sales, compared to 70% in 2001. 25 Cost of Sales and Net Operating Expenses The following table summarizes our cost of sales and net operating expenses:
YEAR ENDED DECEMBER 31 ---------------- 2002 2001 ------ ------ LM LM COST OF SALES............................................... (2,064) (1,902) ====== ====== Distribution costs.......................................... (233) (233) Administration and other expenses........................... (1,888) (2,136) Other operating income...................................... 59 66 ------ ------ NET OPERATING EXPENSES...................................... (2,062) (2,303) ====== ======
Cost of Sales. Cost of sales consists of costs for raw materials, primarily paper, production costs and royalty charges. Our cost of sales increased by L162 million, or 9%, to L2,064 million in 2002, from L1,902 million in 2001. The increase partly reflects the increase in sales over the period, but there was a reduction in overall gross margins as cost of sales as a percentage of sales increased to 48% in 2002 from 45% in 2001. The main reason for the deterioration in overall gross margins was the sales mix effect with Pearson Education contributing more of our group sales in 2002 than in 2001 and FT Group (which has generally higher margins than the rest of the group) contributing a smaller proportion of group sales in 2002 compared to 2001. Distribution Costs. Distribution costs consist primarily of shipping costs, postage and packing. Administration and other expenses. Our administration and other expenses reduced by L248m, or 12%, to L1,888 million in 2002, from L2,136 million in 2001. Administration and other expenses as a percentage of sales decreased to 44% in 2002, from 51% in 2001. Administration and other expenses in 2002 included a charge of L10 million in respect of the costs of the integration of DK and NCS, goodwill amortization of L282 million and a charge for goodwill impairment of L10 million. In 2001, administration and other expenses included a charge of L74 million in respect of the integration of DK and NCS, goodwill amortization of L292 million and a charge for goodwill impairment of L58 million. Goodwill amortization, impairment and integration costs are described further in the following paragraphs. Excluding these charges in 2002 and 2001, administration and other expenses were 37% of sales in 2002 compared to 41% in 2001. The improvement in 2002 was mainly due to the lower level of expenditure on our internet enterprises. Total goodwill amortization, including that relating to associates (L48 million in 2002; L83 million in 2001) decreased by L45 million to L330 million in 2002, from L375 million in 2001. The main reason for this decrease over last year is reduced amortization from the RTL Group following its disposal at the beginning of 2002. Goodwill is amortized over its estimated useful life, not exceeding 20 years, and thus this charge is expected to continue for the foreseeable future. A charge for goodwill impairment of L10 million was incurred in 2002 in respect of a subsidiary of Recoletos in Argentina. In 2001, L50 million of the total impairment charge of L61 million related to DK and a further L11 million of goodwill impairments were taken in various other businesses (including L3 million relating to an associate). Integration costs included within administration and other expenses are primarily the costs for consolidation of property and systems and redundancy programs relating to significant recent acquisitions. In 2002 the total integration cost was L10 million of which L3 million related to DK and L7 million to NCS. In 2001 these costs totaled L74 million of which L45 million related to DK and L29 million to NCS. Other Operating Income. Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased to L59 million in 2002 from L66 million in 2001 with the decrease coming at both Pearson Education and Penguin where distribution commissions we receive for distributing third parties' books has declined. 26 Operating Profit/Loss The total operating profit in 2002 of L143 million compares to a loss of L47 million in 2001. This increase was principally due to a reduction in internet losses, reduced goodwill amortization and impairment, and lower integration costs, as well as strong performances from Pearson Education's Higher Education business, The Penguin Group, Interactive Data and Recoletos. Offsetting these increases has been a decline in profit from advertising and technology related businesses, L30 million of back office consolidation costs and an adverse impact from currency movements. In 2002 operating profit was adversely affected by the weakening of the US dollar against sterling. We estimate that had the 2001 average rates prevailed in 2002, operating profit would have been L20 million greater. Operating profit attributable to Pearson Education increased by L92 million to L75 million in 2002, from a loss of L17 million in 2001. The increase is due to a reduced charge for goodwill and integration costs and the reduction in internet losses, with increases in the Higher Education businesses and reduced losses at FT Knowledge being offset by a shortfall in the School businesses. Operating profit attributable to the FT Group increased by L3 million to L5 million in 2002, from L2 million in 2001. The increase was largely due to reduced internet losses and strong performances from Interactive Data and Recoletos. The increase was partly offset by the continued decline of the business advertising market, which has adversely affected all of the FT Group's business newspapers. Operating profit attributable to the Penguin Group increased by L100 million to L66 million in 2002, from a loss of L34 million in 2001. The main reasons were the absence of the goodwill impairment charge of L50 million in 2002 and a significant reduction in integration charges. The return to profitability of DK was also a contributor to the increase. In 2002 we reduced costs across the Group and especially in those areas (such as business and financial newspapers and technology publishing) where we suffered most in the global slowdown. At the same time we ensured that we continued to invest in product development to sustain future revenue growth and invested a further L30 million in new back office systems and processes that we believe will improve our operating profit in the future. Non-operating Items Losses before taxation on the sale of fixed assets, investments, businesses and associates were L37 million in 2002 compared to L128 million in 2001. In 2002 the principal items were a profit of L18 million on the sale of the RTL Group in January 2002 and a provision of L40 million for the loss on sale of our Forum business, which completed in January 2003. Other items include a loss on sale of PH Direct of L8m, a profit of L3 million on finalization of the sale of the Journal of Commerce by the Economist and various smaller losses on investments and property. In 2001, the most significant items were L36 million for our share of the loss on sale of the Journal of Commerce by the Economist Group, a loss on the sale of iForum of L27 million, L17 million for our share of the net loss on disposals by the RTL Group and the disposal or closure of various smaller businesses and investments totaling L48 million. In 2001 we also sold FT Energy and received net cash proceeds of L43 million, although there was no significant profit and loss impact as the proceeds were equivalent to the carrying value of the business sold. Amounts Written Off Investments In 2002, we continued to review our fixed asset investments and concluded that there were no material impairments. In 2001 we wrote off L92 million of our fixed asset investments. This charge followed a thorough review of our fixed asset investments, principally in the internet and new media arenas, as a result of general economic conditions and stock market declines. We provided L55 million against these investments reflecting the higher of net realizable value and value in use. The biggest items were L17 million for Business.com and L10 million for TimeCruiser. We also reviewed the carrying value of Pearson shares held to secure employee share option plans created at the time of more buoyant stock markets. Following a decline in our share price, we 27 determined that the most appropriate course of action was to write down our investment in own shares to the market price on December 31, 2001 resulting in a charge of L37 million. Net Finance Costs Net finance costs consist primarily of net interest expense related to our borrowings. Our total like for like net interest payable, excluding the swap cancellation fee discussed below, decreased by L75 million, or 44%, to L94 million in 2002, from L169 million in 2001. Our average net debt decreased by L748 million from L2,639 million in 2001 to L1,891 million in 2002, while our year end indebtedness decreased to L1,408 million in 2002 compared to L2,379 million in 2001. The decrease in net debt follows the receipt of proceeds from the RTL Group disposal and improved cash flow from operations. The weighted average three month LIBOR rate, reflecting our borrowings in US dollars, euro and sterling, fell by 160 basis points, or 1.6%. The effect of these falls was 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. As a result, our net interest rate payable averaged approximately 5.0% in 2002, falling 1.4% from 2001. During 2002 we took an additional one off charge of L37 million for cancellation of certain swap contracts and the early repayment of debt following the re-balancing of the group's debt portfolio on the receipt of the RTL Group proceeds. For a more detailed discussion of our borrowings and interest expenses see "-- Liquidity and Capital Resources -- Capital Resources" and "-- Borrowing" and "Item 11. Quantitative and Qualitative Disclosures About Market Risk". Taxation The overall taxation charge was L64 million in 2002, compared to a benefit of L33 million in 2001. In 2002 the Group recorded a total pre-tax loss of L25 million but there was an overall tax charge for the year of L64 million. This situation reflects the fact that there is only limited relief available for goodwill amortization charged in the profit and loss account. The total tax charge was reduced by a non-operating credit of L45 million attributable to the resolution of the tax position on the disposal of the group's remaining interest in BSkyB. In 2001 there was again only limited taxation relief available on goodwill amortization and only limited taxation relief was recognized on integration costs and losses from internet enterprises. Included in the tax benefit in 2001 was L143 million attributable to settlement during the year of the tax position on the BSkyB and Tussauds disposals which occurred in 1995 and 1998 respectively. The settlement resulted in the reversal of previously established reserves. Minority Interests Minority interests principally consisted of the public's 40% interest in Interactive Data and the public's 21% interest in Recoletos. Loss for the Financial Year The loss for the financial year after taxation and equity minority interests in 2002 was L111 million compared to a loss in 2001 of L423 million. The decrease in the loss of L312 million was due to the increase in operating profit including reduced internet losses, goodwill amortization and impairment and integration costs. There was also a significant reduction in amounts written off investments and losses on the sale of fixed assets, investments, businesses and associates in 2002 compared to 2001 and reduced finance charges which more than made up for an increase in the tax charge in 2002. Loss Per Ordinary Share The loss per ordinary share, which is defined as the loss divided by the weighted average number of shares in issue, was 13.9 pence in 2002 compared to 53.2 pence in 2001 based on a weighted average number of shares in issue of 796.3 million in 2002 and 795.4 million in 2001. This increase was due to the decrease in the overall loss for the financial year described above and was not significantly affected by the increase in the weighted average number of shares. 28 In 2002 and 2001, the Group made a loss for the financial year and the effect of share options is anti-dilutive and therefore a diluted loss per share is not shown. Exchange Rate Fluctuations The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2002 compared to 2001. We estimate that if the 2001 average rates had prevailed in 2002, sales would have been higher by L163 million and operating profit would have been higher by L20 million. See "Item 11. Quantitative and Qualitative Disclosures About Market Risk" for a discussion regarding our management of exchange rate risks. SALES AND OPERATING PROFIT BY DIVISION The following table summarizes our operating profit and results from operations for each of Pearson's divisions.
YEAR ENDED DECEMBER 31 -------------------------- 2002 2001 ----------- ----------- LM % LM % OPERATING PROFIT Pearson Education........................................... 75 51 (17) -- FT Group.................................................... 5 4 2 -- The Penguin Group........................................... 66 45 (34) -- ---- --- ---- --- CONTINUING OPERATIONS....................................... 146 100 (49) -- ==== === ==== === COMPRISED OF: GOODWILL AMORTIZATION Pearson Education........................................... (244) (254) FT Group.................................................... (65) (67) The Penguin Group........................................... (18) (19) ---- ---- CONTINUING OPERATIONS....................................... (327) (340) ==== ==== GOODWILL IMPAIRMENT Pearson Education........................................... -- (8) FT Group.................................................... (10) (3) The Penguin Group........................................... -- (50) ---- ---- CONTINUING OPERATIONS....................................... (10) (61) ==== ==== INTEGRATION COSTS Pearson Education........................................... (7) (29) FT Group.................................................... -- -- The Penguin Group........................................... (3) (45) ---- ---- CONTINUING OPERATIONS....................................... (10) (74) ==== ==== RESULTS FROM OPERATIONS Pearson Education........................................... 326 66 274 64 FT Group.................................................... 80 16 72 17 The Penguin Group........................................... 87 18 80 19 ---- --- ---- --- CONTINUING OPERATIONS....................................... 493 100 426 100 ==== === ==== ===
- --------------- (1) Discontinued operations contributed Lnil to operating profit and a loss of L3 million to results from operations in 2002. The equivalent figures in 2001 were profits of L2 million and L37 million respectively. See Note 2. 29 Pearson Education Pearson Education's sales increased by L152 million, or 6%, to L2,756 million in 2002 from L2,604 million in 2001, principally due to the sales from our Professional business and its contract with the newly-formed TSA to recruit 64,000 security personnel for US airports. The contract was awarded in March 2002 and was substantially complete by the end of December 2002. Pearson Education's 2002 sales comprised 64% of Pearson's total sales. Results from operations increased by L52 million or 19% from L274 million in 2001 to L326 million in 2002. The increase can be attributed to the reduction in internet losses with increases in the Higher Education businesses and reduced losses at FT Knowledge being offset by a shortfall in the School businesses and L20m of back office consolidation costs. The School business sales decreased by L115 million, or 9%, to L1,151 million in 2002, from L1,266 million in 2001. In the US in 2002, our school publishing revenues were affected by a slower adoption cycle than in 2001 and our decision to compete in fewer adoptions in 2002. Overall our share of the US school publishing market fell to 24.0% in 2002 compared to 24.5% in 2001. US school testing revenues increased in 2002 but were offset by a decline in revenues from the school software business primarily due to the deferral of a number of contracts into 2003. Results from operations for the school business decreased by L27 million or 16%, to L140 million in 2002 from L167 million in 2001. The decrease reflects the decline in sales and the fact that testing revenues (with lower than average margins) made up for some of the shortfall in publishing. The Higher Education business sales increased by L54 million, or 7%, to L775 million in 2002, from L721 million in 2001. This increase is attributable to a general increase in the college population and our taking a greater share of the overall market in 2002. The business also continued to benefit from its lead in making online services an integral part of its products. The custom publishing business, which produces text books and course materials custom-made for individual college professors continued its rapid growth. On a geographical basis, sales in 2002 were particularly strong in the US and Europe. Results from operations increased by L15 million or 12%, from L127 million in 2001 to L142 million in 2002. Sales in the Professional business increased by L226 million, or 41%, to L784 million in 2002, from L558 million in 2001. Results from operations increased by L1 million or 1%, to L81 million in 2002, from L80 million in 2001. A major investment in 200 professional certification centers across the US (which opened for business in the fourth quarter of 2002), along with further decline in our higher-margin technology publishing businesses particularly in the US and Europe, meant that profits grew considerably slower than revenues. In the US, revenues were significantly higher than in 2001 principally due to the contract with the TSA. This contract involved creating a qualification, assessment, staffing and placement system for 64,000 security screeners at over 400 airports in the US. In addition the contract provided human resource services for airport security screeners, law enforcement officers and other TSA personnel in compliance with federal law, regulation and policy allowing the TSA to meet or exceed dated mandates or other legislative requirements. The contract was awarded in March 2002 and was substantially complete by the end of December 2002. Gross billings under this contract in 2002 were L435 million ($700 million) of which L180 million ($290 million) was pass through costs recharged directly to the TSA and not recognized as revenue in our financial statements. Of the remaining L255 million ($410 million) of revenue recognized over L186 million ($300 million) was attributable to our Government Solutions business with the balance being earned by the Assessments and Testing business. Industry conditions for FT Knowledge were particularly tough as major corporations continued to cut back their training budgets. Sales at FT Knowledge were down by L13 million, or 22%, to L46 million in 2002, from L59 million in 2001. Losses from operations were reduced by L11 million from L23 million in 2001 to L12 million in 2002 as we scaled back this business. In January 2003 we sold the Forum business, a significant part of FT Knowledge. FT Group Sales in the FT Group decreased by L75 million, or 9%, to L726 million in 2002, from L801 million in 2001. The decline in sales at the newspaper businesses was principally due to lower advertising revenue. Sales were down in each of the FT Group businesses except Interactive Data where sales were up by L13 million or 6% from 2001. 30 The FT Group's results from operations increased by L8 million, or 11%, to L80 million in 2002, from L72 million in 2001. The increase was in spite of the significant reduction in revenue and was due to profit growth at Interactive Data and Recoletos, successful cost reduction programs across the group, and sharply lower internet losses of L34 million down from L60 million in 2001. Excluding the benefit of lower internet losses the FT Group's profit declined by L18 million or 14%. Sales at the Financial Times newspaper decreased by L47 million, or 19%, to L224 million in 2002, from L271 million in 2001. Results from operations declined by L18 million to a loss of L23 million in 2002, from a loss of L5 million in 2001. Industry conditions remained difficult for the FT's major advertising categories, including financial services, technology and business to business. Advertising volumes fell by 24% (on top of a 29% fall in 2001) The average daily circulation for the newspaper in December 2002 was 473,587, 6% lower than the equivalent period in 2001. Most of this decline was in the UK. Other FT Publishing businesses (Les Echos and FT Business) saw revenues decline by L36 million, or 26%, in total from L141 million in 2001 to L105 million in 2002. Results from operations declined by L6 million, or 38%, from L16 million in 2001 to L10 million in 2002. Les Echos saw advertising revenues fall sharply and average daily circulation was 121,000 a 6% decline on 2001 but well ahead of the decline in the overall market. FT Business saw falls in both sales and profits even though its major titles Investors Chronicle, The Banker and Financial Advisor all strengthened their market positions in 2002. Joint ventures and associate losses from operations within the FT Group decreased by L16 million, or 73%, to an overall loss of L6 million in 2002, from a loss of L22 million in 2001. FT Deutschland, our joint venture with Gruner + Jahr, grew its advertising revenues slightly, in spite of a tough German advertising market, and increased its circulation revenues by 14% to an average daily circulation of 89,000 at the end of 2002. The Economist Group, in which Pearson owns a 50% interest, offset falling advertising revenues with tight cost controls and worldwide circulation grew by 6% to 881,259 in 2002. Sales at Recoletos decreased by L5 million, or 3%, to L148 million in 2002, from L153 million in 2001. Results from operations increased by L11 million, or 61%, to L29 million in 2002, from L18 million in 2001. This increase was primarily due to actions taken in 2001 to reduce costs and reduced internet losses in 2002. After a successful re-launch Marca, Spain's leading sports newspaper grew its circulation by 2% to 382,000 and increased advertising revenues and profits. Circulation at business newspaper Expansion was 9% lower and advertising revenues were 25% lower. Sales at Interactive Data increased by L13 million, or 6%, to L249 million in 2002, from L236 million in 2001. Results from operations increased by L5 million, or 8%, to L70 million in 2002, from L65 million in 2001. Contract renewal rates in Interactive Data's institutional business (which accounts for approximately 90% of revenues) ran at 95%. Interactive Data also benefited from increased adoption of evaluation services, the launch of several new products and the acquisition of the Securities Pricing Services business from Merrill Lynch in January 2002. The Penguin Group Sales at The Penguin Group increased by L18 million, or 2%, to L838 million in 2002, from L820 million in 2001. In the US Penguin published 24 titles that became New York Times number one bestsellers, more than any other publisher and a 25% increase from 2001. In the UK, Penguin posted its best performance on the bestseller lists for a decade as 45 titles reached the Nielsen Bookscan top 15, a 10% increase on 2001. This strong performance helped Penguin gain market share in both the US and UK. The Penguin Group's results from operations increased by L7 million, or 9%, to L87 million in 2002, from L80 million in 2001. The increase was primarily due to Dorling Kindersley, whose profits increased by L15 million as it benefited from its integration with Penguin. The increase in profits at DK was partially offset by a L10 million investment in consolidating and improving back office systems and processes. 31 DISCONTINUED OPERATIONS On December 24, 2001, we announced the disposal of our 22% stake in the television business, RTL Group. The sale was completed on January 30, 2002 for cash proceeds of E1.5 billion and the results of the television business have now been shown in discontinued operations. RTL Group was included in our results as an associate, rather than a subsidiary and only our share of profit before interest, net interest and taxation is reflected in our financial results. Our stake in RTL Group resulted in an operating loss of L3 million in 2002 compared to a profit of L2 million in 2001. The 2002 figures include only the results up to the date of disposal in January 2002. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS AND FINANCING Net cash inflow from operating activities decreased by L170 million, or 32%, to L359 million in 2003, from L529 million in 2002. The main reasons for this decrease were the TSA contract where we incurred additional close-out expenditure (payment of TSA creditors) without receiving the $151 million outstanding receivable, the concentration of the Penguin publishing schedule in the fourth quarter which pushed cash collections from debtors into 2004, and the weakness of the US dollar which reduced the value of our cash flows in sterling terms. The deterioration in the cash impact from year-end working capital changes reflects the TSA contract and Penguin phasing effects discussed above. On an average basis excluding the effect of the TSA contract, the working capital to sales ratio for our book publishing businesses improved slightly from 30.7% to 30.6%. Compared to 2001, the net cash inflow from operating activities in 2002 increased by L39 million, or 8%, to L529 million from L490 million. This reflected the reduced spending on internet enterprises partly offset by increased spending on pensions and other post retirement benefits of some L50 million. Net interest paid reduced to L76 million in 2003 from L140 million in 2002 and L156 million in 2001 as the full year effect of the 2002 debt repayment using the proceeds of the RTL Group sale flowed through and the L37 million of swap close-out costs did not recur. In 2003 we again held capital expenditure below the level of depreciation while continuing to upgrade our facilities and equipment. Capital expenditure reduced to L105 million in 2003 from L126 million in 2002 and L165 million in 2001. Capital expenditure in 2001 included costs associated with a warehouse integration program at Pearson Education in New Jersey and the capital costs of consolidating various of our UK offices on one site in London. The purchase of investments accounted for a cash outflow of only L4 million in 2003 against L21 million in 2002 and L35 million in 2001, as no additional investment was made in Pearson plc shares during 2003 to meet obligations under the executive and employee share plans. The acquisition of subsidiaries accounted for a cash outflow of L94 million in 2003 against L87 million in 2002 and L128 million in 2001. The principal acquisitions in 2003 were of ComStock by Interactive Data for net cash of L68 million and 75% of London Qualifications by Pearson Education for net cash of L16 million. The largest acquisition in 2002 was the purchase of Merrill Lynch's Securities Pricing Services by Interactive Data for net cash of L30 million. The largest item in 2001 was a L30 million payment of deferred consideration relating to the acquisition of Forum in 1999. The sale of subsidiaries and associates produced a cash inflow of L53 million in 2003 against L923 million in 2002 and L42 million in 2001. The principal disposal in 2003 was the sale of Unedisa by Recoletos. Virtually all the proceeds in 2002 relate to the sale of the RTL Group and most of the proceeds in 2001 to the sale of FT Energy. The cash inflow from financing of L65 million largely reflects the issue in the year of a $300 million bond as we took advantage of favorable market conditions, offset by the repayment of a E250 million bond. The outflow of L663 million in 2002 was due to the repayment of loans and bonds using the proceeds from the sale of RTL Group. The 2001 inflow of L2 million reflects the issue of $500 million and E250 million bonds offset by the repayment of loan facilities. Bonds are issued as part of our overall financing program to support general corporate expenditure. 32 CAPITAL RESOURCES 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. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available, with an appropriate level of headroom given our portfolio of businesses and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this 12-month period will depend on many factors, including the rate, if any, at which our cash flow increases and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all. At December 31, 2003, our net debt (excluding finance leases) was L1,361 million compared to net debt of L1,408 million at December 31, 2002. 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 L1,922 million at December 31, 2003, compared to L1,983 million at December 31, 2002. At December 31, 2003, cash and liquid resources were L561 million, compared to L575 million at December 31, 2002. The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases.
AT DECEMBER 31, 2003 -------------------------------------------------- TWO TO AFTER LESS THAN ONE TO FIVE FIVE TOTAL ONE YEAR TWO YEARS YEARS YEARS ----- --------- --------- ------ ----- LM LM LM LM LM Gross borrowings: Bank loans, overdrafts and commercial paper..................................... 204 119 85 -- -- Variable rate loan notes..................... -- -- -- -- -- Bonds........................................ 1,718 456 -- 582 680 Lease obligations.............................. 1,073 119 109 251 594 ----- --- --- --- ----- TOTAL.......................................... 2,995 694 194 833 1,274 ===== === === === =====
The group had capital commitments for fixed assets, including finance leases already under contract of L9 million. There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal claims. None of these claims or guarantees is expected to result in a material gain or loss. The Group does not have any off-balance sheet arrangements, as defined by the SEC Final Rule 67 (FR-67), "Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations", that have or are reasonably likely to have a material current or future effect on the Group's financial position or results of operations. The group is committed to a quarterly fee of 0.1875% on the unused amount of the group's bank facility. BORROWINGS We have in place a $1,850 million term revolving credit facility, which matures in July 2005. At December 31, 2003, approximately $1,701 million was available under this facility. This included allocations to refinance short-term borrowings not directly drawn under the facility. The credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31: 33 We must maintain the ratio of our profit before interest and tax to our net interest payable at no less than 3:1; and We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1. The covenants provide for the exclusion from the ratio calculations of specified amounts of internet related expenditures. "EBITDA" refers to earnings before interest, taxes, depreciation and amortization. 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 "Item 11. Quantitative and Qualitative Disclosures About Market Risk". RELATED PARTIES There were no significant or unusual related party transactions in 2003, 2002 or 2001. Refer to Note 30 of the financial statements. 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 Annual Report. 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 3 and 20 years. Under US GAAP, goodwill arising from acquisitions completed subsequent to July 1, 2001 is no longer amortized, however it is tested for impairment at the reporting unit level at least annually or more frequently when a triggering event occurs. In addition, amortization for all goodwill balances ceased as of January 1, 2002 under US GAAP. 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 acquired intangible assets, and they should be recognized separately from goodwill when they arise from separate contractual or legal rights or can be separately identified and be sold, transferred, licensed, rented or exchanged regardless of intent. Under US GAAP, intangible assets such as publishing rights, non-compete agreements, software, databases, patents and non-contractual customer relationships such as advertising relationships have been recognized and are being amortized over a range of useful lives between 2 and 25 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 prior to adoption of SFAS 142 and intangible assets, as UK GAAP requires that goodwill which had not been capitalized and amortized be removed from the profit and loss reserve upon disposal and factored into the gain or loss on disposal calculation. Under UK GAAP, the Group reviews the recoverability of goodwill where there is a triggering event to indicate a potential impairment or where there has been a previous impairment. These reviews are based on estimated discounted future cash flows from operating activities compared with the carrying value of goodwill, and any impairment is recognized on the basis of such comparison. Under US GAAP, a two stage impairment test is required at least annually under SFAS 142, which was adopted by the Group as of January 1, 2002. The Group 34 performed the transitional impairment test under SFAS 142 by comparing the carrying value of each reporting unit with its fair value as determined by discounted future cash flows. The Group also completed the annual impairment tests required by SFAS 142 at the end of both 2003 and 2002. For further details refer to Note 34 in "Item 17. Financial Statements." Under UK GAAP, FRS 19, "Deferred Taxation", which was adopted for the year ended December 31, 2002 requires a form of full provision to be made for deferred taxes. Deferred taxes are to be accounted for on all timing differences with deferred tax assets recognized to the extent that they are more likely than not recoverable against future taxable profits. Deferred tax assets not considered recoverable are adjusted for through a separate valuation allowance in the balance sheet. Under US GAAP, deferred taxes are accounted for in accordance with SFAS 109, "Accounting for Income Taxes" with a full provision also made for deferred taxes on all timing differences and a valuation allowance established for the amount of the deferred tax assets not considered recoverable. This is similar to the treatment required under FRS 19. The primary differences relate to the deferred tax on intangible assets which are not recorded under UK GAAP and changes in estimates in respect of deferred tax balances relating to business combinations in prior years, which are required to be adjusted against goodwill under US GAAP. Deferred tax may also arise in relation to timing differences of other adjustments required under US GAAP. The disposal of our stake in RTL Group was announced on December 24, 2001 and the sale was completed on January 30, 2002 for E1.5 billion. Under UK GAAP the sale gave rise to a small gain in 2002 and no entries were booked in the 2001 financial statements relating to the disposal. Under US GAAP the sale realized a loss of L985 million principally due to the higher value of goodwill capitalized in 2000. This loss was recognized under US GAAP in 2001. 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, we have adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". During 2003, 2002 and 2001, our derivative contracts did not meet the prescribed criteria for hedge accounting, and have been recorded at market value at each period end, with changes in their fair value being recorded 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 difference between plan assets and plan liabilities is recognized on the balance sheet. Unrecognized gains or losses are 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% of market value at the date of grant. For a further explanation of the differences between UK GAAP and US GAAP see Note 34 to the consolidated financial statements. RECENT U.S. ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS 150 improves the accounting for certain financial instruments that, 35 under previous guidance, companies could only account for as equity and requires that these instruments be classified as liabilities in statements of financial position. The statement is effective prospectively for financial instruments entered into or modified after May 31, 2003 and otherwise is effective for pre-existing instruments as of January 1, 2004. These requirements currently have no material effect on the financial position and results of the Group under US GAAP. In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities -- an interpretation of ARB No. 51", which clarifies the application of the consolidation rules to certain variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. A revision (FIN 46R) was issued in December 2003 which deferred the effective date for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must, at a minimum, apply the provisions to entities that were previously considered "special-purpose entities' by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R did not have any impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2003 under the transitional arrangements. Currently the Group is evaluating FIN 46R for transactions entered into prior to February 1, 2003 and does not believe there will be any material impact upon full adoption in 2004. In November 2003, the EITF reached a final consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This EITF provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 and will apply to the Group for any arrangements entered into after January 1, 2004. Currently, this is not expected to have a material effect on the financial position and results of the Group under US GAAP. RECENT UK AND INTERNATIONAL ACCOUNTING PRONOUNCEMENTS In December, 2003, UITF 38, "Accounting for ESOP trusts", was issued by the Urgent Issues Task Force of the UK Accounting Standards Board. The consensus is that parent company shares held in trust should be treated as treasury shares and deducted from shareholders' funds rather than being held as fixed asset investments. This extract should be adopted for financial statements relating to accounting periods ending on or after June 22, 2004. The Group will adopt the accounting treatment required by this Abstract in its financial statements for the period ending December 31, 2004. The Group will be required to comply with International Financial Reporting Standards ("IFRS") with effect from January 1, 2005. An initial evaluation of the impact on the financial statements of Pearson plc has been made. A program of work is underway to enable the preparation of financial statements, in compliance with IFRS, for the two comparative years ended December 31, 2003 and 2004, as well as for periods from January 1, 2005 onwards. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS AND SENIOR MANAGEMENT We are managed by a board of directors and a chief executive who reports to the board and manages through a management committee. We refer to the executive director members of the board of directors, the most senior executives from each of our three main operating divisions and the chairman of the board of directors as our "senior management". 36 The following table sets forth information concerning senior management, as of April 2004.
NAME AGE POSITION - ---- --- -------- Dennis Stevenson.......................... 58 Chairman Marjorie Scardino......................... 57 Chief Executive David Bell................................ 57 Director for People and Chairman of the FT Group Terry Burns............................... 60 Non-executive Director Patrick Cescau............................ 55 Non-executive Director Rona Fairhead............................. 42 Chief Financial Officer Peter Jovanovich.......................... 55 Chief Executive, Pearson Education John Makinson............................. 49 Chairman and Chief Executive Officer, Penguin Group Reuben Mark............................... 65 Non-executive Director Vernon Sankey............................. 54 Non-executive Director Rana Talwar............................... 56 Non-executive Director
DENNIS STEVENSON was appointed a non-executive director in 1986 and became chairman in 1997. He is a member of our treasury committee. He is also chairman of HBOS plc and a non-executive director of Manpower Inc. in the US. MARJORIE SCARDINO joined the board and became chief executive in January 1997. She was chief executive of The Economist Group from 1993 until joining Pearson. She sits on the board of Recoletos and is also a non-executive director of Nokia Corporation. DAVID BELL became a director in March 1996. He is chairman of the FT Group, having been 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 across the Pearson Group. He also sits on the board of Recoletos and is also a non-executive director of VITEC Group plc and chairman of the International Youth Foundation. TERRY BURNS became a non-executive director in May 1999 and our senior independent director in February this year. He currently serves on the 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 non-executive chairman of Abbey National plc and Glas Cymru Limited and a non-executive director of The British Land Company PLC. PATRICK CESCAU became a non-executive director in April 2002. He joined Unilever in 1973, latterly serving as Finance Director until January 2001, at which time he was appointed to his current position as Director of Unilever's Foods Division. He is a director of Unilever plc and Unilever NV, and will become chairman of Unilever plc and vice chairman of Unilever NV with effect from 30 September 2004. RONA FAIRHEAD became a director and chief financial officer in June 2002. She had served as deputy finance director from October 2001. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy, and as a member of the executive committee from 1998. Prior to that, she worked for Bombardier Inc. in finance, strategy and operational roles. She is also a non-executive director of HSBC Holdings plc, and of Harvard Business School Publishing in the US. PETER JOVANOVICH was appointed to the board in June 2002. He became chief executive of Pearson Education in 1998. Prior to this he was president of the McGraw-Hill Educational and Professional Group, chairman of Harcourt Brace Jovanovich and chief executive of Addison Wesley Longman Inc. He also serves on the board of the Association of American Publishers and the board of the Alfred Harcourt Foundation. JOHN MAKINSON became chairman of the Penguin Group in May 2001 and its chief executive officer in June 2002. He was appointed chairman of Interactive Data in December 2002 and also sits on the board of Recoletos. He served as Pearson Finance Director from March 1996 until June 2002. From 1994 to 1996 he was managing 37 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. REUBEN MARK became a non-executive director in 1988 and currently serves on the audit committee and as chairman of the personnel committee. He became chief executive of the Colgate Palmolive Company in 1984, and chairman in 1986. He has held these positions since then. He is also a director of Time Warner Inc. VERNON SANKEY became a non-executive director in 1993 and currently serves as chairman of the audit committee and as a member of the treasury committee. He was previously chief executive of Reckitt & Colman plc and is deputy chairman of Photo-Me International plc and Beltpacker plc. He is also a non-executive director of Taylor Woodrow plc, Zurich Financial Services AG and a board member of the UK's Food Standards Agency. RANA TALWAR became a non-executive director in March 2000 and currently serves on the personnel and treasury committees. He is currently chairman of Sabre Capital. He served as group chief executive of Standard Chartered plc from 1998 until 2001, and was at Citicorp from 1969 to 1997, where he held a number of senior international management roles. COMPENSATION OF SENIOR MANAGEMENT It is the role of the Personnel Committee to approve the remuneration and benefits packages of the executive directors, the chief executives of the principal operating companies and other members of the Pearson Management Committee, as well as to ensure senior management receives the development they need and that succession plans are being made. The committee also notes the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company. REMUNERATION POLICY Pearson seeks to generate a performance culture by developing programs that support its business goals and rewarding their achievement. It is the company's policy that total remuneration (base compensation plus short-term and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance. The company's policy is that base compensation should provide the appropriate rate of remuneration for the job, taking into account relevant recruitment markets and business sectors and geographic regions. Benefit programs should ensure that Pearson retains a competitive recruiting advantage. Share ownership is encouraged throughout the company. Equity-based reward programs align the interests of directors, and employees in general, with those of shareholders by linking rewards with Pearson's financial success. The main elements of remuneration are base salary and other emoluments, annual bonus with bonus share matching, and long-term incentives in the form of restricted shares or options. Total remuneration is made up of fixed and performance-linked elements. Consistent with its policy, the committee places considerable emphasis on the performance-linked elements of remuneration that comprise annual bonus, bonus share matching and long-term incentives. BASE SALARY Our policy is that the base salaries of the executive directors should be competitive with those of directors and executives in similar positions in comparable companies. We use a range of companies of comparable size and global reach in different sectors including the media sector in the UK and selected media companies in North America to make this comparison. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our salaries were not competitive. Our policy is to review salaries annually. 38 OTHER EMOLUMENTS Other emoluments may include benefits such as company car, healthcare, and where relevant, amounts paid in respect of housing costs. It is the company's policy that its benefit programs should be competitive in the context of the local labour market, but as an international company we recognize the requirements, circumstances and mobility of individual executives. ANNUAL BONUS The committee establishes the annual bonus plans for the executive directors, chief executives of the company's principal operating companies and other members of the Pearson Management Committee, including performance measures and targets and the amount of bonus that can be earned. The performance targets relate to the company's main drivers of business performance at both the corporate and operating company level. Although at the date of publication of this report no decisions had been made for 2004, the performance measures for Pearson plc are likely to be drawn from those in previous years, namely growth in underlying sales and adjusted earnings per share, operating cash conversion and working capital as a ratio to sales, and return on invested capital. For subsequent years, the measures will be set at the time. The target annual bonus opportunity for executive directors and other members of the Pearson Management Committee is 75% of salary. Individuals may receive up to twice their target bonus (i.e. a maximum of 150% of salary) based on performance in excess of target. The committee may award individual discretionary bonuses. The committee will continue to review the bonus plans on an annual basis and to revise the bonus limits and targets in light of the current conditions. In the UK, bonuses do not form part of pensionable earnings. In the US, bonuses up to 50% of base salary are pensionable under the supplemental executive retirement plan, consistent with US market practice. BONUS SHARE MATCHING The company encourages executive directors and other senior executives to hold Pearson shares in many ways. The annual bonus share matching plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the company's adjusted earnings per share increase in real terms by at least 3% per annum, the company will match them on a gross basis of one share for every two held after three years, and another one for two originally held (i.e. a total of one-for-one) after five years. THE LONG-TERM INCENTIVE PLAN Executive directors, senior and other executives and managers are eligible to participate in Pearson's long-term incentive plan introduced in 2001. The plan consists of two parts: stock options and/or restricted stock. The aim is to give the committee a range of tools with which to link corporate performance to management's long-term reward in a flexible way. The principles underlying it are as follows: - the Personnel Committee establishes guidelines that set out the maximum expected value of awards each year using an economic valuation methodology for fixing the relative values of both option grants and restricted stock awards; - the maximum expected value of awards for executive directors is based on assessment of market practice for comparable companies; - no more than 10% of Pearson equity will be issued, or be capable of being issued, under all Pearson's share plans in any ten-year period commencing in January 1997; 39 - awards of restricted stock are satisfied using existing shares. For stock options, within this overall 10% limit, up to 1.5% of new issue equity may be placed under option under the plan in any year, subject to the company's earnings per share performance. No options may be granted unless the company's adjusted earnings per share increase in real terms by at least 3% per annum over the three-year period prior to grant. The vesting of restricted stock is normally dependent on the satisfaction of a stretching corporate performance target over a three-year period. SHAREHOLDING POLICY As previously noted, in line with the policy of encouraging widespread employee ownership, the company encourages executive directors, as well as other senior management, to build up a substantial shareholding in the company. However, we do not think it is appropriate to specify a particular relationship of shareholding to salary. SERVICE AGREEMENTS Executive directors have rolling service agreements with the company. Other than by termination in accordance with the terms of these agreements, employment continues until retirement. It is normal policy that the company may terminate these agreements by giving 12 months' notice, although there may be circumstances when a longer notice period may be justified. The agreements also specify the compensation payable by way of liquidated damages in circumstances where the company terminates agreements without notice or cause. The compensation payable in these circumstances is typically 100% of annual salary, 100% of other benefits, and a proportion of potential bonus. Peter Jovanovich's service agreement provides for compensation on termination of employment by the company without cause of 200% of annual salary plus target bonus, reflecting US employment practice and the terms agreed with him before his appointment as a director of the company in June 2002. RETIREMENT BENEFITS We describe in turn the retirement benefits for each of the executive directors. MARJORIE SCARDINO has both defined benefit and defined contribution pension arrangements. The Pearson Inc. Pension Plan (the US Plan) is an approved defined benefit plan providing a lump sum convertible to a pension on retirement. The lump sum is accrued at 6% of capped compensation, but accruals of benefit in this plan ceased on 31 December 2001. The defined contribution arrangements are an approved 401(k) plan in the US and an unfunded, unapproved defined contribution arrangement. In addition, from 2004 a funded defined contribution plan replaces part of the unfunded plan. The US plan has a normal retirement age of 65. Early retirement after age 55 is possible, with the company's consent and on a reduced pension. The US plan also provides a spouse's pension on death in service from age 55 and death in retirement broadly equivalent to 50% of the member's early retirement pension. The US plan does not guarantee any increases to the pension once it comes into payment. DAVID BELL is a member of the Final Pay Section of the Pearson Group Pension Plan (the UK Plan), to which he contributes 5% of his pensionable salary. He is eligible for a pension from the UK Plan of two-thirds of his final base salary at normal retirement age (age 62) due to his previous service with the Financial Times. Early retirement after age 50 is possible, with company consent, and on a pension from the plan that is scaled down to reflect the shorter period of service completed. If retiring before age 60, the pension will be further reduced by an actuarial factor to reflect the longer period over which it is expected to be paid. 40 On death before normal retirement age, a pension will be paid to the spouse, or in the absence of a spouse to a financial dependent nominated by the member. The pension will be one-third of annual base salary. On death after leaving service but before retirement, a pension of 50% of the deferred pension will be payable to the spouse or nominated financial dependent. On death in retirement the pension payable is 60% of the director's pension (ignoring any pension commuted for a lump sum at retirement). Children's pensions may also be payable to dependent children. Pensions in payment are guaranteed in the UK plan to increase each year at 5% or the increase in the Index of Retail Prices, whichever is lower. RONA FAIRHEAD is also a member of the Final Pay Section of the UK Plan, but her pensionable salary is restricted to the earnings cap introduced by the Finance Act 1989. In addition, the company contributes into a Funded Unapproved Retirement Benefits Scheme, or FURBS. The UK Plan provides her with a pension that accrues at one-thirtieth of the earnings cap for each year of service. Early retirement after age 50 is possible, with company consent, and on a pension from the plan that is scaled down to reflect the shorter period of service completed. If retiring before age 60, the pension will be further reduced by an actuarial factor to reflect the longer period over which it is expected to be paid. Under the company's FURBS arrangements, early retirement is possible with company consent from age 50 onwards. The benefit payable will be the amount of the member's fund at the relevant date. On death before normal retirement age, a pension will be paid to the spouse, or in the absence of a spouse to a financial dependent nominated by the member. The pension will be one-third of the earnings cap at the time of death. On death after leaving service but before retirement, a pension of 50% of the deferred pension will be payable to the spouse or nominated financial dependent. On death in retirement the pension payable is 60% of the director's pension (ignoring any pension commuted for a lump sum at retirement). Children's pensions may also be payable to dependent children. Pensions in payment are guaranteed in the UK plan to increase each year at 5% or the increase in the Index of Retail Prices, whichever is lower. In addition, the proceeds of the FURBS will be paid at retirement. PETER JOVANOVICH has both defined benefit and defined contribution pension arrangements in the US. The Pearson Inc. Pension Plan (the US Plan) is an approved defined benefit plan providing a lump sum convertible to a pension on retirement. The lump sum is accrued at 6% of capped compensation, but accruals of benefit in this plan ceased on 31 December 2001. In addition, there is an unfunded, unapproved Supplemental Executive Retirement Plan (the US SERP) providing an annual pension accrual of 2% of final average earnings, less benefits accrued in the US Plan and US Social Security. The defined contribution arrangements are an approved 401(k) plan and a funded, unapproved 401(k) excess plan. For 2003, Peter Jovanovich's pension arrangements included a new unfunded, unapproved, defined contribution plan as his participation in the US SERP ceased. The US Plan has a normal retirement age of 65. Early retirement after age 55 is possible, with company consent and on a reduced pension for early payment. The US Plan and the US SERP also provide a spouse's pension on death in service from age 55 and death in retirement broadly equivalent to 50% of the member's early retirement pension. The US Plan does not guarantee any increases to the pension once it comes into payment. JOHN MAKINSON is also a member of the Final Pay Section of the UK Plan, and his pensionable salary is also restricted to the earnings cap. The company has been paying contributions into a FURBS, but the contributions ceased on 31 December 2001. During 2002, the company established an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pensions payable from the UK Plan and the closed FURBS to a target pension of two-thirds of Revalued Base Salary on retirement at age 62. Revalued Base Salary is defined as L450,000 indexed in line with the increase in the Index of Retail Prices. Early retirement after age 50 is possible, with company consent and based on a uniform accrual from 1 April 1994. In that event, the pension from the UK Plan, the FURBS and the UURBS in aggregate will be scaled down 41 to reflect the shorter period of service completed. If retiring before age 60, the pension will be further reduced by an actuarial factor to reflect the longer period over which it is expected to be paid. On death in service before normal retirement age, a pension from the UK Plan, the FURBS and the UURBS in aggregate will be paid to the spouse, or in the absence of a spouse to a financial dependent nominated by the member. The pension will be one-third of Revalued Base Salary. On death after leaving service but before retirement, a pension of 50% of the deferred pension will be payable to the spouse or nominated financial dependent. On death in retirement the pension payable is 60% of the director's pension (ignoring any pension commuted for a lump sum at retirement). Children's pensions may also be payable to dependent children. The pension in payment is guaranteed to increase each year at 5% or the increase in the Index of Retail Prices, whichever is lower. CHAIRMAN'S REMUNERATION Our policy is that the chairman's pay should be set at a level that is competitive with those of chairmen in similar positions in comparable companies. He is not entitled to an annual bonus, retirement or other benefits. He is eligible to participate in the company's worldwide save for shares plan on the same terms as all other eligible employees. The chairman's salary has remained unchanged since 1999 at L275,000 per year. He has voluntarily given up any consideration for awards under the long-term incentive plans that have been developed since then and for which he might have been eligible. During 2003, the committee reviewed his remuneration with advice from Towers Perrin on practice relating to chairmen's remuneration and on the increase in the remuneration of chairmen in comparable positions since the last review. After considering all the circumstances, the committee's view was that the current appropriate total pay level was around L425,000 per year. Having been informed of the committee's view, the chairman indicated that he thought it was not appropriate for him to receive an increase of this magnitude in cash -- a view which the committee accepted. Instead, the committee recommended to the board that the chairman's salary should be increased to L325,000 with effect from January 1, 2004 and that he should receive a share award of 30,000 shares in 2004. This award is linked to the company's share price and will not be released to him unless the Pearson share price reaches L9.00 within a maximum period of three years. NON-EXECUTIVE DIRECTORS Fees for non-executive directors are determined by the full board having regard to market practice and within the restrictions contained in the company's articles of association. Non-executive directors receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of the company) and do not participate in the company's equity-based incentive plans. Since January 2000, non-executive directors have received an annual fee of L35,000 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 each receive an additional fee of L5,000 per annum. In the case of Patrick Cescau, his fee is paid over to his employer. For those non-executive directors who retain their fees personally, L10,000 of the total fee, or all of the fee in the case of Rana Talwar, is payable in the form of Pearson shares which the non-executive directors have committed to retain for the period of their directorships. Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships. 42 REMUNERATION OF SENIOR MANAGEMENT Excluding contributions to pension funds and related benefits, senior management remuneration for 2003 was as follows:
SALARIES/FEES BONUS(1) OTHER(2) TOTAL ------------- -------- -------- ----- L'000 L'000 L'000 L'000 CHAIRMAN Lord Stevenson...................................... 275 -- -- 275 EXECUTIVE DIRECTORS Marjorie Scardino................................... 625 200 54 879 David Bell.......................................... 360 115 16 491 Rona Fairhead....................................... 363 116 14 493 Peter Jovanovich.................................... 530 156 9 695 John Makinson....................................... 450 127 232 809 ----- --- --- ----- SENIOR MANAGEMENT AS A GROUP........................ 2,603 714 325 3,642 ===== === === =====
- --------------- (1) For Pearson plc, the 2003 performance measures in the annual bonus plan were growth in underlying sales, growth in adjusted earnings per share, trading cash conversion and average working capital as a ratio to sales. In the case of Peter Jovanovich and John Makinson, part of their bonuses also related to the performance of Pearson Education and Penguin Group respectively. For both businesses, the performance measures were growth in underlying sales, trading margin, trading cash conversion and average working capital as a ratio to sales. (2) Other emoluments include company car and healthcare benefits and, in the case of Marjorie Scardino, include L37,030 in respect of housing costs. John Makinson is entitled to a location and market premium in relation to the management of the business of the Penguin Group in the US. He received L206,586 for 2003. SHARE OPTIONS OF SENIOR MANAGEMENT This table sets forth for each director the number of share options held as of December 31, 2003 as well as the exercise price, rounded to the nearest whole penny/cent, and the range of expiration dates of these options.
NUMBER OF EARLIEST DIRECTOR OPTIONS (1) EXERCISE PRICE EXERCISE DATE EXPIRY DATE - -------- --------- --- -------------- ------------- ----------- Dennis Stevenson..................... 2,512 b 687p 01/08/03 01/02/04 ------- TOTAL................................ 2,512 -- ======= Marjorie Scardino.................... 176,556 a* 974p 14/09/01 14/09/08 5,660 a* 1090p 14/09/01 14/09/08 2,839 b 687p 01/08/05 01/02/06 2,224 b 425p 01/08/06 01/02/07 37,583 c 1373p 08/06/02 08/06/09 37,583 c 1648p 08/06/02 08/06/09 37,583 c 1922p 08/06/02 08/06/09 36,983 c 2764p 03/05/03 03/05/10 36,983 c 3225p 03/05/03 03/05/10 41,550 d* 1421p 09/05/02 09/05/11 41,550 d* 1421p 09/05/03 09/05/11 41,550 d 1421p 09/05/04 09/05/11 41,550 d 1421p 09/05/05 09/05/11 ------- TOTAL................................ 540,194 -- =======
43
NUMBER OF EARLIEST DIRECTOR OPTIONS (1) EXERCISE PRICE EXERCISE DATE EXPIRY DATE - -------- --------- --- -------------- ------------- ----------- David Bell........................... 20,496 a* 974p 14/09/01 14/09/08 501 b* 687p 01/08/03 01/02/04 184 b 913p 01/08/04 01/02/05 202 b 1428p 01/08/03 01/02/04 202 b 957p 01/08/04 01/02/05 272 b 696p 01/08/05 01/02/06 444 b 425p 01/08/06 01/02/07 18,705 c 1373p 08/06/02 08/06/09 18,705 c 1648p 08/06/02 08/06/09 18,705 c 1922p 08/06/02 08/06/09 18,686 c 2764p 03/05/03 03/05/10 18,686 c 3225p 03/05/03 03/05/10 16,350 d* 1421p 09/05/02 09/05/11 16,350 d* 1421p 09/05/03 09/05/11 16,350 d 1421p 09/05/04 09/05/11 16,350 d 1421p 09/05/05 09/05/11 ------- TOTAL................................ 181,188 -- ------- Rona Fairhead........................ 19,997 d* 822p 01/11/02 01/11/11 19,998 d* 822p 01/11/03 01/11/11 20,005 d 822p 01/11/04 01/11/11 ------- TOTAL................................ 60,000 -- ------- Peter Jovanovich..................... 8,250 a* 758p 12/09/00 12/09/07 102,520 a* 677p 12/09/00 12/09/07 32,406 c 1373p 08/06/02 08/06/09 32,406 c 1648p 08/06/02 08/06/09 32,406 c 1922p 08/06/02 08/06/09 33,528 c 2764p 03/05/03 03/05/10 33,528 c 3225p 03/05/03 03/05/10 31,170 d* $21.00 09/05/02 09/05/11 31,170 d* $21.00 09/05/03 09/05/11 31,170 d $21.00 09/05/04 09/05/11 31,170 d $21.00 09/05/05 09/05/11 19,998 d* $11.97 01/11/02 01/11/11 19,998 d* $11.97 01/11/03 01/11/11 20,004 d $11.97 01/11/04 01/11/11 ------- TOTAL................................ 459,724 -- =======
44
NUMBER OF EARLIEST DIRECTOR OPTIONS (1) EXERCISE PRICE EXERCISE DATE EXPIRY DATE - -------- --------- --- -------------- ------------- ----------- John Makinson........................ 56,000 a* 567p 06/05/97 06/05/04 20,160 a* 487p 20/04/98 20/04/05 36,736 a* 584p 08/08/99 08/08/06 73,920 a* 677p 12/09/00 12/09/07 30,576 a* 974p 14/09/01 14/09/08 1,920 b 957p 01/08/08 01/02/09 4,178 b 425p 01/08/10 01/02/11 21,477 c 1373p 08/06/02 08/06/09 21,477 c 1648p 08/06/02 08/06/09 21,477 c 1922p 08/06/02 08/06/09 21,356 c 2764p 03/05/03 03/05/10 21,356 c 3225p 03/05/03 03/05/10 19,785 d* 1421p 09/05/02 09/05/11 19,785 d* 1421p 09/05/03 09/05/11 19,785 d 1421p 09/05/04 09/05/11 19,785 d 1421p 09/05/05 09/05/11 ------- TOTAL................................ 409,773 -- =======
- --------------- (1) Shares under option are designated as: A executive; B worldwide save for shares; C premium priced; and D long-term incentive; and * where options are exercisable. A EXECUTIVE Subject to any performance condition being met, executive options become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. Options granted prior to 1996 are not subject to performance conditions representing market best practice at that time. The exercise of options granted since 1996 is subject to a real increase in the company's adjusted earnings per share over any three-year period prior to exercise. B WORLDWIDE SAVE FOR SHARES The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target. C PREMIUM PRICED Subject to the performance conditions being met, Premium Priced Options (PPOs) become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. PPOs were granted in three tranches. For these to become exercisable, the Pearson share price has to stay above the option price for 20 consecutive days within three, five and seven years respectively. In addition, for options to be exercisable, the company's adjusted earnings per share have to increase in real terms by at least 3% per annum over the three-year period prior to exercise. D LONG-TERM INCENTIVE Options granted in 2001 were based on pre-grant earnings per share growth of 75% against a target of 16.6% over the period 1997 to 2000 and are not subject to further performance conditions on exercise. Long-term incentive options granted on May 9, 2001 become exercisable in tranches on the first, second, third and fourth anniversary of the date of grant and lapse if they remain unexercised at the tenth. The fourth 45 tranche lapses if any of the options in the first, second or third tranche are exercised prior to the fourth anniversary of the date of grant. Long-term incentive options granted on November 1, 2001 become exercisable in tranches on the first, second and third anniversary of the date of grant and lapse if they remain unexercised at the tenth. (2) In addition to the above listed options both Marjorie Scardino and Peter Jovanovich participate in the Pearson US Employee Stock Purchase Plan saving the maximum amount of US$12,000 per annum. SHARE OWNERSHIP OF SENIOR MANAGEMENT The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at March 31, 2004. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in "Remuneration of Senior Management" and "Share Options for Senior Management". The total number of ordinary shares held by senior management as of March 31, 2004 was 444,497 representing less than 1% of the issued share capital on March 31, 2004.
AS AT 31 MARCH 2004 ORDINARY SHARES(1) RESTRICTED SHARES(2) - ------------------- ------------------ -------------------- Lord Stevenson............................................ 163,268 -- Marjorie Scardino......................................... 93,733 643,566 David Bell................................................ 56,492 326,095 Lord Burns................................................ 3,371 -- Patrick Cescau............................................ -- -- Rona Fairhead............................................. 9,622 279,594 Peter Jovanovich.......................................... 56,450 453,587 John Makinson............................................. 39,214 393,894 Reuben Mark............................................... 13,870 -- Vernon Sankey............................................. 3,230 -- Rana Talwar............................................... 5,247 --
- --------------- (1) Amounts include shares acquired by individuals under the annual bonus share matching plan and amounts purchased in the market by individuals. (2) Restricted shares comprise awards made under the reward, annual bonus share matching and long-term incentive plans. The number of shares shown represents the maximum number of shares which may vest, subject to the performance conditions being fulfilled. EMPLOYEE SHARE OWNERSHIP PLANS ALL-EMPLOYEE SHARE AWARDS Since 1999, we have made share awards to all employees at the discretion of the board. No award was made in 2002. In 2004, the board has made an award of 10 shares to all employees employed at 1 March 2004. WORLDWIDE SAVE FOR SHARES PLAN In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world 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 United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson's listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary for a period of twelve months. At the end of this period, the employee has the option to purchase ADRs representing ordinary shares with their 46 accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period. BOARD PRACTICES Our board currently comprises the chairman, who is part-time, five executive directors 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, 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. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their appointment. Details of our approach to corporate governance and an account of how we comply with NYSE requirements can be found on our website (www.pearson.com/investor/corpgov.htm). 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 Terry Burns and Reuben Mark are members. 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. Vernon Sankey is also the designated Audit Committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. 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 This committee is chaired by Reuben Mark and its other members are Terry Burns and Rana Talwar. All three are non-executive directors. The committee meets regularly to decide the remuneration and benefits of the executive directors and the chief executives of our three operating divisions. The committee also recommends the chairman's remuneration to the board of directors for its decision and reviews management development and succession plans. NOMINATION COMMITTEE This committee is chaired by Dennis Stevenson and comprises all directors. The committee meets from time to time as necessary to consider the appointment of new directors. Its composition and chairmanship are currently under consideration. TREASURY COMMITTEE This committee is chaired by Dennis Stevenson and also comprises Rona Fairhead, Vernon Sankey and Rana Talwar. The committee sets the policies for our treasury department and reviews its procedures on a regular basis. EMPLOYEES The average numbers of persons employed by us during each of the three fiscal years ended 2003 were as follows: - 30,868 in fiscal 2003 - 30,359 in fiscal 2002, and - 29,027 in fiscal 2001. 47 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. The table set forth below shows for 2003 the average number of persons employed in each of our operating divisions in the United Kingdom, the United States, other locations and in total.
BUSINESS UNIT UK US OTHER TOTAL - ------------- ----- ------ ----- ------ Pearson Education......................................... 1,443 14,438 4,097 19,978 FT Group.................................................. 1,885 1,397 2,362 5,644 The Penguin Group......................................... 1,223 2,115 980 4,318 Other..................................................... 414 513 1 928 ----- ------ ----- ------ TOTAL PEARSON............................................. 4,965 18,463 7,440 30,868 ===== ====== ===== ======
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS To our knowledge, as of March 31, 2004, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were The Capital Group Companies Inc. which owned 112,304,891 ordinary shares representing 14.0% of our outstanding ordinary shares, Franklin Resources Inc. which owned 56,515,055 ordinary shares representing 7.04% of our outstanding ordinary shares, Telefonica Contenidos SA, which owned 38,853,403 ordinary shares representing 4.84% of our outstanding ordinary shares, and Legal and General which owned 24,046,759 ordinary shares representing 3.0% of our outstanding ordinary shares. On February 29, 2004, record holders with registered addresses in the United States held 16,482,527 ADRs, which represented 2.05% of our outstanding ordinary shares. Because some of these ADRs are held by nominees, these numbers may not accurately represent the number of beneficial owners in the United States. ITEM 8. FINANCIAL INFORMATION The financial statements filed as part of this Annual Report are included on pages F-1 through F-63 hereof. Other than those events described in Note 31 of this Form 20-F and seasonal fluctuations in borrowings, there has been no significant change to our financial condition or results of operations since December 31, 2003. 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. Our policy with respect to dividend distributions is described in response to "Item 3. Key Information" above. 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. On December 11, 2003, Interactive Data, our 61% owned subsidiary, announced a $125,000 settlement with the SEC, without admitting or denying their formal findings, arising out of an investigation by the SEC into the management of certain unaffiliated bond funds. There will be costs associated with Interactive Data's increased record-keeping obligations. However, we do not expect the SEC settlement to have a material effect on the results of operations or financial condition of Interactive Data or on Pearson as a whole. 48 ITEM 9. THE OFFER AND LISTING The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States 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 and amended it in August 2000 in connection with our New York Stock Exchange listing. Each ADS represents one ordinary share. The ADSs trade 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 and the average daily trading volume on the London Stock Exchange: - on an annual basis for our five most recent fiscal years, - on a quarterly basis for our most recent quarter and two most recent fiscal years, and - on a monthly basis for the six most recent months.
ORDINARY SHARES ---------------- AVERAGE DAILY REFERENCE PERIOD HIGH LOW TRADING VOLUME - ---------------- ------ ------ ----------------- (IN PENCE) (ORDINARY SHARES) Five Most Recent Fiscal Years 2003...................................................... 680 430 6,631,800 2002...................................................... 922 505 6,164,500 2001...................................................... 1,726 645 5,245,000 2000...................................................... 2,302 1,470 2,686,700 1999...................................................... 2,004 1,173 1,910,700 Most Recent Quarter and Two Most Recent Fiscal Years 2004 First quarter......................................... 657 584 7,039,600 2003 Fourth quarter........................................ 680 579 6,786,300 Third quarter........................................ 639 550 6,160,400 Second quarter....................................... 606 497 6,402,900 First quarter........................................ 604 430 7,182,800 2002 Fourth quarter........................................ 740 523 6,570,900 Third quarter........................................ 690 505 6,783,200 Second quarter....................................... 914 653 5,507,900 First quarter........................................ 922 694 5,732,400 Most Recent Six Months April 2004........................................... 680 623 8,846,800 March 2004........................................... 631 594 7,559,000 February 2004........................................ 634 584 7,777,300 January 2004......................................... 657 610 5,748,100 December 2003........................................ 662 604 7,910,800 November 2003........................................ 680 610 7,423,200
ITEM 10. ADDITIONAL INFORMATION MEMORANDUM AND ARTICLES OF ASSOCIATION We summarize below the material provisions of our memorandum and articles of association, as amended, which have been filed as an exhibit to this annual report. 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. 49 DIRECTORS' POWERS Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association to be exercised by resolution of the shareholders in general meeting. 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 in accordance with the Companies Act 1985. Provided that the director has declared his interest and acted in accordance with law, no such contract or arrangement shall be avoided and no director so contracting or being interested shall be liable to account to us for any profit realised by him from the contract or arrangement by reason of the director holding his office or the fiduciary relationship thereby established. 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. Notwithstanding the foregoing, 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 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 to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of our or any third party's debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by us (and any of our subsidiaries), but excluding any intra-group debts, shall not at any time exceed a sum equal to twice the aggregate 50 of the adjusted capital and reserves, unless the shareholders in general meeting sanction an excession of this limitation. 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 and, in the case of non-executive directors, up to an aggregate of L500,000 or such other amounts as resolved by the shareholders at a general meeting. 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 are ordinarily 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 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. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the 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. 51 SHARE CAPITAL Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders' vote in general meeting. Subject to the Companies Act 1985, any shares may be issued on terms that they are, or at our or the shareholders' option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may by special resolution of the shareholders, determine. There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares. Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him. CHANGES IN CAPITAL We may from time to time, by ordinary resolution: - consolidate and divide our share capital into shares of a larger amount than its existing shares; or - sub-divide all of or any of our existing shares into shares of smaller amounts than is fixed by the Memorandum of Association, subject to the Companies Act 1985; or - cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of our share capital by the amount of the shares so cancelled. We may, from time to time, by ordinary resolution increase our share capital and, by special resolution, decrease our share capital, capital redemption reserve fund and any share premium account in any way. 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 before the declaration of the results of a show of hands. 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. 52 The directors may, with the sanction of a resolution of the shareholders, offer any holders of ordinary shares 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. The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to us on account of calls or otherwise in relation to our shares. 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 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 the board of directors 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 pay dividends (or issue shares in lieu of dividends); and - we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require 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. 53 MATERIAL CONTRACTS The following summaries are not intended to be complete and reference is made to the contracts themselves, which are included as exhibits to this annual report. We have entered into the following contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report: ISSUANCE OF $300,000,000 4.625% SENIOR NOTES DUE 2018 We issued US $300 million principal amount of 4.625% senior notes due 2018 under an indenture dated June 23, 2003 between us and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 15, 2003. We may redeem the notes at any time, in whole or in part, at our option. The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than the bankruptcy of us or a subsidiary, the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued, but unpaid, interest and other amounts described in the indenture, as immediately due and payable. The indenture limits our ability to create liens to secure certain types of debt intended to be traded on an exchange. EXECUTIVE EMPLOYMENT CONTRACTS We have entered into agreements with each of our executive directors pursuant to which such executive director is employed by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See "Item 6. Directors, Senior Management & Employees -- Compensation of Senior Management". Each agreement may be terminated by us on 12 months' notice or by the executive director on six months' notice. In the event we terminate any executive director without giving the full 12 months' advance notice, the executive director is entitled to receive liquidated damages equal to 12 months base salary and benefits together with a proportion of potential bonus. In the case of Peter Jovanovich, his service agreement provides for compensation on termination of employment by the company without cause of 200% of annual salary plus target bonus, reflecting US employment practice and the terms agreed with him in his employment and confirmed in October 2000 before his appointment as a director of the company. EXCHANGE CONTROLS There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under "-- Tax Considerations" below. TAX CONSIDERATIONS The following is a discussion of the material US federal income tax considerations and UK tax considerations arising 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 United States 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. 54 This discussion deals only with 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 ordinary shares or ADSs as financial services income, - insurance companies, - tax-exempt entities, - US holders that hold the 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 United States, 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, or the Code, and regulations, rulings and judicial decisions as of the date of this Annual Report; 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 Income Tax Treaty between the United Kingdom and the United States, which came into force in March 2003 (the "New Income Tax Treaty"). The New Income Tax Treaty replaced the 1975 Income Tax Treaty between the United Kingdom and the United States (the "Old Income Tax Treaty"), and is effective in relation to withholding tax from 1 May 2003, for United Kingdom income and capital gains tax from 6 April 2003 (individuals) and 1 April 2003 (Companies) and for US income tax from 1 January 2004. Under the Old Income Tax Treaty a US holder was entitled to claim a tax credit from the UK Inland Revenue in respect of dividends received from us, subject to a notional withholding tax. The payment of such tax credits was specifically abolished with effect from 1 May 2003. However, a UK holder is entitled to have the Old Income Tax Treaty apply in its entirety for a period of twelve months after the effective dates of the New Income Tax Treaty. Notwithstanding this, for the purposes of this discussion it is assumed that the New Income Tax Treaty applies. 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 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 FORCE AS OF THE DATE OF THIS ANNUAL REPORT, AND ARE SUBJECT TO ANY CHANGES OCCURRING AFTER THAT DATE. UK INCOME TAXATION OF DISTRIBUTIONS The United Kingdom does not impose dividend withholding tax on dividends paid to US holders. 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 our current and accumulated earnings and profits. The amount of any distribution will equal the amount of the cash distribution. Distributions, if any, in 55 excess of our current and accumulated earnings and profits will constitute a non-taxable return of capital to a US holder and 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 the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds 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 pounds 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. As a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (referred to here as the 2003 Tax Act), a distribution by the Company to noncorporate shareholders before 2009 will be taxed as net capital gain at a maximum rate of 15%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under U.S. federal income tax principles. UK INCOME TAXATION OF CAPITAL GAINS Under the New 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 United Kingdom for UK tax purposes and who does not carry on a trade, profession or vocation in the United Kingdom 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. 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. As a result of the 2003 Tax Act, long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of 15%. This long-term capital gain rate, which reflects a reduction from the prior maximum rate of 20%, is scheduled to expire, under the 2003 Tax Act, in 2009. 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. ESTATE AND GIFT TAX The current Estate and Gift Tax Convention, or the Convention, between the United States and the United Kingdom 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 United States, 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 United Kingdom or pertain to the fixed base in the United Kingdom 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 56 and US Estate or Gift Tax, the Convention generally provides for tax paid in the United Kingdom to be credited against tax payable in the United States or for tax paid in the United States to be credited against tax payable in the United Kingdom 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 United Kingdom 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 United Kingdom and that the instrument or written agreement of transfer is not executed in the United Kingdom. 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. DOCUMENTS ON DISPLAY Copies of our Memorandum and Articles of Association, the material contracts described above and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our registered office at 80 Strand, London WC2R 0RL (c/o the Company Secretary), or, in the United States, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable prior request. ITEM 11. 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 is the responsibility of the Chief Financial Officer, 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 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 to ensure compliance with these policies. Although the majority of our derivative contracts were transacted without regard to existing US GAAP requirements on hedge accounting, during 2003 we sought to gain qualification for hedge accounting under US GAAP for a limited number of key derivative contracts, but did not meet the prescribed hedge designation requirements. The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk. See Note 19 for discussion of treasury policy in these areas. 57 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 debt outstanding at fixed rates 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 40% and 65% of current core debt, the rate of interest should be fixed or capped for the next four years. Within this target range the proportion that is hedged is triggered by a formula based on historical interest rate frequencies. 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 and six-month LIBOR, and the dates on which these rates are set do not necessarily 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 debt. To avoid the rate on a single transaction unduly influencing our overall net interest expense, 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. CURRENCY EXCHANGE RATES Although we are based in the United Kingdom, we have significant investments in overseas operations. The most significant currency in which we trade 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, euro 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, euro and sterling, we still borrow small amounts in other currencies, typically for seasonal working capital needs. At December 31, 2003 the split of aggregate net borrowings in core currencies was US dollar 81%, euro 10% and sterling 9%. 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 58 policy is to effect transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate. 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. Although we prepare our consolidated accounts in sterling, we have invested significant sums in overseas assets, particularly in the United States. 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. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 59 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. ITEM 15. CONTROLS AND PROCEDURES An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2003 was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that Pearson's disclosure controls and procedures have been designed to provide, and are effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. A controls system, no matter how well designed and operated cannot provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Subsequent to the date of the most recent evaluation of our internal controls, there were no significant changes in our internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The members of the Board of Directors of Pearson plc have determined that Vernon Sankey is an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. ITEM 16B. CODE OF ETHICS Pearson has adopted a code of ethics (the Pearson code of business conduct) which applies to all employees including the Chief Executive Officer and Chief Financial Officer. This code of ethics is available on our website (www.pearson.com/investor/corpgov.htm). The information on our website is not incorporated by reference into this report. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES In 2003, the audit committee adopted a revised policy for auditor services. The policy requires all audit engagements to be approved by the audit committee. The policy permits the auditors to be engaged for other services provided the engagement is specifically approved in advance by the committee or alternatively meets the detailed criteria of specific pre-approved services and is notified to the committee. 60 The Group Chief Financial Officer or Group Controller can procure pre-approved services, as defined in the audit committee's policy for auditor services, of up to amount of L100,000 per engagement, subject to a cumulative limit of L500,000 per year. The limit of L100,000 will be subject to annual review by the audit committee. Where pre-approval has not been granted for a service or where the amount is above these limits, specific case by case approval must be obtained from the Audit Committee prior to the engagement of our auditor.
AUDITORS' REMUNERATION 2003 2002 - ---------------------- ---- ---- LM LM Statutory audit and audit-related regulatory reporting services.................................................. 3 3 Non-audit services.......................................... 2 3 Non-audit services were as follows: Tax compliance services..................................... 1 2 Tax advisory services....................................... 1 1
- --------------- NOTE Included in statutory audit fees are amounts relating to the parent company of L20,000 (2002:L20,000). Audit-related regulatory reporting fees are L200,000 (2002:L200,000). Non-audit fees in the UK in 2003 are L341,000 (2002:L231,000) and are in respect of tax advisory and tax compliance services. The remainder of the non-audit fees relate to overseas subsidiaries. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES Not applicable. 61 PART III ITEM 17. FINANCIAL STATEMENTS The financial statements filed as part of this Annual Report are included on pages F-1 through F-63 hereof. ITEM 18. FINANCIAL STATEMENTS We have elected to respond to Item 17. ITEM 19. EXHIBITS 1.1 Memorandum and Articles of Association of Pearson plc. 2.1 Indenture dated June 21, 2001 between Pearson plc and The Bank of New York, as trustee.+ 2.2 Indenture dated June 23, 2003 between Pearson plc and The Bank of New York, as trustee. 4.1 Letter Agreement dated October 9, 2000 between Pearson plc and Peter Jovanovich.# 8.1 List of Significant Subsidiaries. 12.1 Certification of Chief Executive Officer. 12.2 Certification of Chief Financial Officer. 13.1 Certification of Chief Executive Officer. 13.2 Certification of Chief Financial Officer.
- --------------- + Incorporated by reference to the Form 20-F of Pearson plc for the year ended December 31, 2001 and filed June 10, 2002. # Incorporated by reference to the Form 20-F of Pearson plc for the year ended December 31, 2002 and filed June 5, 2003. 62 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Profit and Loss Account for the Year Ended December 31, 2003......................................... F-3 Consolidated Balance Sheet as at December 31, 2003.......... F-4 Consolidated Cash Flow Statement for the Year Ended December 31, 2003.................................................. F-5 Statement of Total Recognized Gains and Losses for the Year Ended December 31, 2003................................... F-6 Reconciliation of Movements in Equity Shareholders' Funds for the Year Ended December 31, 2003...................... F-6 Notes to the Accounts....................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Pearson plc: In our opinion, the accompanying consolidated balance sheets and the related consolidated profit and loss accounts, statements of total recognized gains and losses, reconciliations of movements in equity shareholders' funds, and consolidated cash flow statements present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries at 31 December 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended 31 December 2003, 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 statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 34 to the consolidated financial statements. As discussed in Note 34 to the consolidated financial statements, the Group changed its method of accounting for deferred taxes in 2002 in accordance with principles generally accepted in the United Kingdom. The change has been accounted for by restating comparative information at December 31, 2001 and 2000, and for the years then ended. PricewaterhouseCoopers LLP Chartered Accountants And Registered Auditors London, United Kingdom February 27, 2004 F-2 CONSOLIDATED PROFIT AND LOSS ACCOUNT YEAR ENDED 31 DECEMBER 2003 (ALL FIGURES IN L MILLIONS)
NOTE 2003 2002 2001 ----- ----- ----- ----- SALES (INCLUDING SHARE OF JOINT VENTURES)................... 4,066 4,331 4,240 Less: share of joint ventures............................... (18) (11) (15) ----- ----- ----- SALES....................................................... 2a 4,048 4,320 4,225 GROUP OPERATING PROFIT...................................... 226 194 20 SHARE OF OPERATING PROFIT/(LOSS) OF JOINT VENTURES AND ASSOCIATES................................................ 2c/d -- (51) (67) ----- ----- ----- TOTAL OPERATING PROFIT...................................... 2b 226 143 (47) ----- ----- ----- Loss on sale of fixed assets and investments................ 4a (2) (13) (12) Profit/(loss) on sale of subsidiaries and associates........ 4b 8 (27) (63) Profit on sale of a subsidiary by an associate.............. 4c -- 3 (53) ----- ----- ----- NON OPERATING ITEMS......................................... 6 (37) (128) ----- ----- ----- PROFIT BEFORE INTEREST AND TAXATION......................... 232 106 (175) Amounts written off investments............................. -- -- (92) Net finance costs........................................... 5 (80) (131) (169) ----- ----- ----- PROFIT/(LOSS) BEFORE TAXATION............................... 152 (25) (436) Taxation.................................................... 7 (75) (64) 33 ----- ----- ----- PROFIT/(LOSS) AFTER TAXATION................................ 77 (89) (403) Equity minority interests................................... (22) (22) (20) ----- ----- ----- PROFIT/(LOSS) FOR THE FINANCIAL YEAR........................ 55 (111) (423) DIVIDENDS ON EQUITY SHARES.................................. 8 (192) (187) (177) ----- ----- ----- LOSS RETAINED............................................... (137) (298) (600) ===== ===== ===== BASIC EARNINGS/(LOSS) PER SHARE............................. 9 6.9P (13.9)p (53.2)p DILUTED EARNINGS/(LOSS) PER SHARE........................... 9 6.9P (13.9)p (53.2)p DIVIDENDS PER SHARE......................................... 8 24.2P 23.4p 22.3p
There is no difference between the profit/(loss) before taxation and the loss retained for the year stated above and their historical cost equivalents. F-3 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2003 (ALL FIGURES IN L MILLIONS)
NOTE 2003 2002 ---- ------ ------ FIXED ASSETS Intangible assets........................................... 11 3,260 3,610 Tangible assets............................................. 12 468 503 Investments: joint ventures................................. 13 Share of gross assets..................................... 7 7 Share of gross liabilities................................ (1) -- ------ ------ 6 7 Investments: associates..................................... 14 58 106 Investments: other.......................................... 15 80 84 ------ ------ 3,872 4,310 ------ ------ CURRENT ASSETS Stocks...................................................... 16 683 734 Debtors..................................................... 17 1,132 1,057 Deferred taxation........................................... 21 145 174 Investments................................................. 2 2 Cash at bank and in hand.................................... 18 561 575 ------ ------ 2,523 2,542 ------ ------ CREDITORS -- AMOUNTS FALLING DUE WITHIN ONE YEAR Short-term borrowing........................................ 19 (575) (249) Other creditors............................................. 20 (1,129) (1,114) ------ ------ (1,704) (1,363) ------ ------ NET CURRENT ASSETS.......................................... 819 1,179 ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES....................... 4,691 5,489 CREDITORS -- AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium and long-term borrowing.............................. 19 (1,347) (1,734) Other creditors............................................. 20 (45) (60) ------ ------ (1,392) (1,794) ------ ------ PROVISIONS FOR LIABILITIES AND CHARGES...................... 22 (152) (165) ------ ------ NET ASSETS.................................................. 3,147 3,530 ====== ====== CAPITAL AND RESERVES Called up share capital..................................... 23 201 200 Share premium account....................................... 24 2,469 2,465 Profit and loss account..................................... 24 282 673 ------ ------ Equity shareholders' funds.................................. 2,952 3,338 Equity minority interests................................... 195 192 ------ ------ 3,147 3,530 ====== ======
The company balance sheet is shown in note 32. The financial statements were approved by the board of directors on 27 February 2004 and signed on its behalf by Dennis Stevenson, Rona Fairhead, Chairman Chief financial officer
F-4 CONSOLIDATED CASH FLOW STATEMENT YEAR ENDED 31 DECEMBER 2003 (ALL FIGURES IN L MILLIONS)
NOTE 2003 2002 2001 ---- ---- ---- ---- NET CASH INFLOW FROM OPERATING ACTIVITIES................... 27 359 529 490 ---- ---- ---- DIVIDENDS FROM JOINT VENTURES AND ASSOCIATES................ 9 6 25 ---- ---- ---- Interest received........................................... 11 11 31 Interest paid............................................... (86) (151) (187) Debt issue costs............................................ (1) -- (1) Dividends paid to equity minority interests................. (19) (1) (9) ---- ---- ---- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. (95) (141) (166) ---- ---- ---- Taxation.................................................... (44) (55) (71) ---- ---- ---- Purchase of tangible fixed assets........................... (105) (126) (165) Sale of tangible fixed assets............................... 8 7 36 Purchase of investments..................................... (4) (21) (35) Sale of investments......................................... -- 3 22 ---- ---- ---- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ (101) (137) (142) ---- ---- ---- Purchase of subsidiaries.................................... 25 (94) (87) (128) Net cash acquired with subsidiaries......................... 34 1 83 Purchase of joint ventures and associates................... (5) (40) (26) Sale of subsidiaries........................................ 26 (4) 3 41 Net overdrafts/(cash) disposed with subsidiaries............ 1 (1) -- Sale of associates.......................................... 57 920 1 ---- ---- ---- ACQUISITIONS AND DISPOSALS.................................. (11) 796 (29) ---- ---- ---- EQUITY DIVIDENDS PAID....................................... (188) (181) (174) ---- ---- ---- NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING................................... (71) 817 (67) ---- ---- ---- Liquid resources acquired................................... (85) (65) (48) Collateral deposit reimbursed............................... -- 22 47 ---- ---- ---- MANAGEMENT OF LIQUID RESOURCES.............................. (85) (43) (1) ---- ---- ---- Issue of equity share capital............................... 5 6 20 Capital element of finance leases........................... (3) (5) (7) Loan facility advanced/(repaid)............................. 1 (507) (521) Bonds advanced.............................................. 180 -- 507 Bonds repaid................................................ (159) (167) -- Collateral deposit reimbursed............................... 54 17 -- Net movement in other borrowings............................ (13) (7) 3 ---- ---- ---- FINANCING................................................... 65 (663) 2 ---- ---- ---- (DECREASE)/INCREASE IN CASH IN THE YEAR..................... 27 (91) 111 (66) ==== ==== ====
F-5 STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES YEAR ENDED 31 DECEMBER 2003 (ALL FIGURES IN L MILLIONS)
2003 2002 2001 ---- ---- ---- Profit/(loss) for the financial year........................ 55 (111) (423) Other net gains and losses recognised in reserves: Exchange differences........................................ (254) (317) 26 Taxation on exchange differences............................ -- 5 (6) ---- ---- ---- TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR...... (199) (423) (403) ---- ---- ---- Prior year adjustment....................................... -- 209 240 ---- ---- ---- TOTAL RECOGNISED GAINS AND LOSSES........................... (199) (214) (163) ==== ==== ====
Included within profit/(loss) for the financial year is a loss for the year of L10m (2002: loss of L13m) relating to joint ventures and a profit of L6m (2002: a loss of L39m) relating to associates. The prior year adjustment in 2002 related to the adoption of FRS 19 "Deferred tax". RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS YEAR ENDED 31 DECEMBER 2003 (ALL FIGURES IN L MILLIONS)
2003 2002 2001 ----- ----- ----- Profit/(loss) for the financial year........................ 55 (111) (423) Dividends on equity shares.................................. (192) (187) (177) ----- ----- ----- (137) (298) (600) Exchange differences net of taxation........................ (254) (312) 20 Goodwill written back on sale of subsidiaries and associates................................................ -- 144 37 Goodwill written back on sale of subsidiaries and associates by an associate........................................... -- -- 36 Shares issued............................................... 5 6 18 Replacement options granted on acquisition of subsidiary.... -- 1 2 ----- ----- ----- Net movement for the year................................... (386) (459) (487) Equity shareholders' funds at beginning of the year......... 3,338 3,797 4,284 ----- ----- ----- EQUITY SHAREHOLDERS' FUNDS AT END OF THE YEAR............... 2,952 3,338 3,797 ===== ===== =====
F-6 NOTES TO THE ACCOUNTS 1 ACCOUNTING POLICIES Accounting policies have been consistently applied and the amendment to FRS 5 -- Application Note G "Revenue recognition" has been applied in respect of multiple element arrangements as set out in note 1d below. The impact of this revision has not given rise to a material adjustment to these financial statements. The transitional arrangements of FRS 17 "Retirement benefits" which require additional disclosures in respect of retirement benefits have been adopted, as set out in note 10. A. BASIS OF ACCOUNTING -- The accounts are prepared under the historical cost convention and in accordance with the Companies Act and 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 all subsidiaries made up to 31 December. Where companies have become or ceased to be subsidiaries or associates during the year, the Group results include results for the period during which they were subsidiaries or associates. The results of the Group includes the Group's share of the results of joint ventures and associates, and the consolidated balance sheet includes the Group's interest in joint ventures and associates at the book value of attributable net assets and attributable goodwill. C. GOODWILL -- From 1 January 1998 goodwill, being either the net excess of the cost of shares in subsidiaries, joint ventures and associates over the value attributable to their net assets on acquisition or the cost of other goodwill by purchase, is capitalised and amortised through the profit and loss account on a straight-line basis 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 1 January 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. D. 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 associates. Revenue from the sale of books is recognised when the goods are shipped. Anticipated returns are based primarily on historical return rates. Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription. Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with textbooks, revenue is recognised for each element as if it were an individual contractual arrangement. Revenue from long-term contracts, such as contracts to process qualifying tests for individual professions and government departments, is recognised over the contract term based on the percentage of services provided during the period, compared to the total estimated services to be provided over the entire contract. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue. F-7 NOTES TO THE ACCOUNTS (CONTINUED) E. PENSION COSTS -- The regular pension cost of the Group's defined benefit pension schemes is charged to the profit and loss account in accordance with SSAP 24 "Accounting for pension costs" 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. The pension cost of the Group's defined contribution schemes is the amount of contributions payable for the year. F. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS -- Post-retirement benefits other than pensions are accounted for on an accruals basis to recognise the obligation over the expected service lives of the employees concerned. G. TANGIBLE FIXED ASSETS -- The cost of tangible fixed assets other than freehold land is depreciated over 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. H. LEASES -- Finance lease rentals are capitalised at the net present value of the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated in accordance with policy g 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. I. FIXED ASSET INVESTMENTS -- Fixed asset investments are stated at cost less provisions for diminution in value. J. SHARE SCHEMES -- Shares held by employee share ownership trusts are shown at cost less any provision for permanent diminution in value. The costs of funding and administering the trusts are charged to the profit and loss account in the period to which they relate. The cost of shares acquired by the trusts or the fair market value of the shares at the date of the grant, less any consideration to be received from the employee, is charged to the profit and loss account over the period to which the employee's performance relates. Where awards are contingent upon future events (other than continued employment) an assessment of the likelihood of these conditions being achieved is made at the end of each reporting period and an appropriate provision made. K. STOCKS -- Stocks and work in progress are stated at the lower of cost and net realisable value. L. PRE-PUBLICATION COSTS -- Pre-publication costs represent direct costs incurred in the development of titles prior to their publication. These costs are carried forward in stock where the title to which they relate has a useful life in excess of one year. These costs are amortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected life cycle of the title, with a higher proportion of the amortisation taken in the earlier years. M. ROYALTY ADVANCES -- Advances of royalties to authors are included within debtors when the advance is paid less any provision required to bring the amount down to its net realisable value. The royalty advance is expensed at the contracted royalty rate as the related revenues are earned. N. NEWSPAPER 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 and enhanced editorial content, extended distribution and remote printing. These extra costs arising are expensed as incurred. O. DEFERRED TAXATION -- Provision is made in full for deferred tax that arises from timing differences that have originated but not reversed by the balance sheet date on transactions or events that result in an obligation to pay more tax in the future. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that there will be taxable profits from which the underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance F-8 NOTES TO THE ACCOUNTS (CONTINUED) sheet date. Deferred tax assets and liabilities are not discounted. No deferred tax is provided in respect of any future remittance of earnings of foreign subsidiaries or associates where no commitment has been made to remit such earnings. P. FINANCIAL INSTRUMENTS -- Interest and the premium or discount on the issue of financial instruments is taken to the profit and loss account so as to produce a constant rate of return over the period to the date of expected redemption. 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. Where the underlying exposure ceases to exist, any termination gain or loss is taken to the profit and loss account. 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 subsidiaries 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. Premiums paid on contracts designed to manage currency exposure on specific acquisitions or disposals are charged to the profit and loss account. The company participates in offset arrangements with certain banks whereby cash and overdraft amounts are offset against each other. Q. 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 31 December. Exchange differences arising on consolidation are taken directly to reserves. Other exchange differences are taken to the profit and loss account where they relate to trading transactions and directly to reserves where they relate to investments. The principal overseas currency for the Group is the US dollar. The average rate for the year against sterling was $1.63 (2002: $1.51) and the year end rate was $1.79 (2002: $1.61). R. LIQUID RESOURCES -- Liquid resources comprise short-term deposits of less than one year and investments which are readily realisable and held on a short-term basis. S. 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-9 NOTES TO THE ACCOUNTS (CONTINUED) 2A ANALYSIS OF SALES
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education........................................... 2,451 2,756 2,604 FT Group.................................................... 757 726 801 The Penguin Group........................................... 840 838 820 ----- ----- ----- Continuing operations....................................... 4,048 4,320 4,225 ===== ===== ===== GEOGRAPHICAL MARKETS SUPPLIED United Kingdom.............................................. 474 411 433 Continental Europe.......................................... 463 419 446 North America............................................... 2,742 3,139 2,975 Asia Pacific................................................ 255 249 241 Rest of world............................................... 114 102 130 ----- ----- ----- Continuing operations....................................... 4,048 4,320 4,225 ===== ===== =====
2003 2002 2001 --------------------------- --------------------------- --------------------------- TOTAL BY INTER- TOTAL TOTAL BY INTER- TOTAL TOTAL BY INTER- TOTAL SOURCE REGIONAL SALES SOURCE REGIONAL SALES SOURCE REGIONAL SALES -------- -------- ----- -------- -------- ----- -------- -------- ----- (ALL FIGURES IN L MILLIONS) GEOGRAPHICAL SOURCE OF SALES United Kingdom............ 720 (29) 691 644 (25) 619 686 (20) 666 Continental Europe........ 339 (4) 335 304 (4) 300 315 (5) 310 North America............. 2,758 (39) 2,719 3,144 (36) 3,108 2,976 (35) 2,941 Asia Pacific.............. 230 (1) 229 226 (2) 224 221 (6) 215 Rest of world............. 77 (3) 74 69 -- 69 93 -- 93 ----- --- ----- ----- --- ----- ----- --- ----- Continuing operations..... 4,124 (76) 4,048 4,387 (67) 4,320 4,291 (66) 4,225 ===== === ===== ===== === ===== ===== === =====
- --------------- NOTE The table above analyses sales by the geographical region from which the products and services originate. Inter-regional sales are those made between Group companies in different regions. Included within sales for 2003 is an amount of L127m attributable to acquisitions made during the year. F-10 NOTES TO THE ACCOUNTS (CONTINUED) 2B ANALYSIS OF TOTAL OPERATING PROFIT
2003 ---------------------------------------------------------------------- RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT PROFIT ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education................ 313 -- (207) -- 106 FT Group......................... 86 -- (36) -- 50 The Penguin Group................ 91 -- (21) -- 70 --- --- ---- --- --- Continuing operations............ 490 -- (264) -- 226 === === ==== === === GEOGRAPHICAL MARKETS SUPPLIED United Kingdom................... (46) -- (31) -- (77) Continental Europe............... 29 -- (10) -- 19 North America.................... 466 -- (218) -- 248 Asia Pacific..................... 33 -- (5) -- 28 Rest of world.................... 8 -- -- -- 8 --- --- ---- --- --- Continuing operations............ 490 -- (264) -- 226 === === ==== === ===
2002 ---------------------------------------------------------------------- RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT PROFIT ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education................ 326 (7) (244) -- 75 FT Group......................... 80 -- (65) (10) 5 The Penguin Group................ 87 (3) (18) -- 66 --- --- ---- --- ---- Continuing operations............ 493 (10) (327) (10) 146 Discontinued operations.......... -- -- (3) -- (3) --- --- ---- --- ---- 493 (10) (330) (10) 143 --- --- ---- --- ---- GEOGRAPHICAL MARKETS SUPPLIED United Kingdom................... (72) (5) (25) -- (102) Continental Europe............... 40 -- (8) -- 32 North America.................... 495 (5) (288) -- 202 Asia Pacific..................... 31 -- (6) -- 25 Rest of world.................... (1) -- -- (10) (11) --- --- ---- --- ---- Continuing operations............ 493 (10) (327) (10) 146 Discontinued operations.......... -- -- (3) -- (3) --- --- ---- --- ---- 493 (10) (330) (10) 143 === === ==== === ====
F-11 NOTES TO THE ACCOUNTS (CONTINUED)
2001 ---------------------------------------------------------------------- RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education................ 274 (29) (254) (8) (17) FT Group......................... 72 -- (67) (3) 2 The Penguin Group................ 80 (45) (19) (50) (34) --- --- ---- --- ---- Continuing operations............ 426 (74) (340) (61) (49) Discontinued operations.......... 37 -- (35) -- 2 --- --- ---- --- ---- 463 (74) (375) (61) (47) === === ==== === ==== GEOGRAPHICAL MARKETS SUPPLIED United Kingdom................... (37) (33) (27) (55) (152) Continental Europe............... 45 -- (6) -- 39 North America.................... 397 (41) (302) (3) 51 Asia Pacific..................... 24 -- (4) -- 20 Rest of world.................... (3) -- (1) (3) (7) --- --- ---- --- ---- Continuing operations............ 426 (74) (340) (61) (49) Discontinued operations.......... 37 -- (35) -- 2 --- --- ---- --- ---- 463 (74) (375) (61) (47) === === ==== === ====
- --------------- NOTE Integration costs in 2002 include amounts in respect of the Dorling Kindersley and NCS acquisitions. Integration costs, goodwill amortisation and goodwill impairment are included as "other items" in the profit and loss account. Discontinued operations related to the withdrawal of the Group from the television business. Included within operating profit for 2003 is an amount of L12m attributable to acquisitions made during the year. 2C SHARE OF OPERATING LOSS OF JOINT VENTURES
2003 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... -- -- -- -- -- FT Group............................. (11) -- -- -- (11) The Penguin Group.................... 1 -- -- -- 1 --- --- --- --- --- Continuing operations................ (10) -- -- -- (10) === === === === ===
2002 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... (1) -- -- -- (1) FT Group............................. (13) -- -- -- (13) The Penguin Group.................... 1 -- -- -- 1 --- --- --- --- --- Continuing operations................ (13) -- -- -- (13) === === === === ===
F-12 NOTES TO THE ACCOUNTS (CONTINUED)
2001 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... -- -- -- -- -- FT Group............................. (20) -- -- -- (20) The Penguin Group.................... 1 -- -- -- 1 --- --- --- --- --- Continuing operations................ (19) -- -- -- (19) === === === === ===
2D SHARE OF OPERATING PROFIT/(LOSS) OF ASSOCIATES
2003 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT PROFIT ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... 1 -- -- -- 1 FT Group............................. 16 -- (7) -- 9 The Penguin Group.................... -- -- -- -- -- --- --- --- --- --- Continuing operations................ 17 -- (7) -- 10 === === === === ===
2002 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... 3 -- (1) -- 2 FT Group............................. 7 -- (44) -- (37) The Penguin Group.................... -- -- -- -- -- --- --- --- --- --- Continuing operations................ 10 -- (45) -- (35) Discontinued operations.............. -- -- (3) -- (3) --- --- --- --- --- 10 -- (48) -- (38) === === === === ===
2001 ------------------------------------------------------------------ RESULTS FROM INTEGRATION GOODWILL GOODWILL OPERATING OPERATIONS COSTS AMORTISATION IMPAIRMENT LOSS ------------ ----------- ------------ ---------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education.................... 3 -- (1) (3) (1) FT Group............................. (2) -- (47) -- (49) The Penguin Group.................... -- -- -- -- -- --- --- --- --- --- Continuing operations................ 1 -- (48) (3) (50) Discontinued operations.............. 37 -- (35) -- 2 --- --- --- --- --- 38 -- (83) (3) (48) === === === === ===
F-13 NOTES TO THE ACCOUNTS (CONTINUED) 2E ANALYSIS OF CAPITAL EMPLOYED
NOTE 2003 2002 ---- ------ ------ (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education........................................... 3,487 3,914 FT Group.................................................... 432 410 The Penguin Group........................................... 596 605 ------ ------ Continuing operations....................................... 4,515 4,929 ====== ====== GEOGRAPHICAL LOCATION United Kingdom.............................................. 464 557 Continental Europe.......................................... 219 258 North America............................................... 3,691 3,971 Asia Pacific................................................ 120 125 Rest of world............................................... 21 18 ------ ------ Continuing operations....................................... 4,515 4,929 ====== ====== RECONCILIATION OF CAPITAL EMPLOYED TO NET ASSETS Capital employed............................................ 4,515 4,929 Add: deferred taxation...................................... 21 145 174 Less: provisions for liabilities and charges................ 22 (152) (165) Less: net debt excluding finance leases..................... 27 (1,361) (1,408) ------ ------ Net assets.................................................. 3,147 3,530 ====== ======
3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) COST OF SALES............................................... (1,910) (2,064) (1,902) ====== ====== ====== GROSS PROFIT................................................ 2,138 2,256 2,323 ====== ====== ====== Distribution costs.......................................... (239) (233) (233) Administration and other expenses........................... (1,724) (1,888) (2,136) Other operating income (see below).......................... 51 59 66 ------ ------ ------ NET OPERATING EXPENSES...................................... (1,912) (2,062) (2,303) ====== ====== ====== Analysed as: Net operating expenses -- before other items................ (1,655) (1,760) (1,879) Net operating expenses -- other items - -- Integration costs........................................ -- (10) (74) - -- Goodwill amortisation.................................... (257) (282) (292) - -- Goodwill impairment...................................... -- (10) (58) ------ ------ ------ NET OPERATING EXPENSES...................................... (1,912) (2,062) (2,303) ====== ====== ======
- --------------- NOTE Other items are all included in administration and other expenses. F-14 NOTES TO THE ACCOUNTS (CONTINUED)
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) OTHER OPERATING INCOME Income from other investments Unlisted.................................................... 4 2 2 Other operating income (mainly royalties, rights and commission income)........................................ 47 57 64 --- --- --- 51 59 66 === === === PROFIT/(LOSS) BEFORE TAXATION IS STATED AFTER CHARGING Amortisation of pre-publication costs....................... 158 170 161 Depreciation................................................ 111 122 125 Operating lease rentals - -- Plant and machinery...................................... 14 11 31 - -- Properties............................................... 113 101 99 - -- Other.................................................... 9 13 17 Auditors' remuneration Statutory audit and audit-related regulatory reporting services.................................................. 3 3 2 Non-audit services.......................................... 2 3 5 NON-AUDIT SERVICES WERE AS FOLLOWS Tax compliance services..................................... 1 2 -- Tax advisory services....................................... 1 1 1 Acquisition related work.................................... -- -- 4
- --------------- NOTE Included in statutory audit fees are amounts relating to the parent company of L20,000 (2002: L20,000). Audit-related regulatory reporting fees are L200,000 (2002: L200,000). Non-audit fees in the UK in 2003 are L341,000 (2002: L231,000) and are in respect of tax advisory and tax compliance services. The remainder of the non-audit fees relate to overseas subsidiaries. 4A LOSS ON SALE OF FIXED ASSETS AND INVESTMENTS
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Net loss on sale of property................................ (1) (3) (2) Net loss on sale of investments............................. (1) (10) (10) Continuing operations....................................... (2) (13) (12) --- --- --- Taxation.................................................... -- 6 1 === === ===
4B PROFIT/(LOSS) ON SALE OF SUBSIDIARIES AND ASSOCIATES
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Profit on sale of Unidesa................................... 12 -- -- Loss on sale of Forum....................................... (1) (40) -- Loss on sale of PH Direct................................... -- (8) -- Loss on sale of iForum...................................... -- -- (27) Net (loss)/profit on sale of other subsidiaries and associates................................................ (3) 3 (36) --- --- --- Continuing operations....................................... 8 (45) (63) Profit on sale of the RTL Group -- discontinued operations................................................ -- 18 -- --- --- --- 8 (27) (63) --- --- --- Taxation.................................................... (3) (6) 4 === === ===
F-15 NOTES TO THE ACCOUNTS (CONTINUED) 4C PROFIT ON SALE OF A SUBSIDIARY BY AN ASSOCIATE
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Profit/(loss) on sale of Journal of Commerce by the Economist -- continuing operations........................ -- 3 (36) Loss on sale of subsidiaries and associates by the RTL Group -- discontinued operations.......................... -- -- (17) --- --- --- -- 3 (53) === === ===
5 NET FINANCE COSTS
2003 2002 2001 ---------------------------- ---------------------------- ---------------------------- RESULTS FROM OTHER RESULTS FROM OTHER RESULTS FROM OTHER NOTE OPERATIONS ITEMS TOTAL OPERATIONS ITEMS TOTAL OPERATIONS ITEMS TOTAL ---- ------------ ----- ----- ------------ ----- ----- ------------ ----- ----- (ALL FIGURES IN L MILLIONS) Net interest payable - -- Group............... 6 (81) -- (81) (94) -- (94) (163) -- (163) - -- Associates.......... 1 -- 1 -- -- -- (6) -- (6) Early repayment of debt and termination of swap contracts....... -- -- -- -- (37) (37) -- -- -- --- --- --- --- --- ---- ---- --- ---- Total net finance costs................ (80) -- (80) (94) (37) (131) (169) -- (169) === === === === === ==== ==== === ====
6 NET INTEREST PAYABLE -- GROUP
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) INTEREST PAYABLE AND SIMILAR CHARGES BANK LOANS, OVERDRAFTS AND COMMERCIAL PAPER On borrowing repayable wholly within five years not by instalments............................................... (60) (54) (100) On borrowing repayable wholly or partly after five years.... (31) (51) (72) OTHER BORROWINGS On borrowing repayable wholly within five years not by instalments............................................... (2) -- (16) --- ---- ---- (93) (105) (188) --- ---- ---- INTEREST RECEIVABLE AND SIMILAR INCOME On deposits and liquid funds................................ 12 11 23 Amortisation of swap proceeds............................... -- -- 2 --- ---- ---- NET INTEREST PAYABLE........................................ (81) (94) (163) === ==== ====
F-16 NOTES TO THE ACCOUNTS (CONTINUED) 7 TAXATION
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) ANALYSIS OF (CHARGE)/BENEFIT IN THE YEAR CURRENT TAXATION UK corporation tax for the year............................. (9) 11 (28) Adjustments in respect of prior years....................... 10 58 147 --- --- --- 1 69 119 Overseas tax for the year................................... (59) (63) (43) Adjustments in respect of prior years....................... 3 -- (6) Associates.................................................. (5) (4) (9) --- --- --- (60) 2 61 === === === DEFERRED TAXATION Origination and reversal of timing differences UK.......................................................... (4) (11) 4 Overseas.................................................... (54) (56) (32) Adjustments in respect of prior years....................... 43 1 -- --- --- --- (15) (66) (28) --- --- --- TAXATION.................................................... (75) (64) 33 === === ===
- --------------- NOTE Included in the adjustment in respect of prior years in 2003 is a tax benefit of L44m (2002: L45m) relating to a prior year acquisition of a subsidiary and the disposal of a subsidiary and a fixed asset investment. The current tax charge for the year is different from the standard rate of corporation tax in the UK (30%). The differences are explained below:
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Profit/(loss) before tax.................................... 152 (25) (436) --- ---- ---- Expected (charge)/benefit at UK corporation tax rate of 30% (2002: 30%)............................................... (46) 8 131 Effect of overseas tax rates................................ 8 11 37 Effect of tax losses........................................ (5) (7) (1) Timing differences.......................................... 64 55 (98) Non-deductible goodwill amortisation........................ (90) (111) (149) US state taxes.............................................. (4) (10) (6) Adjustments in respect of prior years and other items....... 13 56 147 --- ---- ---- CURRENT TAX (CHARGE)/BENEFIT FOR THE YEAR................... (60) 2 61 === ==== ====
2003 2002 2001 ------ ------ ------ (ALL FIGURES IN PERCENTAGES) TAX RATE RECONCILIATION UK tax rate................................................. 30.0 30.0 30.0 Effect of overseas tax rates................................ 1.3 2.8 4.5 Other items................................................. (0.1) -- (0.5) ---- ---- ---- TAX RATE REFLECTED IN ADJUSTED EARNINGS..................... 31.2 32.8 34.0 ==== ==== ====
- --------------- F-17 NOTES TO THE ACCOUNTS (CONTINUED) NOTE Both the current and the total tax charge on profit (or loss) before tax will continue to be affected by the fact that there is only very limited tax relief available on the goodwill amortisation charged in the accounts. The current tax charge will continue to be affected by the utilisation of tax losses and by the impact of other timing differences, in both cases mainly in the United States. Following the adoption of FRS 19 these factors will have only a very limited impact on the total tax rate; as shown in note 21, the Group has recognised a total deferred tax asset of L145m at 31 December 2003 (2002: L174m). In both 2003 and 2002 the tax charge was materially affected by adjustments in respect to prior years; it is not practicable to forecast the possible effect of such items in future years as this will depend on progress in agreeing the Group's tax returns with the tax authorities. The total charge in future years will also be affected by any changes to corporation tax rates and/or any other relevant legislative changes in the jurisdictions in which the Group operates and by the mix of profits between the different jurisdictions. 8 DIVIDENDS ON EQUITY SHARES
2003 2002 2001 ---------------- ---------------- ---------------- PENCE PER PENCE PER PENCE PER SHARE LM SHARE LM SHARE LM --------- --- --------- --- --------- --- Interim paid............................ 9.4 73 9.1 72 8.7 68 Final proposed.......................... 14.8 119 14.3 115 13.6 109 ---- --- ---- --- ---- --- DIVIDENDS FOR THE YEAR.................. 24.2 192 23.4 187 22.3 177 ==== === ==== === ==== ===
- --------------- NOTE Dividends in respect of the company's shares held by employee share trusts (see note 15) have been waived. 9 EARNINGS/(LOSS) PER SHARE
2003 2002 2001 ----------------- ----------------- ----------------- EARNINGS/ EARNINGS/ EARNINGS/ (LOSS) (LOSS) (LOSS) PER SHARE PER SHARE PER SHARE NOTE LM (P) LM (P) LM (P) ---- ----- --------- ----- --------- ----- --------- Profit/(loss) for the financial year............................. 55 6.9 (111) (13.9) (423) (53.2) Taxation on conversion of ordinary shares........................... -- -- -- -- (1) -- ----- ---- ----- ----- ----- ----- Diluted earning/(loss)............. 55 6.9 (111) (13.9) (424) (53.2) ===== ==== ===== ===== ===== ===== Weighted average number of shares (millions) - -- for basic earnings and adjusted earnings......................... 794.4 796.3 795.4 Effect of dilutive share options... 0.9 -- -- Weighted average number of shares (millions) ----- ----- ----- - -- for diluted earnings............ 795.3 796.3 795.4 ===== ===== =====
- --------------- NOTE In 2002 and 2001 the Group made a loss for the financial year (after taking into account goodwill amortisation). Consequently, the effect of share options was anti-dilutive and there was no difference between the loss per share and the diluted loss per share. F-18 NOTES TO THE ACCOUNTS (CONTINUED) There is no difference between the profit for the financial year and the diluted profit for the financial year. Therefore the diluted earnings per share is 6.9p (2002: a loss of 13.9p). The weighted average number of shares in 2003 is lower than in 2002 as a result of own shares purchased to hedge share schemes. 10A EMPLOYEE INFORMATION The details of the emoluments of the directors of Pearson plc are shown on pages 55 to 69.
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) STAFF COSTS Wages and salaries.......................................... 1,027 1,106 1,090 Social security costs....................................... 99 106 104 Post-retirement costs....................................... 62 59 39 ----- ----- ----- 1,188 1,271 1,233 ===== ===== =====
UK US OTHER TOTAL ----- ------ ----- ------ AVERAGE NUMBER EMPLOYED 2003 Pearson Education......................................... 1,443 14,438 4,097 19,978 FT Group.................................................. 1,885 1,397 2,362 5,644 The Penguin Group......................................... 1,223 2,115 980 4,318 Other..................................................... 414 513 1 928 ----- ------ ----- ------ 4,965 18,463 7,440 30,868 ===== ====== ===== ====== AVERAGE NUMBER EMPLOYED 2002 Pearson Education......................................... 1,326 14,459 4,250 20,035 FT Group.................................................. 1,914 1,140 2,169 5,223 The Penguin Group......................................... 1,305 2,167 890 4,362 Other..................................................... 204 534 1 739 ----- ------ ----- ------ 4,749 18,300 7,310 30,359 ===== ====== ===== ====== AVERAGE NUMBER EMPLOYED 2001 Pearson Education......................................... 1,505 12,610 4,344 18,459 FT Group.................................................. 2,075 1,121 2,340 5,536 The Penguin Group......................................... 1,333 2,293 768 4,394 Other..................................................... 193 444 1 638 ----- ------ ----- ------ 5,106 16,468 7,453 29,027 ===== ====== ===== ======
10B PENSIONS SSAP 24 ACCOUNTING The Group operates a number of pension schemes throughout the world, the principal ones being in the UK and US. The major schemes are self-administered with the schemes' assets being held independently of the Group. Pension costs are assessed in accordance with the advice of independent qualified actuaries. The UK scheme is a hybrid scheme with both defined benefit and defined contribution F-19 NOTES TO THE ACCOUNTS (CONTINUED) sections but, predominantly, consisting of defined benefit liabilities. There are a number of defined contribution schemes, principally overseas. The cost of the schemes is as follows:
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) UK GROUP SCHEME Regular pension cost - -- Defined benefit sections................................. 10 11 9 - -- Defined contribution sections............................ 7 7 6 Variation cost.............................................. 6 -- (5) --- --- --- 23 18 10 --- --- --- OTHER SCHEMES Defined benefit schemes..................................... 7 6 11 Defined contribution schemes................................ 27 30 14 --- --- --- 34 36 25 --- --- --- 57 54 35 === === ===
- --------------- NOTE From 1 January 2003 the UK Group scheme only offers defined contribution benefits to new joiners. The main US defined benefit scheme was closed to the majority of active members in 2001. The changes to these schemes will give rise to a reduction in defined benefit and an increase in defined contribution costs. Included in note 22, there is a pension provision of L29m (2002: L36m) as measured in accordance with SSAP 24. A full actuarial valuation of the UK Group scheme was performed as at 1 January 2001 using the projected unit method of valuation. This valuation has been updated to 1 January 2003 for the purposes of determining the 2003 SSAP 24 cost for the UK Group scheme. The market value of the assets of the scheme at 1 January 2003 was L976m. The major assumptions used to determine the SSAP 24 charge are as follows:
UK GROUP SCHEME --------------- (ALL FIGURES IN PERCENTAGES) Inflation................................................... 2.5 Rate of increase in salaries................................ 4.5 Rate of inflation-linked increase for pensions in payment and deferred pensions..................................... 2.5 Return on investments....................................... 7.0 Level of funding............................................ 96.0
The funding policy differs from the accounting policy to the extent that more conservative assumptions are used for funding purposes. Furthermore, in 2003 the Group paid an additional one-off contribution of L5m into the scheme which was designed to ensure that the scheme was fully funded. The next full triennial valuation is due to be carried out as at 1 January 2004. The date of the most recent valuation of the US plan was 31 December 2002. FRS 17 DISCLOSURES The disclosures required under the transitional arrangements of FRS 17 for the Group's defined benefit schemes and the UK Group hybrid scheme are set out below. The disclosures for the UK Group hybrid scheme are in respect of both the defined benefit and defined contribution sections. For the purpose of these disclosures, the latest full actuarial valuations of the UK Group scheme and other schemes have been updated by independent actuaries to 31 December 2003. The assumptions used are shown below. F-20 NOTES TO THE ACCOUNTS (CONTINUED) Weighted average assumptions have been shown for the other schemes.
2003 2002 2001 ------------------ ------------------ ------------------ UK GROUP OTHER UK GROUP OTHER UK GROUP OTHER SCHEME SCHEMES SCHEME SCHEMES SCHEME SCHEMES -------- ------- -------- ------- -------- ------- ALL FIGURES IN PERCENTAGES Inflation........................... 2.75 3.00 2.25 3.00 2.50 3.00 Rate of increase in salaries........ 4.75 4.50 4.25 4.50 4.50 4.50 Rate of inflation-linked increase for pensions in payment and deferred pensions................. 2.75 -- 2.25 -- 2.50 -- Rate used to discount scheme liabilities....................... 5.50 6.10 5.70 6.75 6.00 7.20
The assets of the UK Group scheme and the expected rate of return on these assets, and the assets of the other defined benefit schemes and the expected rate of return on these assets shown as a weighted average, are as follows:
LONG-TERM LONG-TERM LONG-TERM RATE OF RETURN RATE OF RETURN RATE OF RETURN EXPECTED AT VALUE AT EXPECTED AT VALUE AT EXPECTED AT VALUE AT 31 DEC 2003 31 DEC 2003 31 DEC 2002 31 DEC 2002 31 DEC 2001 31 DEC 2001 % LM % LM % LM -------------- ----------- -------------- ----------- -------------- ----------- UK GROUP SCHEME Equities.................. 7.75 589 8.00 472 7.50 657 Bonds..................... 5.00 262 4.75 284 5.30 293 Properties................ 6.50 107 6.50 112 6.30 102 Other..................... 6.50 133 6.50 108 6.30 42 ------ ------ ------ Total market value of assets.................. 1,091 976 1,094 Present value of scheme liabilities............. (1,316) (1,189) (1,167) ------ ------ ------ Deficit in the scheme..... (225) (213) (73) Related deferred tax asset................... 68 64 22 ------ ------ ------ NET PENSION LIABILITY..... (157) (149) (51) ====== ====== ====== OTHER SCHEMES Equities.................. 9.00 41 9.75 33 9.50 37 Bonds..................... 6.00 25 6.00 23 6.50 24 Other..................... 2.80 1 2.75 1 -- -- ------ ------ ------ Total market value of assets.................. 67 57 61 Present value of scheme liabilities............. (104) (96) (95) ------ ------ ------ Deficit in the schemes.... (37) (39) (34) Related deferred tax asset................... 13 14 12 ------ ------ ------ NET PENSION LIABILITY..... (24) (25) (22) ====== ====== ======
- --------------- NOTE The measurement of the deficit in the scheme for FRS 17 follows a different approach to SSAP 24. The FRS 17 measurement date is 31 December 2003. Although the rise in stock markets in 2003 increased the market value of the UK Group scheme assets, this is more than offset by the increase in the present value of the UK Group scheme liabilities, which is largely caused by the fall in bond yields and increase in the inflation assumption in 2003. This has resulted in an increased deficit in the UK Group scheme under FRS 17. F-21 NOTES TO THE ACCOUNTS (CONTINUED)
UK DEFINED GROUP BENEFIT DEFINED 2003 SCHEME OTHER TOTAL CONTRIBUTION TOTAL ------ ------- ----- ------------ ----- (ALL FIGURES IN L MILLIONS) OPERATING CHARGE Current service cost................................ (20) (1) (21) (27) (48) Past service cost................................... -- (1) (1) -- (1) ---- --- ---- --- --- TOTAL OPERATING CHARGE.............................. (20) (2) (22) (27) (49) ---- --- ---- --- --- OTHER FINANCE INCOME/(CHARGE) Expected return on pension scheme assets............ 65 5 70 -- 70 Interest on pension scheme liabilities.............. (66) (7) (73) -- (73) ---- --- ---- --- --- Net charge.......................................... (1) (2) (3) -- (3) ---- --- ---- --- --- NET PROFIT AND LOSS IMPACT.......................... (21) (4) (25) (27) (52) ==== === ==== === === STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Actual return less expected return on pension scheme assets............................................ 80 8 88 Experience losses arising on the scheme liabilities....................................... (1) (8) (9) Changes in assumptions underlying the present value of the scheme liabilities....... (95) (6) (101) Exchange differences................................ -- 3 3 ---- --- ---- ACTUARIAL LOSS...................................... (16) (3) (19) ==== === ==== MOVEMENT IN DEFICIT DURING THE YEAR Deficit in scheme at beginning of the year.......... (213) (39) (252) Current service cost................................ (20) (1) (21) Past service cost................................... -- (1) (1) Contributions....................................... 25 9 34 Other finance charge................................ (1) (2) (3) Actuarial loss...................................... (16) (3) (19) ---- --- ---- DEFICIT IN SCHEME AT END OF THE YEAR................ (225) (37) (262) ==== === ==== Related deferred tax asset.......................... 68 13 81 ---- --- ---- NET PENSION DEFICIT................................. (157) (24) (181) ==== === ====
In 2003, the company contributions to the UK Group scheme were 17.1% of pensionable salaries, plus L1m in respect of the new Money Purchase section introduced with effect from 1 January 2003. In addition, a one-off contribution of L5m was paid into this scheme to improve the funding position. The 17.1% contribution rate will be reviewed following completion of the 1 January 2004 funding actuarial valuation. F-22 NOTES TO THE ACCOUNTS (CONTINUED)
UK DEFINED GROUP BENEFIT DEFINED 2002 SCHEME OTHER TOTAL CONTRIBUTION TOTAL ------ ------- ----- ------------ ----- (ALL FIGURES IN L MILLIONS) OPERATING CHARGE Current service cost............................ (19) (3) (22) (30) (52) Past service cost............................... -- (1) (1) -- (1) ---- --- ---- --- --- TOTAL OPERATING CHARGE.......................... (19) (4) (23) (30) (53) ---- --- ---- --- --- OTHER FINANCE INCOME/(CHARGE) Expected return on pension scheme assets........ 73 5 78 -- 78 Interest on pension scheme liabilities.......... (68) (6) (74) -- (74) ---- --- ---- --- --- Net income/(charge)............................. 5 (1) 4 -- 4 ---- --- ---- --- --- NET PROFIT AND LOSS IMPACT...................... (14) (5) (19) (30) (49) ==== === ==== === === STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Actual return less expected return on pension scheme assets......................... (165) (11) (176) Experience gains and (losses) arising on the scheme liabilities........................ 17 (1) 16 Changes in assumptions underlying the present value of the scheme liabilities............... 3 (4) (1) Exchange differences............................ -- 2 2 ---- --- ---- ACTUARIAL LOSS.................................. (145) (14) (159) ==== === ==== MOVEMENT IN DEFICIT DURING THE YEAR Deficit in scheme at beginning of the year...... (73) (34) (107) Current service cost............................ (19) (3) (22) Past service cost............................... -- (1) (1) Contributions................................... 19 14 33 Other finance income/(charge)................... 5 (1) 4 Actuarial loss.................................. (145) (14) (159) ---- --- ---- DEFICIT IN SCHEME AT END OF THE YEAR............ (213) (39) (252) ==== === ==== Related deferred tax asset...................... 64 14 78 ---- --- ---- NET PENSION DEFICIT............................. (149) (25) (174) ==== === ====
The contribution rate for 2002 for the UK Group scheme was 17.1% of pensionable salaries. The experience gains and losses of both the UK Group scheme and other schemes are shown below:
2003 2002 ------ ------- (ALL FIGURES IN L MILLIONS) HISTORY OF EXPERIENCE GAINS AND LOSSES Difference between the actual and expected return on scheme assets.................................................... L88M L(176)m As a percentage of year end assets.......................... 8% 17% Experience gains and (losses) on scheme liabilities......... L(9)M L16m As a percentage of year end liabilities..................... 1% 1% Total amount recognised in statement of total recognised gains and losses.......................................... L(19)M L(159)m As a percentage of year end liabilities..................... 1% 12%
F-23 NOTES TO THE ACCOUNTS (CONTINUED) If the above amounts had been recognised in the financial statements, the Group's net assets and profit and loss reserve at 31 December 2003 would be as follows:
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) Net assets excluding pension liability (see note below)..... 3,176 3,566 FRS 17 pension liability.................................... (181) (174) ----- ----- NET ASSETS INCLUDING FRS 17 PENSION LIABILITY............... 2,995 3,392 ===== ===== Profit and loss reserve excluding pension reserve (see note below).................................................... 311 709 FRS 17 pension reserve...................................... (181) (174) ----- ----- PROFIT AND LOSS RESERVE INCLUDING FRS 17 PENSION RESERVES... 130 535 ===== =====
- --------------- NOTE The net assets and profit and loss reserve exclude the pension liability of L29m (2002: L36m) included within provisions (see note 22). 10C OTHER POST-RETIREMENT BENEFITS UITF 6 ACCOUNTING The Group provides certain healthcare and life assurance benefits principally for retired US employees and their dependants. These plans are unfunded. Retirees are eligible for participation in the plans if they meet certain age and service requirements. Plans that are available vary depending on the business division in which the retiree worked. Plan choices and retiree contributions are dependent on retirement date, business division, option chosen and length of service. The valuation and costs relating to other post- retirement benefits are assessed in accordance with the advice of independent qualified actuaries. The cost of the benefits and the major assumptions used, based on a measurement date of 31 December 2002, are as follows:
2003 2002 2001 ------ ------ ------ (ALL FIGURES IN L MILLIONS) Other post-retirement benefits.............................. 5 5 4 (ALL FIGURES IN PERCENTAGES) Inflation................................................... 3.0 Initial rate of increase in healthcare rates................ 12.0 Ultimate rate of increase in healthcare rates (2007)........ 5.0 Rate used to discount scheme liabilities.................... 6.8
Included in note 22, there is a post-retirement medical benefits provision of L51m (2002: L56m). In accordance with UITF 6, the cost of post-retirement benefits, and related provisions, are based on the equivalent US GAAP standard, FAS 106. FRS 17 DISCLOSURES The disclosures required under the transitional arrangements of FRS 17 are set out below. For the purpose of these disclosures the valuation of the schemes has been updated to 31 December 2003 using the assumptions listed below.
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN PERCENTAGES) Inflation................................................... 3.00 3.00 3.00 Initial rate of increase in healthcare rates................ 12.00 12.00 10.00 Ultimate rate of increase in healthcare rates (2008; 2007; 2006)..................................................... 5.00 5.00 5.00 Rate used to discount scheme liabilities.................... 6.10 6.75 7.20
F-24 NOTES TO THE ACCOUNTS (CONTINUED) The value of the unfunded liability is as follows:
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Present value of unfunded liabilities....................... (61) (63) (63) Related deferred tax asset.................................. 21 22 22 --- --- --- NET POST-RETIREMENT HEALTHCARE LIABILITY.................... (40) (41) (41) === === === OPERATING CHARGE Current service cost........................................ (1) (1) Past service cost........................................... -- -- --- --- TOTAL OPERATING CHARGE...................................... (1) (1) === === OTHER FINANCE CHARGE Interest on pension scheme liabilities...................... (4) (4) --- --- Net charge.................................................. (4) (4) --- --- NET PROFIT AND LOSS IMPACT.................................. (5) (5) === === STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Experience gains arising on the scheme liabilities.......... 3 3 Changes in assumptions underlying the present value of the scheme liabilities........................................ (6) (7) Exchange differences........................................ 6 5 --- --- ACTUARIAL GAIN.............................................. 3 1 === === MOVEMENT IN DEFICIT DURING THE YEAR Deficit in scheme at beginning of the year.................. (63) (63) Current service cost........................................ (1) (1) Contributions............................................... 4 4 Other finance charge........................................ (4) (4) Actuarial gain.............................................. 3 1 --- --- DEFICIT IN SCHEME AT END OF THE YEAR........................ (61) (63) === === Related deferred tax asset.................................. 21 22 --- --- NET POST-RETIREMENT DEFICIT................................. (40) (41) === === The experience gains and losses for the schemes are shown below: HISTORY OF EXPERIENCE GAINS AND LOSSES Experience gains on scheme liabilities...................... L3M L3m As a percentage of year end liabilities..................... 5% 4% Total amount recognised in statement of total recognised gains and losses.......................................... L3M L1m As a percentage of year end liabilities..................... 5% 2%
F-25 NOTES TO THE ACCOUNTS (CONTINUED) If the above amounts had been recognised in the financial statements, the Group's net assets and profit and loss reserves at 31 December 2003 would be as follows:
2003 2002 ----- ----- (ALL FIGURES IN L MILLIONS) Net assets excluding post-retirement healthcare liability (see note below).......................................... 3,198 3,586 FRS 17 post-retirement healthcare liability................. (40) (41) ----- ----- NET ASSETS INCLUDING FRS 17 POST-RETIREMENT HEALTHCARE LIABILITY................................................. 3,158 3,545 ===== ===== Profit and loss reserve excluding post-retirement healthcare reserve (see note below).................................. 333 729 FRS 17 post-retirement healthcare reserve................... (40) (41) ----- ----- PROFIT AND LOSS RESERVE INCLUDING FRS 17 POST-RETIREMENT HEALTHCARE RESERVE........................................ 293 688 ===== =====
- --------------- NOTE The net assets and profit and loss reserve exclude the post-retirement healthcare liability of L51m (2002: L56m) included within provisions (see note 22). 11 INTANGIBLE FIXED ASSETS
GOODWILL -------------- (ALL FIGURES IN L MILLIONS) COST AT 31 DECEMBER 2001......................................... 4,866 Exchange differences........................................ (383) Additions................................................... 63 Disposals................................................... (59) ----- AT 31 DECEMBER 2002......................................... 4,487 Exchange differences........................................ (321) Additions................................................... 157 Disposals................................................... (99) ----- AT 31 DECEMBER 2003......................................... 4,224 ===== AMORTISATION AT 31 DECEMBER 2001......................................... (673) Exchange differences........................................ 70 Provided in the year........................................ (282) Provision for impairment.................................... (10) Disposals................................................... 18 ----- AT 31 DECEMBER 2002......................................... (877) Exchange differences........................................ 75 Provided in the year........................................ (257) Disposals................................................... 95 ----- AT 31 DECEMBER 2003......................................... (964) ===== NET CARRYING AMOUNT At 31 December 2002......................................... 3,610 ----- AT 31 DECEMBER 2003......................................... 3,260 =====
F-26 NOTES TO THE ACCOUNTS (CONTINUED) 12 TANGIBLE FIXED ASSETS
FREEHOLD AND PLANT ASSETS IN LEASEHOLD AND COURSE OF PROPERTY EQUIPMENT CONSTRUCTION TOTAL ------------ --------- ------------ ----- (ALL FIGURES IN L MILLIONS) COST AT 31 DECEMBER 2001............................. 316 719 7 1,042 Exchange differences............................ (16) (37) -- (53) Reclassifications............................... -- 3 (3) -- Owned by subsidiaries acquired.................. -- 14 -- 14 Capital expenditure............................. 21 89 16 126 Disposals....................................... (10) (74) -- (84) --- ---- --- ----- AT 31 DECEMBER 2002............................. 311 714 20 1,045 Exchange differences............................ (19) (33) (3) (55) Reclassifications............................... 1 9 (10) -- Owned by subsidiaries acquired.................. 5 19 -- 24 Owned by subsidiaries disposed.................. (2) (6) -- (8) Capital expenditure............................. 12 77 15 104 Disposals....................................... (15) (63) -- (78) --- ---- --- ----- AT 31 DECEMBER 2003............................. 293 717 22 1,032 === ==== === ===== DEPRECIATION AT 31 DECEMBER 2001............................. (90) (410) -- (500) Exchange differences............................ 5 25 -- 30 Provided in the year............................ (17) (105) -- (122) Owned by subsidiaries acquired.................. -- (14) -- (14) Disposals....................................... 6 58 -- 64 --- ---- --- ----- AT 31 DECEMBER 2002............................. (96) (446) -- (542) Exchange differences............................ 10 27 -- 37 Provided in the year............................ (16) (95) -- (111) Owned by subsidiaries acquired.................. -- (14) -- (14) Owned by subsidiaries disposed.................. 1 4 -- 5 Disposals....................................... 7 54 -- 61 AT 31 DECEMBER 2003............................. (94) (470) -- (564) === ==== === ===== NET BOOK VALUE At 31 December 2002............................. 215 268 20 503 --- ---- --- ----- AT 31 DECEMBER 2003............................. 199 247 22 468 === ==== === =====
FREEHOLD AND LEASEHOLD PROPERTY -- Net book value includes freehold of L120m (2002: L130m) and short leases of L79m (2002: L85m). CAPITAL COMMITMENTS -- The Group had capital commitments for fixed assets, including finance leases, already under contract amounting to L1m at 31 December 2003 (2002: L12m). OTHER NOTES -- The net book value of Group tangible fixed assets includes L5m (2002: L7m) in respect of assets held under finance leases. Depreciation on these assets charged in 2003 was L2m (2002: L2m). F-27 NOTES TO THE ACCOUNTS (CONTINUED) 13 JOINT VENTURES
2003 2002 ------------------ ------------------ BOOK BOOK VALUATION VALUE VALUATION VALUE --------- ----- --------- ----- (ALL FIGURES IN L MILLIONS) Unlisted joint ventures.................................. 6 6 7 7
- --------------- NOTE The valuations of unlisted joint ventures are directors' valuations as at 31 December 2003. If realised at these values there would be an estimated liability for taxation of Lnil (2002: Lnil). The Group had no capital commitments to subscribe for further capital and loan stock.
SHARE OF TOTAL NET EQUITY RESERVES ASSETS -------- -------- --------- (ALL FIGURES IN L MILLIONS) SUMMARY OF MOVEMENTS AT 31 DECEMBER 2002......................................... 61 (54) 7 Exchange differences........................................ 7 (5) 2 Additions................................................... 7 -- 7 Retained loss for the year.................................. -- (10) (10) -- --- --- AT 31 DECEMBER 2003......................................... 75 (69) 6 == === ===
2003 2002 2001 ---------------------- ---------------------- ---------------------- OPERATING TOTAL NET OPERATING TOTAL NET OPERATING TOTAL NET LOSS ASSETS LOSS ASSETS LOSS ASSETS --------- --------- --------- --------- --------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education............. -- -- (1) -- -- 1 FT Group...................... (11) 2 (13) 3 (20) 3 The Penguin Group............. 1 4 1 4 1 3 --- --- --- --- --- --- (10) 6 (13) 7 (19) 7 --- --- --- --- --- --- GEOGRAPHICAL MARKETS SUPPLIED AND LOCATION OF NET ASSETS United Kingdom................ 1 4 1 4 (1) 3 Continental Europe............ (11) 2 (13) 3 (18) 3 North America................. -- -- (1) -- -- 1 --- --- --- --- --- --- (10) 6 (13) 7 (19) 7 === === === === === ===
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) RECONCILIATION TO RETAINED LOSS Operating loss of joint ventures............................ (10) (13) (19) Taxation.................................................... -- -- (6) --- --- --- RETAINED LOSS FOR THE YEAR.................................. (10) (13) (25) === === ===
F-28 NOTES TO THE ACCOUNTS (CONTINUED) 14 ASSOCIATES
2003 2002 ----------------------- ----------------------- VALUATION BOOK VALUE VALUATION BOOK VALUE --------- ---------- --------- ---------- Listed associates................................ 27 9 17 17 Unlisted associates.............................. 192 49 214 88 Loans............................................ -- -- 1 1 --- --- --- --- 219 58 232 106 === === === ===
- --------------- NOTE Principal associates are listed in Item 4 -- Information on the Company. The valuations of unlisted associates are directors' valuations as at 31 December 2003. If realised at these values there would be an estimated liability for taxation of Lnil (2002: Lnil). The Group had no capital commitments to subscribe for further capital and loan stock.
SHARE OF TOTAL NET EQUITY LOANS RESERVES TOTAL GOODWILL ASSETS -------- ----- -------- ----- -------- --------- (ALL FIGURES IN L MILLIONS) SUMMARY OF MOVEMENTS AT 31 DECEMBER 2001................... 228 1 7 236 657 893 Exchange differences.................. (2) -- 1 (1) (3) (4) Additions............................. 20 -- -- 20 1 21 Disposals............................. (182) -- (1) (183) (575) (758) Retained profit for the year.......... -- -- 2 2 -- 2 Goodwill amortisation................. -- -- -- -- (48) (48) ---- --- --- ---- ---- ---- AT 31 DECEMBER 2002................... 64 1 9 74 32 106 Exchange differences.................. 1 1 -- 2 (1) 1 Disposals............................. (16) -- (5) (21) (24) (45) Loan repayment........................ -- (2) -- (2) -- (2) Retained profit for the year.......... -- -- 5 5 -- 5 Goodwill amortisation................. -- -- -- -- (7) (7) ---- --- --- ---- ---- ---- AT 31 DECEMBER 2003................... 49 -- 9 58 -- 58 ==== === === ==== ==== ====
F-29 NOTES TO THE ACCOUNTS (CONTINUED)
2003 2002 2001 --------------------- --------------------- --------------------- OPERATING TOTAL NET OPERATING TOTAL NET OPERATING TOTAL NET PROFIT ASSETS LOSS ASSETS LOSS ASSETS --------- --------- --------- --------- --------- --------- (ALL FIGURES IN L MILLIONS) BUSINESS SECTORS Pearson Education........................ 1 4 2 8 (1) 10 FT Group................................. 9 54 (37) 98 (49) 120 --- --- --- --- --- --- Continuing operations.................... 10 58 (35) 106 (50) 130 Discontinued operations.................. -- -- (3) -- 2 763 --- --- --- --- --- --- 10 58 (38) 106 (48) 893 === === === === === === GEOGRAPHICAL MARKETS SUPPLIED AND LOCATION OF NET ASSETS/(LIABILITIES) United Kingdom........................... 10 20 11 9 4 12 Continental Europe....................... 2 39 (1) 92 2 72 North America............................ (3) (7) (45) (5) (59) 36 Rest of world............................ 1 6 -- 10 3 10 --- --- --- --- --- --- Continuing operations.................... 10 58 (35) 106 (50) 130 Discontinued operations.................. -- -- (3) -- 2 763 --- --- --- --- --- --- 10 58 (38) 106 48 893 === === === === === ===
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) RECONCILIATION TO RETAINED PROFIT Operating profit of associates (before goodwill amortisation)............................................. 17 10 38 Interest.................................................... 1 -- (53) Profit on sale of subsidiaries.............................. -- 3 (9) Taxation.................................................... (5) (4) (25) Dividends (including tax credits) from unlisted associates................................................ (8) (7) -- Other....................................................... -- -- (8) --- --- --- RETAINED PROFIT FOR THE YEAR................................ 5 2 (57) === === ===
The aggregate of the Group's share in its associates is shown below:
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) SALES....................................................... 234 141 700 Fixed assets................................................ 24 28 270 Current assets.............................................. 116 130 384 Liabilities due within one year............................. (70) (76) (360) Liabilities due after one year or more...................... (12) (8) (58) --- --- ---- NET ASSETS.................................................. 58 74 236 === === ====
F-30 NOTES TO THE ACCOUNTS (CONTINUED) 15 OTHER FIXED ASSET INVESTMENTS
2003 2002 ----------------------- ----------------------- VALUATION BOOK VALUE VALUATION BOOK VALUE --------- ---------- --------- ---------- (ALL FIGURES IN L MILLIONS) Listed........................................... 73 59 67 64 Unlisted......................................... 21 21 20 20 -- -- -- -- 94 80 87 84 == == == ==
- --------------- NOTE The valuations of unlisted investments are directors' valuations as at 31 December 2003. If realised at valuation there would be an estimated liability for taxation of Lnil (2002: Lnil).
OWN SHARES HELD OTHER TOTAL ---------- ----- ----- (ALL FIGURES IN L MILLIONS) COST At 31 December 2001......................................... 91 107 198 Exchange differences........................................ -- (4) (4) Additions................................................... 17 4 21 Disposals................................................... -- (10) (10) --- --- ---- At 31 December 2002......................................... 108 97 205 --- --- ---- Exchange differences........................................ -- (5) (5) Additions................................................... -- 4 4 Disposals................................................... (2) -- (2) --- --- ---- AT 31 DECEMBER 2003......................................... 106 96 202 === === ==== PROVISION At 31 December 2001......................................... (59) (55) (114) Provided during the year.................................... (7) -- (7) --- --- ---- At 31 December 2002......................................... (66) (55) (121) --- --- ---- Provided during the year.................................... (3) -- (3) Disposals................................................... 2 -- 2 --- --- ---- AT 31 DECEMBER 2003......................................... (67) (55) (122) === === ==== NET BOOK VALUE At 31 December 2002......................................... 42 42 84 --- --- ---- AT 31 DECEMBER 2003......................................... 39 41 80 === === ====
- --------------- NOTE The Pearson Employee Share Trust and Pearson plc Employee Share Ownership Trusts hold 7.5m (2002: 7.9m) Pearson plc ordinary shares which had a market value of L46m at 31 December 2003 (2002: L45m) and a nominal value of L2m at 31 December 2003 (2002: L2m). These shares have been acquired by the trusts, using funds provided by Pearson plc, to meet obligations under various executive and employee option and restricted share plans. Under these plans the participants become entitled to shares after a specified number of years and subject to certain performance criteria being met. Pearson aims to hedge its liability under the plans by buying shares through the trusts to meet the anticipated future liability. Dividends on the shares held by the trusts have been waived. The amount of dividend waived on the ESOP shares was L2m (2002: L1m). The Group operates a worldwide Save As You Earn scheme together with a similar scheme for US employees that allows the grant of share options at a discount to the market price of the option granted. The F-31 NOTES TO THE ACCOUNTS (CONTINUED) Group has made use of the exemption under UITF 17 not to recognise any compensation charge in respect of these options. Employer's National Insurance and similar taxes arise on the exercise of certain share options. In accordance with UITF 25 a provision is made, calculated using the market price of the company's shares at the balance sheet date, pro-rated over the vesting period of the options. 16 STOCKS
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) Raw materials............................................... 24 22 Work in progress............................................ 30 36 Finished goods.............................................. 270 297 Pre-publication costs....................................... 359 379 --- --- 683 734 === ===
- --------------- NOTE The replacement cost of stocks is not materially different from book value. 17 DEBTORS
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) AMOUNTS FALLING DUE WITHIN ONE YEAR Trade debtors............................................... 822 778 Associates.................................................. 1 1 Royalty advances............................................ 110 109 Other debtors............................................... 61 51 Prepayments and accrued income.............................. 38 44 ----- ----- 1,032 983 ===== ===== AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Royalty advances............................................ 83 63 Other debtors............................................... 16 10 Prepayments and accrued income.............................. 1 1 ----- ----- 100 74 ----- ----- 1,132 1,057 ===== =====
18 CASH AT BANK AND IN HAND
2003 2002 ---------------- ---------------- GROUP COMPANY GROUP COMPANY ----- ------- ----- ------- (ALL FIGURES IN L MILLIONS) Cash, bank current accounts and overnight deposits..... 309 -- 417 -- Certificates of deposit and commercial paper........... 8 -- 15 -- Term bank deposits..................................... 244 75 143 8 --- --- --- --- 561 75 575 8 === === === ===
F-32 NOTES TO THE ACCOUNTS (CONTINUED) 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 chief financial officer under policies approved by the board which are summarised below. These policies have remained unchanged, except as disclosed, since the beginning of 2003. 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 centre and its activities are subject to internal 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. Since October 2002 the Group's policy objective has been to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt) to be hedged (i.e. fixed or capped) over the next four years within a 40% to 65% range. At the end of 2003 that ratio was 61%. A 1% change in the Group's variable rate US dollar, euro and sterling interest rates would have a L5m effect on 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. The Group's policy objective has been 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 10 years. At the end of 2003 the average maturity of gross borrowings was 4.9 years and non-banks provided L1,718m (89%) of them (up from 4.8 years and down from 90% respectively at the beginning of the year). 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 its interest cover ratio. 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 it believes necessary to support and protect its current credit ratings. The Group also maintains undrawn committed borrowing facilities. At the end of 2003 these amounted to L950m and their weighted average maturity was 1.5 years. Credit Risk 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. The Group's risk of loss on deposit 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 chief financial officer. 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 addition, for a currency swap that transforms a major part of the 6.125% eurobonds due 2007 into a US dollar liability (a higher value derivative contract than is usual in the portfolio) the Group has entered into mark to market agreements, whose effect is to reduce significantly the counterparty risk of the transaction. F-33 NOTES TO THE ACCOUNTS (CONTINUED) 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. Currency risk Although the Group is based in the UK, it has its most 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 on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be effected at the relevant spot exchange rate. No unremitted profits are hedged with foreign exchange contracts as the company judges it inappropriate to hedge non-cash flow translational exposure with cash flow instruments. However, the Group does seek to create a 'natural hedge' though its policy of aligning 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 consolidated interest cover and earnings. Long-term core borrowing is 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 81%, euro 10% and sterling 9%. A. MATURITY OF BORROWINGS AND OTHER FINANCIAL LIABILITIES The maturity profile of the Group's borrowings and other financial liabilities is shown below:
2003 2002 ---------------- ---------------- GROUP COMPANY GROUP COMPANY ----- ------- ----- ------- (ALL FIGURES IN L MILLIONS) MATURITY OF BORROWINGS SHORT-TERM Bank loans and overdrafts.............................. 119 262 101 175 5% Euro Bonds 2003..................................... -- -- 148 148 9.5% Sterling Bonds 2004............................... 108 -- -- -- 4.625% Euro Bonds 2004................................. 348 348 -- -- ----- ----- ----- ----- TOTAL DUE WITHIN ONE YEAR, OR ON DEMAND................ 575 610 249 323 ----- ----- ----- ----- MEDIUM AND LONG-TERM Loans or instalments thereof repayable: From one to two years.................................. 85 -- 458 338 From two to five years................................. 582 443 616 371 After five years not by instalments.................... 680 680 660 660 ----- ----- ----- ----- TOTAL DUE AFTER MORE THAN ONE YEAR..................... 1,347 1,123 1,734 1,369 ----- ----- ----- ----- TOTAL BORROWINGS....................................... 1,922 1,733 1,983 1,692 ===== ===== ===== =====
- --------------- NOTE At 31 December 2003 L85m (2002: L91m) of debt, including commercial paper, currently classified from one to two years would be repayable within one year if refinancing contracts were not in place. The short-term bank loans and overdrafts of the Group are lower than those of the company because of bank offset arrangements. F-34 NOTES TO THE ACCOUNTS (CONTINUED)
2003 2002 ----------------------------- ----------------------------- GROUP GROUP OTHER GROUP GROUP OTHER FINANCE FINANCIAL GROUP FINANCE FINANCIAL GROUP LEASES LIABILITIES TOTAL LEASES LIABILITIES TOTAL ------- ----------- ----- ------- ----------- ----- (ALL FIGURES IN L MILLIONS) MATURITY OF OTHER FINANCIAL LIABILITIES Amounts falling due: In one year or less or on demand....... 3 5 8 4 11 15 In more than one year but not more than two years............................ 1 14 15 2 8 10 In more than two years but not more than five years...................... 1 7 8 1 16 17 In more than five years................ -- 21 21 -- 22 22 --- --- --- --- --- --- 5 47 52 7 57 64 === === === === === ===
B. BORROWINGS BY INSTRUMENT
2003 2002 --------------- --------------- GROUP COMPANY GROUP COMPANY ----- ------- ----- ------- (ALL FIGURES IN L MILLIONS) UNSECURED 5% Euro Bonds 2003........................................ -- -- 148 148 9.5% Sterling Bonds 2004.................................. 108 -- 120 -- 4.625% Euro Bonds 2004.................................... 348 348 338 338 7.375% US Dollar notes 2006............................... 139 -- 154 -- 6.125% Euro Bonds 2007.................................... 343 343 370 370 10.5% Sterling Bonds 2008................................. 100 100 100 100 7% Global Dollar Bonds 2011............................... 278 278 310 310 7% Sterling Bonds 2014.................................... 235 235 250 250 4.625% US Dollar notes 2018............................... 167 167 -- -- Variable rate loan notes.................................. -- -- 1 1 Bank loans and overdrafts and commercial paper............ 204 262 192 175 ----- ----- ----- ----- TOTAL BORROWINGS.......................................... 1,922 1,733 1,983 1,692 ===== ===== ===== =====
C. UNDRAWN COMMITTED BORROWING FACILITIES
2003 2002 ----- ------ (ALL FIGURES IN L MILLIONS) Expiring within one year.................................... -- -- Expiring between one and two years.......................... 950 -- Expiring in more than two years............................. -- 1,059 --- ----- 950 1,059 === =====
- --------------- NOTE All of the above committed borrowing facilities incur commitment fees at market rates. In addition to the above facilities, there are a number of short-term overdrafts that are utilised in the normal course of the business. F-35 NOTES TO THE ACCOUNTS (CONTINUED) D. CURRENCY AND INTEREST RATE RISK PROFILE
2003 -------------------------------------------------------- FIXED RATE BORROWINGS ------------------------ WEIGHTED WEIGHTED AVERAGE TOTAL TOTAL AVERAGE PERIOD FOR VARIABLE FIXED INTEREST WHICH RATE IS BORROWINGS RATE RATE RATE FIXED - YEARS ---------- -------- ----- -------- ------------- LM LM LM % CURRENCY AND INTEREST RATE RISK PROFILE OF BORROWINGS US dollar......................................... 1,427 864 563 5.9 3.2 Sterling.......................................... 201 61 140 8.0 9.0 Euro.............................................. 292 166 126 5.3 1.7 Other currencies.................................. 2 2 -- -- -- ----- ----- --- 1,922 1,093 829 ===== ===== ===
2002 -------------------------------------------------------- FIXED RATE BORROWINGS ------------------------ WEIGHTED WEIGHTED AVERAGE TOTAL TOTAL AVERAGE PERIOD FOR VARIABLE FIXED INTEREST WHICH RATE IS BORROWINGS RATE RATE RATE FIXED - YEARS ---------- -------- ----- -------- ------------- LM LM LM % CURRENCY AND INTEREST RATE RISK PROFILE OF BORROWINGS US dollar......................................... 1,350 752 598 5.9 4.0 Sterling.......................................... 241 161 80 10.5 5.5 Euro.............................................. 380 305 75 5.2 1.5 Other currencies.................................. 12 12 -- -- -- ----- ----- --- 1,983 1,230 753 ===== ===== ===
- --------------- NOTE The figures shown in the tables above take into account interest rate, currency swaps and forward rate contracts entered into by the Group. Variable rate borrowings bear interest at rates based on relevant national LIBOR equivalents.
2003 --------------------------------- OTHER TOTAL TOTAL FINANCIAL FIXED NO INTEREST LIABILITIES RATE PAID ----------- ----- ----------- (ALL FIGURES IN L MILLIONS) CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER FINANCIAL LIABILITIES US dollar................................................... 35 4 31 Sterling.................................................... 5 1 4 Euro........................................................ 12 -- 12 -- ---- -- 52 5 47 == ==== ==
F-36 NOTES TO THE ACCOUNTS (CONTINUED)
2002 --------------------------------- OTHER TOTAL TOTAL FINANCIAL FIXED NO INTEREST LIABILITIES RATE PAID ----------- ----- ----------- (ALL FIGURES IN L MILLIONS) CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER FINANCIAL LIABILITIES US dollar................................................... 45 5 40 Sterling.................................................... 8 2 6 Euro........................................................ 11 -- 11 -- ---- -- 64 7 57 == ==== ==
2003 ------------------------------------------------ OTHER US DOLLAR STERLING EURO CURRENCIES TOTAL --------- -------- ---- ---------- ----- (ALL FIGURES IN L MILLIONS) CURRENCY AND INTEREST RATE RISK PROFILE OF FINANCIAL ASSETS Cash at bank and in hand............................ 150 54 40 65 309 Short-term deposits................................. 112 20 104 16 252 Other financial assets.............................. 44 7 7 1 59 --- -- --- -- --- 306 81 151 82 620 === == === == === Fixed rate.......................................... 6 2 -- -- 8 Floating rate....................................... 259 72 144 78 553 No interest received................................ 41 7 7 4 59 --- -- --- -- --- 306 81 151 82 620 === == === == ===
- --------------- NOTE The US dollar fixed rate asset is fixed for 12 years at a rate of 8.2%. The Sterling fixed rate asset is fixed for 6 years at a rate of 7.0%.
2002 ------------------------------------------------ OTHER US DOLLAR STERLING EURO CURRENCIES TOTAL --------- -------- ---- ---------- ----- (ALL FIGURES IN L MILLIONS) CURRENCY AND INTEREST RATE RISK PROFILE OF FINANCIAL ASSETS Cash at bank and in hand............................ 279 9 67 62 417 Short-term deposits................................. 2 18 127 11 158 Other financial assets.............................. 28 6 -- -- 34 --- -- --- -- --- 309 33 194 73 609 === == === == === Floating rate....................................... 281 27 193 73 574 No interest received................................ 28 6 1 -- 35 --- -- --- -- --- 309 33 194 73 609 === == === == ===
F-37 NOTES TO THE ACCOUNTS (CONTINUED) E. CURRENCY EXPOSURES The table below shows the extent to which Group companies have monetary assets and liabilities in currencies other than their local currency.
2003 NET FOREIGN MONETARY ASSETS/(LIABILITIES) ---------------------------------------------------- OTHER US DOLLAR STERLING EURO CURRENCIES TOTAL --------- -------- ---- ---------- ----- (ALL FIGURES IN L MILLIONS FUNCTIONAL CURRENCY OF ENTITY US dollar....................................... -- 3 -- 6 9 Sterling........................................ 20 -- 7 6 33 Euro............................................ -- -- -- 5 5 Other currencies................................ 5 (8) 5 -- 2 -- -- -- -- -- 25 (5) 12 17 49 == == == == ==
2002 NET FOREIGN MONETARY ASSETS/(LIABILITIES) ------------------------------------------------ OTHER US DOLLAR STERLING EURO CURRENCIES TOTAL --------- -------- ---- ---------- ----- (ALL FIGURES IN L MILLIONS) FUNCTIONAL CURRENCY OF ENTITY US dollar........................................... -- 2 -- 2 4 Sterling............................................ 48 -- 41 8 97 Euro................................................ -- 1 -- 6 7 Other currencies.................................... 4 4 5 -- 13 -- -- -- -- --- 52 7 46 16 121 == == == == ===
F. FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES The table below shows the book value and the fair value of the Group's financial assets and financial liabilities.
2003 2002 ----------------------- ----------------------- BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE ---------- ---------- ---------- ---------- ALL FIGURES IN L MILLIONS PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED TO FINANCE THE GROUP'S OPERATIONS Other financial assets................................. 59 59 34 34 Other financial liabilities............................ (52) (52) (64) (64) Cash at bank and in hand............................... 309 309 417 417 Short-term deposits.................................... 252 252 158 158 Short-term borrowings.................................. (575) (619) (249) (253) Medium and long-term borrowings........................ (1,347) (1,553) (1,734) (1,877) ------ ------ ------ ------ DERIVATIVE FINANCIAL INSTRUMENTS HELD TO MANAGE THE INTEREST RATE AND CURRENCY PROFILE Interest rate swaps.................................... -- (4) -- 26 Currency swaps......................................... -- 26 -- 32 Foreign exchange contracts............................. -- -- -- 4 ------ ------ ------ ------
- --------------- F-38 NOTES TO THE ACCOUNTS (CONTINUED) NOTE Other financial assets, other financial liabilities, cash at bank and in hand and short-term deposits: 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 31 December 2003 the notional principal value of these swaps was L2,394m (2002: L1,605m). Currency swaps: the fair value of these contracts is based on market values. At 31 December 2003 the Group had L1,096m (2002: L758m) of such contracts outstanding. G. HEDGES The Group's policy on hedges is explained on page F-33. The table below shows the extent to which the Group has off-balance sheet (unrecognised) gains and losses in respect of financial instruments used as hedges at the beginning and end of the year. It also shows the amount of such gains and losses which have been included in the profit and loss account for the year and those gains and losses which are expected to be included in next year's or later profit and loss accounts.
UNRECOGNISED TOTAL NET UNRECOGNISED UNRECOGNISED GAINS/ GAINS LOSSES (LOSSES) ------------ ------------ ------------ (ALL FIGURES IN L MILLIONS) Gains and losses on hedges at 31 December 2002............. 113 (51) 62 Gains and losses arising in previous years that were recognised in 2003....................................... (9) -- (9) --- --- --- GAINS AND LOSSES ARISING BEFORE 31 DECEMBER 2002 THAT WERE NOT RECOGNISED IN 2003................................... 104 (51) 53 Gains and losses arising in 2003 that were not recognised in 2003.................................................. (22) (9) (31) --- --- --- UNRECOGNISED GAINS AND LOSSES ON HEDGES AT 31 DECEMBER 2003..................................................... 82 (60) 22 Of which: Gains and losses expected to be recognised in 2004......... 4 -- 4 --- --- --- Gains and losses expected to be recognised in 2005 or later.................................................... 78 (60) 18 === === ===
F-39 NOTES TO THE ACCOUNTS (CONTINUED) 20 OTHER CREDITORS
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) AMOUNTS FALLING DUE WITHIN ONE YEAR Trade creditors............................................. 407 376 Taxation.................................................... 55 24 Social security and other taxes............................. 4 13 Other creditors............................................. 85 83 Accruals and deferred income................................ 456 499 Obligations under finance leases............................ 3 4 Dividends................................................... 119 115 ----- ----- 1,129 1,114 ===== ===== AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Other creditors............................................. 34 31 Accruals and deferred income................................ 9 26 Obligations under finance leases............................ 2 3 ----- ----- 45 60 ===== =====
21 DEFERRED TAXATION
(ALL FIGURES IN L MILLIONS) --------------- SUMMARY OF MOVEMENTS At 31 December 2002......................................... 174 Exchange differences........................................ (39) Held by subsidiary acquired................................. (15) Transfers................................................... 40 Net release in the year..................................... (15) --- AT 31 DECEMBER 2003......................................... 145 ===
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) DEFERRED TAXATION DERIVES FROM Capital allowances.......................................... (21) (47) Tax losses carried forward.................................. 168 170 Taxation on unremitted overseas earnings.................... (4) (16) Other timing differences.................................... 2 67 --- --- 145 174 === === DEFERRED TAXATION NOT PROVIDED Relating to gains subject to roll-over relief............... 1 1 === ===
- --------------- NOTE The Group has calculated deferred tax not provided on rolled over gains in 2003, taking into account the indexation allowance which would be deductible on a disposal of the asset into which the gain was rolled. The recovery of the deferred tax asset relating to tax losses carried forward is dependent on future taxable profits arising mainly in the US. The Group regularly reviews its projections of these future taxable profits to ensure that recoverability of the asset is still foreseeable. F-40 NOTES TO THE ACCOUNTS (CONTINUED) 22 PROVISIONS FOR LIABILITIES AND CHARGES
POST- DEFERRED REORGANIS- RETIREMENT CONSIDERATION INTEGRATION ATIONS LEASES OTHER TOTAL ---------- ------------- ----------- ---------- ------ ----- ----- (ALL FIGURES IN L MILLIONS) AT 31 DECEMBER 2001......... 123 25 29 29 19 14 239 Exchange differences........ (11) (4) (2) (2) (2) -- (21) Subsidiaries acquired/disposed......... 2 -- -- -- (1) 1 2 Deferred consideration arising on acquisitions... -- 3 -- -- -- -- 3 Released.................... -- -- -- (3) (1) (1) (5) Provided.................... 59 -- 8 9 7 1 84 Utilised.................... (81) (13) (18) (14) (4) (7) (137) --- --- --- --- -- -- ---- AT 31 DECEMBER 2002......... 92 11 17 19 18 8 165 Exchange differences........ (13) -- -- (1) (1) 1 (14) Subsidiaries acquired....... 4 -- -- -- -- -- 4 Transfers................... -- 1 3 (4) -- -- -- Deferred consideration arising on acquisitions... -- 24 -- -- -- -- 24 Released.................... -- -- -- -- (1) (1) (2) Provided.................... 62 -- -- 8 3 1 74 Utilised.................... (65) (7) (11) (10) (5) (1) (99) --- --- --- --- -- -- ---- AT 31 DECEMBER 2003......... 80 29 9 12 14 8 152 === === === === == == ====
- --------------- NOTE A Post-retirement provisions are in respect of pensions, L29m (2002: L36m) and post-retirement medical benefits, L51m (2002: L56m). B Deferred consideration. During the year, additional deferred consideration of L24m was incurred mainly relating to the acquisition of Lesson Lab. C Integration. During the year, L11m of this balance has been utilised, primarily in relation to properties, severance and IT systems. The remaining provision should be utilised in the next two years. D Reorganisations. L8m has been provided during the year mostly relating to redundancies at the Financial Times and the relaunch of Les Echos in Berlinois format. L10m has been utilised, mainly in respect of redundancies. E Lease commitments. These relate primarily to onerous lease contracts, acquired as part of the purchase of subsidiaries, which have various expiry dates up to 2010. The provision is based on current occupancy estimates. F-41 NOTES TO THE ACCOUNTS (CONTINUED) 23 SHARE CAPITAL
NUMBER OF SHARES (000'S) LM --------- --- AUTHORISED Ordinary shares of 25p each AT 31 DECEMBER 2002......................................... 1,174,000 294 ========= === AT 31 DECEMBER 2003......................................... 1,178,000 295 ========= === CALLED UP, ALLOTTED AND FULLY PAID AT 31 DECEMBER 2001......................................... 800,589 200 Issued under share option and employee share schemes........ 1,073 -- --------- --- AT 31 DECEMBER 2002......................................... 801,662 200 Issued under share option and employee share schemes........ 726 1 --------- --- AT 31 DECEMBER 2003......................................... 802,338 201 ========= ===
- --------------- NOTE The consideration received in respect of shares issued during the year was L5m (2002: L6m). F-42 NOTES TO THE ACCOUNTS (CONTINUED)
ORIGINAL NUMBER SUBSCRIPTION WHEN OF SHARES EXERCISE GRANTED (000'S) PRICE (P) PERIOD ------- --------- ----------- ------------ OPTIONS OUTSTANDING AT 31 DECEMBER 2002 Worldwide Save for Shares plans.................... 1995 20 390 2000-03 1996 60 517 2001-04 1997 114 530 2000-05 1998 360 687 2001-06 1999 544 913-970 2001-07 2000 217 688-1,793 2001-08 2001 532 957-1,096 2004-09 2002 1,466 696 2005-10 ------ 3,313 ====== Discretionary share option plans................... 1994 171 567-635 1997-04 1995 194 487-606 1998-05 1996 282 584-654 1999-06 1997 1,156 677-758 2000-07 1998 1,781 847-1,090 2001-08 1999 3,681 1,081-1,922 2002-09 2000 10,432 64-3,224 2000-10 2001 14,599 822-1,421 2002-11 ------ 32,296 ====== OPTIONS OUTSTANDING AT 31 DECEMBER 2003 Worldwide Save for Shares plans.................... 1996 9 517 2003-04 1997 39 530 2004-05 1998 319 687 2003-06 1999 137 913-926 2004-07 2000 169 688-1,644 2003-08 2001 350 957-1,096 2004-09 2002 573 696 2005-10 2003 2,273 425-426 2006-11 ------ 3,869 ====== Discretionary share option plans................... 1994 148 567-635 1997-04 1995 154 487-606 1998-05 1996 248 584-654 1999-06 1997 1,023 677-758 2000-07 1998 1,637 847-1,090 2001-08 1999 3,260 1,081-1,922 2002-09 2000 8,510 64-3,224 2000-10 2001 13,437 822-1,421 2002-11 ------ 28,417 ======
- --------------- NOTE The subscription prices have been rounded up to the nearest whole penny. The figures include replacement options granted to employees of Dorling Kindersley and the Family Education Network following their acquisition. The discretionary share option plans include all options granted under the Pearson Executive Share Option Plans, the Pearson Reward Plan, the Pearson Special Share Option Plan and the Pearson Long Term Incentive Plan. F-43 NOTES TO THE ACCOUNTS (CONTINUED) 24 RESERVES
SHARE PROFIT PREMIUM AND LOSS ACCOUNT ACCOUNT ------- -------- (ALL FIGURES IN L MILLIONS) SUMMARY OF MOVEMENTS At 31 December 2001......................................... 2,459 1,138 Exchange differences net of taxation........................ -- (312) Premium on issue of equity shares........................... 6 -- Goodwill written back on disposal of an associate........... -- 144 Replacement options granted on acquisition of a subsidiary................................................ -- 1 Loss retained for the year.................................. -- (298) ----- ----- AT 31 DECEMBER 2002......................................... 2,465 673 ===== ===== ANALYSED AS Joint ventures and associates............................... (45) Group excluding joint ventures and associates............... 718 ===== SUMMARY OF MOVEMENTS At 31 December 2002......................................... 2,465 673 Exchange differences net of taxation........................ -- (254) Premium on issue of equity shares........................... 4 -- Loss retained for the year.................................. -- (137) ----- ----- AT 31 DECEMBER 2003......................................... 2,469 282 ===== ===== ANALYSED AS Joint ventures and associates............................... (60) Group excluding joint ventures and associates............... 342
- --------------- NOTE Cumulative goodwill relating to acquisitions made prior to 1998, which was deducted from reserves, amounts to L961m (2002: L1,031m). During 2003 Pearson plc received L5m on the issue of shares in respect of the exercise of options awarded under various share option plans. Employees paid L5m to the Group for the issue of these shares. The Group has taken advantage of the exemption available by UITF 17 and has not incurred a charge on options granted at a discount to market value for its Inland Revenue approved SAYE schemes and similar overseas schemes. Included in exchange differences are exchange gains of L74m (2002: L70m) arising on borrowings denominated in, or swapped into, foreign currencies designated as hedges of net investments overseas. F-44 NOTES TO THE ACCOUNTS (CONTINUED) 25 ACQUISITIONS All acquisitions have been consolidated applying acquisition accounting principles. A. ACQUISITION OF SUBSIDIARIES
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) Tangible fixed assets....................................... 10 -- Associates.................................................. -- (3) Stocks...................................................... -- (2) Debtors..................................................... 32 2 Creditors................................................... (95) (4) Provisions.................................................. (4) (3) Deferred taxation........................................... (15) -- Net cash and short-term deposits acquired................... 34 25 ---- --- (38) 15 Equity minority interests................................... (8) (4) ---- --- Net (liabilities)/assets acquired at fair value............. (46) 11 ---- --- FAIR VALUE OF CONSIDERATION Cash........................................................ (87) (74) Deferred cash consideration................................. (24) (3) Net prior year adjustments.................................. -- 3 ---- --- Total consideration......................................... (111) (74) ---- --- GOODWILL ARISING............................................ 157 63 ==== ===
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) ACQUISITION FAIR VALUES Book value of net (liabilities)/assets acquired............. (32) 25 Fair value adjustments...................................... (14) (14) --- --- FAIR VALUE TO THE GROUP..................................... (46) 11 === ===
- --------------- NOTE All the fair value adjustments above relate to acquisitions made in 2003. They include a write-off of certain fixed assets and recognition of a pension scheme liability. These fair value adjustments are provisional and will be finalised in the 2004 financial statements. B. CASH FLOW FROM ACQUISITIONS
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Cash -- current year acquisitions........................... 87 74 52 Deferred payments for prior year acquisitions and other items..................................................... 7 13 76 -- -- --- NET CASH OUTFLOW............................................ 94 87 128 == == ===
F-45 NOTES TO THE ACCOUNTS (CONTINUED) 26. DISPOSALS A. DISPOSAL OF SUBSIDIARIES
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Intangible fixed assets..................................... (4) (41) (53) Tangible fixed assets....................................... (3) -- (7) Stocks...................................................... (2) (3) (2) Debtors..................................................... (9) (2) (15) Creditors................................................... 10 (3) 14 Taxation.................................................... -- -- (5) Provisions.................................................. -- 1 1 Net overdraft/(cash)........................................ 1 (1) -- Equity minority interest.................................... -- 3 -- --- --- --- Net assets disposed of...................................... (7) (46) (67) Proceeds received........................................... 1 11 49 Deferred consideration...................................... 2 -- -- Costs....................................................... (1) (7) (7) Net prior year adjustments.................................. 1 (3) (1) --- --- --- LOSS ON SALE................................................ (4) (45) (26) Goodwill written back from reserves......................... -- -- (37) --- --- --- NET LOSS ON SALE............................................ (4) (45) (63) === === ===
B. CASH FLOW FROM DISPOSALS
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) Cash -- current year disposals.............................. 1 11 49 Costs paid.................................................. (2) (3) (8) Deferred receipts and payments from prior year disposals and other amounts............................................. (3) (5) -- --- --- --- NET CASH (OUTFLOW)/INFLOW................................... (4) 3 41 === === ===
27 NOTES TO CONSOLIDATED CASH FLOW STATEMENT
2001 --------------------------------- 2003 2002 CONTINUING DISCONTINUED TOTAL ---- ---- ---------- ------------ ----- (ALL FIGURES IN L MILLIONS) A. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Total operating profit................................. 226 143 (49) 2 (47) Share of operating loss of joint ventures and associates........................................... -- 51 69 (2) 67 Depreciation........................................... 111 122 125 -- 125 Goodwill amortisation and impairment................... 257 292 350 -- 350 (Increase)/decrease in stocks.......................... (8) 43 (6) -- (6) Increase in debtors.................................... (96) (111) 102 -- 102 (Decrease)/increase in creditors....................... (68) 64 (103) -- (103) Decrease in operating provisions....................... (20) (50) 3 -- 3 Other and non-cash items............................... (43) (25) (1) -- (1) --- ---- ---- --- ---- NET CASH INFLOW FROM OPERATING ACTIVITIES.............. 359 529 490 -- 490 === ==== ==== === ====
F-46 NOTES TO THE ACCOUNTS (CONTINUED)
DEBT DUE DEBT DUE SHORT-TERM WITHIN AFTER FINANCE CASH OVERDRAFTS SUB-TOTAL DEPOSITS ONE YEAR ONE YEAR LEASES TOTAL ---- ---------- --------- ---------- -------- -------- ------- ------ (ALL FIGURES IN L MILLIONS) B. ANALYSIS OF NET DEBT AT 31 DECEMBER 2002........ 417 (77) 340 158 (172) (1,734) (7) (1,415) Exchange differences....... 6 31 37 9 (40) 111 -- 117 Other non-cash items....... -- -- -- -- (459) 458 (1) (2) Net cash flow.............. (114) 23 (91) 85 119 (182) 3 (66) ---- ---- --- --- ---- ------ --- ------ AT 31 DECEMBER 2003........ 309 (23) 286 252 (552) (1,347) (5) (1,366) ==== ==== === === ==== ====== === ====== AT 31 DECEMBER 2001........ 300 (60) 240 93 (105) (2,607) (14) (2,393) Exchange differences....... (15) 4 (11) (2) (6) 150 1 132 Acquired with subsidiary... -- -- -- 24 -- -- -- 24 Other non-cash items....... -- -- -- -- (148) 146 1 (1) Net cash flow.............. 132 (21) 111 43 87 577 5 823 ---- ---- --- --- ---- ------ --- ------ AT 31 DECEMBER 2002........ 417 (77) 340 158 (172) (1,734) (7) (1,415) ==== ==== === === ==== ====== === ====== AT 31 DECEMBER 2000........ 425 (110) 315 91 (2) (2,705) (16) (2,317) Exchange differences....... (10) 1 (9) 1 -- (16) -- (24) Acquired with subsidiary... -- -- -- -- -- 1 -- 1 Other non-cash items....... -- -- -- -- (100) 99 (5) (6) Net cash flow.............. (115) 49 (66) 1 (3) 14 7 (47) ---- ---- --- --- ---- ------ --- ------ AT 31 DECEMBER 2001........ 300 (60) 240 93 (105) (2,607) (14) (2,393) ==== ==== === === ==== ====== === ======
- --------------- NOTE Finance leases are included within other creditors in the balance sheet (see note 20).
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) C. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT (Decrease)/increase in cash in the year..................... (91) 111 (66) Decrease in net debt from management of liquid resources.... 85 43 1 Decrease in net debt from other borrowings.................. (63) 664 11 Decrease in finance leases.................................. 3 5 7 Acquired with subsidiary.................................... -- 24 -- Debt issue costs............................................ -- -- 1 Other non-cash items........................................ (2) (1) (6) Exchange differences........................................ 117 132 (24) ------ ------ ------ Movement in net debt in the year............................ 49 978 (76) Net debt at beginning of the year........................... (1,415) (2,393) (2,317) ------ ------ ------ NET DEBT AT END OF THE YEAR................................. (1,366) (1,415) (2,393) ====== ====== ======
28 CONTINGENT LIABILITIES There are contingent Group and company liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries 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. None of these claims are expected to result in a material gain or loss to the Group. F-47 NOTES TO THE ACCOUNTS (CONTINUED) 29 COMMITMENTS UNDER LEASES At 31 December 2003 the Group had commitments under leases, other than finance leases, to make payments in 2004 as follows:
LAND AND BUILDINGS OTHER --------- ----- (ALL FIGURES IN L MILLIONS) FOR LEASES EXPIRING In 2004..................................................... 7 2 Between 2005 and 2008....................................... 28 14 Thereafter.................................................. 64 1 -- -- 99 17 == ==
30 RELATED PARTIES JOINT VENTURES AND ASSOCIATES -- Loans and equity advanced to joint ventures and associates during the year and at the balance sheet date are shown in notes 13 and 14. Amounts falling due from joint ventures and associates are set out in note 17. Dividends receivable from joint ventures and associates are set out in notes 13 and 14. There were no other related party transactions in 2003. 31 POST BALANCE SHEET EVENTS There were no significant post balance sheet events. F-48 NOTES TO THE ACCOUNTS (CONTINUED) 32 COMPANY BALANCE SHEET AS AT 31 DECEMBER 2003
NOTE 2003 2002 ----- ------- ------- (ALL FIGURES IN L MILLIONS) FIXED ASSETS Tangible fixed assets....................................... 33 -- -- Investments: subsidiaries................................... 33 6,343 6,422 Investments: own shares held................................ 33 33 39 ------ ------ 6,376 6,461 ------ ------ CURRENT ASSETS Debtors: Amounts due from subsidiaries -- due within one year........ 1,394 971 Amounts due from subsidiaries -- due after more than one year...................................................... 944 1,453 Taxation.................................................... 3 10 Other debtors............................................... -- 1 Cash at bank and in hand.................................... 18 75 8 ------ ------ 2,416 2,443 ------ ------ CREDITORS -- AMOUNTS FALLING DUE WITHIN ONE YEAR Short-term borrowing........................................ 19 (610) (323) Amounts due to subsidiaries................................. (2,860) (2,641) Other creditors............................................. (1) (1) Accruals and deferred income................................ (16) (13) Dividends................................................... 8 (119) (115) ------ ------ (3,606) (3,093) ------ ------ NET CURRENT LIABILITIES..................................... (1,190) (650) ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES....................... 5,186 5,811 ------ ------ CREDITORS -- AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium and long-term borrowing.............................. 19 (1,123) (1,369) Amounts due to subsidiaries................................. (234) (393) Provisions for liabilities and charges...................... (2) (2) ------ ------ (1,359) (1,764) ------ ------ NET ASSETS.................................................. 3,827 4,047 ====== ====== CAPITAL AND RESERVES Called up share capital..................................... 23 201 200 Share premium account....................................... 33 2,469 2,465 Special reserve............................................. 33 397 397 Other reserves.............................................. 33 50 50 Profit and loss account..................................... 33 710 935 ------ ------ EQUITY SHAREHOLDERS' FUNDS.................................. 3,827 4,047 ====== ======
The financial statements were approved by the board of directors on 27 February 2004 and signed on its behalf by Dennis Stevenson, Rona Fairhead, Chairman Chief Financial Officer
F-49 NOTES TO THE ACCOUNTS (CONTINUED) 33 NOTES TO THE COMPANY BALANCE SHEET
2003 2002 ------ ------ (ALL FIGURES IN L MILLIONS) TANGIBLE FIXED ASSETS (LEASEHOLD PROPERTY) Cost........................................................ 1 1 Depreciation................................................ (1) (1) ---- ---- NET BOOK VALUE.............................................. -- -- ==== ====
- --------------- NOTE The company had no capital commitments for fixed assets at the end of 2003.
(ALL FIGURES IN L MILLIONS) INVESTMENT IN SUBSIDIARIES AT 31 DECEMBER 2001......................................... 5,384 External acquisition........................................ 2 Subscription for additional share capital in subsidiaries... 1,085 Disposal to subsidiary...................................... (16) Provision for diminution in value........................... (32) Revaluations................................................ (1) ----- AT 31 DECEMBER 2002......................................... 6,422 External acquisition........................................ 15 Disposal to subsidiary...................................... (22) Provision for diminution in value........................... (33) Revaluations................................................ (39) ----- AT 31 DECEMBER 2003......................................... 6,343 =====
- --------------- NOTE Shares are stated at cost less provisions for diminution in value or directors' valuations. F-50 NOTES TO THE ACCOUNTS (CONTINUED) OWN SHARES HELD -- Amounts included within own shares held relate to Pearson plc ordinary shares held in respect of the Pearson plc Employee Share Ownership Trusts (see note 15).
SHARE PROFIT PREMIUM SPECIAL OTHER AND LOSS ACCOUNT RESERVE RESERVES ACCOUNT TOTAL ------- ------- -------- -------- ----- (ALL FIGURES IN L MILLIONS) RESERVES SUMMARY OF MOVEMENTS AT 31 DECEMBER 2001................................ 2,459 397 50 1,179 4,085 Exchange differences............................... -- -- -- (46) (46) Premium on issue of equity shares.................. 6 -- -- -- 6 Loss for the financial year........................ -- -- -- (11) (11) Dividends on equity shares......................... -- -- -- (187) (187) ----- --- -- ----- ----- AT 31 DECEMBER 2002................................ 2,465 397 50 935 3,847 Exchange differences............................... -- -- -- (23) (23) Premium on issue of equity shares.................. 4 -- -- -- 4 Loss for the financial year........................ -- -- -- (10) (10) Dividends on equity shares......................... -- -- -- (192) (192) ----- --- -- ----- ----- AT 31 DECEMBER 2003................................ 2,469 397 50 710 3,626 ===== === == ===== =====
- --------------- 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. 34. SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United Kingdom ("UK GAAP"), which differ in certain significant respects from generally accepted accounting principles in the United States of America ("US GAAP"). Such differences involve methods for measuring the amounts shown in the financial statements. The following is a summary of the 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. F-51 NOTES TO THE ACCOUNTS (CONTINUED) RECONCILIATION OF CONSOLIDATED PROFIT/(LOSS) FOR THE FINANCIAL YEAR
YEAR ENDED DECEMBER 31 ---------------------- NOTE 2003 2002 2001 ----- ---- ---- ------ LM LM LM PROFIT/(LOSS) FOR THE FINANCIAL YEAR UNDER UK GAAP.......... 55 (111) (423) US GAAP adjustments: Goodwill amortization and impairment...................... (i) 257 285 (7) Intangible amortization................................... (i) (104) (120) (168) Discontinued operations................................... (ii) (3) 2 (1,010) Disposal adjustments...................................... (iii) (8) (2) (3) Pensions and other post-retirement benefits............... (iv) (3) 7 14 Deferred taxation......................................... (v) (27) 1 2 Leases.................................................... (vi) (2) 3 -- Options................................................... (vii) (30) (46) (33) Derivatives............................................... (viii) 35 187 (64) Capitalized costs......................................... (ix) -- 1 1 Restructuring costs....................................... (x) -- -- (3) Acquisition adjustments................................... (xi) -- (2) 13 Partnerships and associates............................... (xii) 5 42 16 Fixed asset investments................................... (xiv) -- -- 6 Interest in shares of Pearson plc......................... (xv) -- -- 37 Minority interests........................................ (xvi) (4) (7) 4 Taxation effect of US GAAP adjustments.................... (v) 12 (21) 118 ---- ---- ------ Total US GAAP adjustments................................... 128 330 (1,077) ---- ---- ------ PROFIT/(LOSS) FOR THE FINANCIAL YEAR UNDER US GAAP.......... 183 219 (1,500) ==== ==== ====== Cumulative effect of change in accounting principle (less (benefit from) applicable taxes L(9)m)................. (iv) -- (21) -- ---- ---- ------ PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. 183 198 (1,500) ==== ==== ====== Profit/(loss) from continuing operations (less charge for/(benefit from) applicable taxes 2003: L89m, 2002: L78m, 2001: L(124)m)...................................... 186 257 (475) (Loss)/profit from discontinued operations prior to the measurement date (less charge for/(benefit from) applicable taxes 2003: Lnil, 2002: L(2)m, 2001: L(21)m)... -- (37) (40) Loss on disposal of discontinued operations (less charge for/(benefit from) applicable taxes 2003: L2m, 2002: L(4)m, 2001 L60m)......................................... (3) (1) (985) ---- ---- ------ PROFIT/(LOSS) FOR THE FINANCIAL YEAR UNDER US GAAP.......... 183 219 (1,500) ==== ==== ====== Cumulative effect of change in accounting principle (less (benefit from) applicable taxes L(9)m)................. (iv) -- (21) -- ---- ---- ------ PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. 183 198 (1,500) ==== ==== ======
F-52 NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED DECEMBER 31 ------------------------ NOTE 2003 2002 2001 ----- ----- ----- ------ PRESENTATION OF EARNINGS PER EQUITY SHARE UNDER US GAAP..... (xvii) Earnings per equity share................................... (P) (p) (p) Basic: Continuing operations....................................... 23.4 32.3 (59.7) Discontinued operations..................................... (0.4) (4.8) (128.9) Cumulative effect of change in accounting principle......... -- (2.6) -- ----- ----- ------ Total....................................................... 23.0 24.9 (188.6) ===== ===== ====== Diluted: Continuing operations....................................... 23.4 32.3 (59.7) Discontinued operations..................................... (0.4) (4.8) (128.9) Cumulative effect of change in accounting principle......... -- (2.6) -- ----- ----- ------ Total....................................................... 23.0 24.9 (188.6) ===== ===== ====== Average shares outstanding (millions)....................... 794.4 796.3 795.4 Dilutive effect of stock options (millions)................. 0.9 0.4 -- ----- ----- ------ Average number of shares outstanding assuming dilution (millions)................................................ 795.3 796.7 795.4 ===== ===== ======
In 2001 the Group recorded a loss for the financial year. Consequently the effect of share options is anti-dilutive and has been excluded from the calculation of diluted loss per share. Anti-dilutive options in 2001 were 7.8 million. F-53 NOTES TO THE ACCOUNTS (CONTINUED) RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' FUNDS
YEAR ENDED DECEMBER 31 -------------- NOTE 2003 2002 ----- ----- ----- LM LM SHAREHOLDERS' FUNDS UNDER UK GAAP........................... 2,952 3,338 US GAAP adjustments: Goodwill.................................................. (i) 354 222 Intangibles............................................... (i) 410 508 Discontinued operations................................... (ii) -- 3 Disposal adjustments...................................... (iii) (4) 2 Pensions and other post-retirement benefits............... (iv) (304) (295) Deferred taxation......................................... (v) 29 58 Leases.................................................... (vi) (5) (3) Options................................................... (vii) 32 30 Derivatives............................................... (viii) 21 57 Capitalized costs......................................... (ix) -- -- Restructuring costs....................................... (x) -- -- Acquisition adjustments................................... (xi) 25 1 Partnerships and associates............................... (xii) (5) (8) Ordinary dividends........................................ (xiii) 119 115 Fixed asset investments................................... (xiv) (18) (19) Interest in shares of Pearson plc......................... (xv) (69) (71) Minority interests........................................ (xvi) (22) (20) Taxation effect of US GAAP adjustments.................... (v) (163) (210) ----- ----- Total US GAAP adjustments................................... 400 370 ----- ----- SHAREHOLDERS' FUNDS UNDER US GAAP........................... 3,352 3,708 ===== =====
A summary of the principal differences and additional disclosures applicable to the Group are set out below: (I) GOODWILL AND INTANGIBLES 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, prior to the implementation of FRS 10 "Goodwill and Intangible Assets", 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. Prior to July 1, 2001, goodwill was amortized over its estimated useful life. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard ("SFAS") 142, "Goodwill and Other Intangible Assets" which required that goodwill no longer be amortized. Additionally, under US GAAP, all goodwill arising on acquisitions prior to June 30, 2001 was capitalized and amortized over a period not to exceed 20 years. The group also adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets", on January 1, 2002. As a result, all goodwill is no longer subject to amortization subsequent to the date of adoption, but is subject to the impairment testing provisions of SFAS 142. The 2003 and 2002 US GAAP adjustments reverse the amortization expense recorded under UK GAAP. F-54 NOTES TO THE ACCOUNTS (CONTINUED) Under UK GAAP, the Group periodically reviews the recoverability of goodwill, not identified with impaired long-lived assets, based on estimated discounted future cash flows from operating activities compared with the carrying value of goodwill and recognizes any impairment on the basis of such comparison. Under US GAAP, the Group performed the transitional impairment test under SFAS 142 as of January 1, 2002 by comparing the carrying value of each reporting unit to its fair value as determined by discounted future cash flows. The Group has also completed the subsequent annual impairment tests required by SFAS 142. Under UK GAAP in order to recognize an intangible asset, the Group must be able to dispose 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, know-how, patents and advertising relationships have been recognized as intangible assets as required under SFAS 142 and are being amortized over a range of estimated useful lives of between 2 and 25 years. The identified intangibles have been valued based on independent appraisals and management evaluation and analysis. (II) DISCONTINUED OPERATIONS Following the further deterioration in the corporate training market during 2002, management undertook a review of the FT Knowledge business. As a result of this review, in September 2002 the Board of Directors approved a plan to dispose of Forum and restructure the remaining parts of FT Knowledge. The sale of Forum to the Institute for International Research Support Services Inc ("IRR") was completed in January 2003. In accordance with the provisions of SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" the results of the Forum Corporation have been reclassified as a discontinued operation. In connection with the decision to dispose of Forum in 2002, a loss on disposal was booked under US GAAP reflecting the excess of the carrying value of the investment over the disposal proceeds. The goodwill associated with the Forum business was deemed to be impaired under US GAAP prior to the sale of the business. The GAAP difference on the loss on sale reflects the difference in the carrying value of goodwill at the disposal date and provisions for future operating losses being removed from the disposal calculation under US GAAP. In early December 2001, the Board of Directors approved a plan to dispose of the Group's investment in RTL. On December 24, 2001, the Group announced the agreed sale of its 22% interest in RTL to Bertlesmann AG for cash consideration of E1.5 billion. In accordance with the provisions of Accounting Principles Board ("APB") 30, "Reporting the Results of Operations, Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", the results of operations of RTL have been reclassified as a discontinued operation. In 2001, in connection with the disposal of the RTL investment, L985m was accrued as a loss on disposal reflecting the excess of the carrying value of the investment of L1,967m over the E1.5 billion proceeds to be received. Also included in the loss on disposal is the Group's share of the results of RTL (including goodwill amortization) from the measurement date to the actual disposal date of January 30, 2002 of approximately L30m. Summary financial information for RTL, for the year ended December 31, 2001 is presented in the table below:
2001 ------ LM Net revenues................................................ 2,093 Loss from operations........................................ (4,528) Net loss.................................................... (4,625)
F-55 NOTES TO THE ACCOUNTS (CONTINUED) (III) DISPOSAL ADJUSTMENTS In 2003, 2002 and 2001 gains and losses were recognized under UK GAAP on the disposal of a number of the Group's businesses and assets. 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. Differences can arise on the treatment of property disposals and sale and leaseback transactions. The timing of recognition of profits or losses on these transactions can differ between UK GAAP and US GAAP, as prescribed by SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." (IV) PENSIONS AND OTHER POST-RETIREMENT BENEFITS 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 ("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 SFAS 87 "Employers Accounting for Pensions", which requires readjustment of the significant actuarial assumptions annually to reflect current market and economic conditions. Therefore, different assumptions are used in the SFAS 87 calculation of pensions. 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. Additionally, under US GAAP, where an accumulated benefit obligation exists in excess of plan assets and a prepaid pension asset has been recognized, an additional minimum pension liability has been booked as a reduction to equity. Under UK GAAP, there is no requirement to recognize a minimum pension liability in respect of the unfunded accumulated benefit obligation. In 2002, the Group elected to change the measurement date of its defined benefit plans under US GAAP from 30 September to 31 December. As a result the 2002 profit and loss charge under US GAAP for pension plans includes a pre-tax charge of L30 million reflecting the cumulative effect of this change in accounting principle. Additionally, the Pearson Inc. Pension Equity Plan (one of the US defined benefit plans) was suspended as at December 31, 2001 and employees no longer earn additional defined benefits for future services. In accordance with SFAS 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", the Group recognized a curtailment gain in 2001 reflecting the reduction in the projected benefit obligation as credits, and final average compensation under the pension formula were frozen as of December 31, 2001. Under UK GAAP this gain is being spread over the expected remaining service lives of the employees in the scheme as of January 1, 2002. F-56 NOTES TO THE ACCOUNTS (CONTINUED) (V) DEFERRED TAXATION Financial Reporting Standard ("FRS") 19, the UK standard on deferred tax, was adopted for the first time in 2002. The Group previously provided deferred tax using the liability method under SSAP ("Statement of Standard Accounting Practice") 15 and only recognized deferred tax liabilities to the extent that it was probable that the liabilities would crystallize. Deferred tax assets were only recognized to the extent that their recoverability was assured beyond reasonable doubt. Under FRS 19 the recognition criteria for deferred tax assets changed resulting in the recognition of a deferred tax asset under UK GAAP in respect of US tax losses and other timing differences that are regarded as recoverable against future profits. The adoption of FRS 19 also had an impact on capitalized goodwill since the restatement of deferred tax balances acquired had a corresponding effect upon the goodwill recognized on those acquisitions. A prior year adjustment was made in the 2002 financial statements to reflect the adoption of FRS 19 and comparative figures were restated. 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 crystallize 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 tax 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 2003, 2002 and 2001 reflect the impact of recording the full provision and deferred tax assets, net of valuation allowance. The reconciling item in 2003 also incorporates the effect of a change in estimate in respect of deferred tax assets relating to a purchase business combination in prior years, which was recorded through the profit and loss account under UK GAAP, but which was required to be adjusted against goodwill under US GAAP. 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. (VI) LEASES UK GAAP defines a finance (capital) lease as one that transfers substantially all 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 (capital) under US GAAP. Adjustments also arise due to the timing of recognition of lease related costs being different under UK and US GAAP. (VII) OPTIONS Under UK GAAP, the Group does not recognize 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 all stock-based awards is recognized in accordance with SFAS 123, "Accounting For Stock-Based Compensation". 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. Under US F-57 NOTES TO THE ACCOUNTS (CONTINUED) GAAP, the total compensation charge for stock-based compensation schemes was L33m in 2003, L53m in 2002 and L42m in 2001. Under UK GAAP, UITF 25, "National Insurance Contributions on share option gains", requires that a provision be made for the employer's share of the National Insurance Contributions ("NIC") on outstanding share options that are expected to be exercised. Under US GAAP, EITF 00-16, "Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation", requires that the NIC liability on employee stock compensation be recognized on the date of the event triggering the measurement and payment of tax, which is deemed to be the exercise date. Under UK GAAP, compensation cost is charged to the income statement with the offsetting amount recorded as either a reduction of the own shares held as an asset on the balance sheet or a liability that is transferred to shareholders' funds upon exercise or expiration of the option. Under US GAAP, compensation cost is charged to the income statement with the offsetting amount recorded directly to shareholders' funds. Accordingly, as part of the reconciliation from UK to US GAAP, the amount credited to a liability account under UK GAAP has been transferred to shareholders' funds. (VIII) DERIVATIVES 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, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in fair value of the derivatives that the Group has designated and that qualify as effective hedges are recorded in either other comprehensive income or earnings. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings. In 2003, as in 2002 and 2001, the Group did not meet the prescribed designation requirements and hedge effectiveness tests under US GAAP for its derivative contracts, which are not a requirement to obtain hedge accounting under UK GAAP. Consequently the Group has recorded the changes in the fair values of these derivative contracts through earnings under US GAAP. In line with the Group's treasury policy, these are 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 and 6 month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the borrowings that are being hedged. The Group believes that its portfolio of such swaps is an efficient economic hedge of its portfolio of variable rate borrowings. (IX) CAPITALIZED COSTS The group has capitalized certain amounts under UK GAAP for computer hardware, purchased software, software licences 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) RESTRUCTURING COSTS Certain restructuring costs recorded in prior periods under UK GAAP did not meet the criteria specified under US GAAP to be recorded as a liability in those periods. Under US GAAP these costs have been recorded in the period in which the obligation exists. F-58 NOTES TO THE ACCOUNTS (CONTINUED) The total restructuring charge in 2003 was L14m (L36m in 2002 and L101m in 2001), with L28m remaining as a short term liability as at December 31, 2003, and relates primarily to staff severance and lease exit costs. For 2003, these costs have been accounted for in accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities". In 2002 and 2001, these costs were accounted for in accordance with Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" and Staff Accounting Bulletin ("SAB") 100, "Restructuring and Impairment Charges". Compulsory severance costs are accrued after a plan has been approved and the required communications have been made. All other costs are incremental and relate to existing contractual obligations that do not have any future economic benefit (e.g. vacant lease provisions). (XI) ACQUISITION ADJUSTMENTS Acquisition adjustments principally relate to restructuring provisions recognized under US GAAP in purchase accounting as an increase in goodwill under 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. Under US GAAP, consideration related to the acquisition of businesses contingent on achieving specific earnings levels in future periods is recorded only when the specified conditions are met and the consideration distributable, in accordance with SFAS 141 "Business Combinations." Under UK GAAP, contingent consideration is treated as part of the purchase price on the date of acquisition. Under US GAAP, the Group cannot hedge the foreign-currency risk related to a purchase business combination because only direct costs of an acquisition are allowed to be included in the purchase price. Derivative gains and losses do not qualify as direct costs. As a result, gains relating to foreign-currency forward contracts are recorded in earnings under US GAAP. These are reflected as adjustments to the purchase price under UK GAAP. (XII) PARTNERSHIPS AND ASSOCIATES There is no difference under UK and US GAAP in 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 Group's investments in partnerships and associates include: goodwill amortization, pensions, derivatives, and goodwill impairment charges. As of December 31, 2003, the Group held a 32% interest in MarketWatch.com, Inc. ("MW.com"), a publicly traded financial media company. The Group's interest has subsequently been reduced to 23% following their issuance of shares to acquire Pinnacor. This investment is accounted for under the equity method of accounting. Under US GAAP, in accordance with Accounting Principles Board Opinion ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock", the Group periodically reviews its equity method investments for impairment. These reviews are performed to determine whether declines in market values of investments below their carrying values are deemed to be other than temporary. During 2001, the Group recorded a pre-tax write-down of MW.com related to the market value declines of that company's stock as this decline was deemed to be "other than temporary" as defined in SFAS 121 "Accounting for the Impairment of Long-lived Assets". No write-down was recorded under UK GAAP, as the Group did not deem the decline in value to be permanent. The investment is now fully amortized under UK GAAP. (XIII) 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. F-59 NOTES TO THE ACCOUNTS (CONTINUED) (XIV) 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, 2003 and 2002 all securities covered by SFAS 115 were designated by management as available for sale. (XV) 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. These shares are recorded at cost including expenses. Under US GAAP, shares in Pearson plc held by the employee share ownership trusts are recorded at cost as a direct reduction to shareholders funds. Under UK GAAP, the carrying value of shares in Pearson plc was written down by L37m in 2001 to reflect the market value of the shares on December 31, 2001 due to the decline in the market value of these shares since the date of purchase. Under US GAAP, this impairment charge was reversed. (XVI) MINORITY INTERESTS Minority interests represent the minority share of US GAAP adjustments. (XVII) PRESENTATION OF EARNINGS PER EQUITY SHARE Under US GAAP an entity that reports a discontinued operation or cumulative effect of an accounting change must present basic and diluted EPS for those line items. Accordingly, the Group has presented EPS for income from continuing operations, discontinued operations, cumulative effect of an accounting change and net income. In 2001 the Group recorded a loss for the financial year under US GAAP. Consequently the effect of share options is anti-dilutive and has been excluded from the calculation of diluted loss per share. (XVIII) OTHER DISCLOSURES REQUIRED BY US GAAP 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 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 joint ventures and associates, and cash flows from acquisitions and disposals would be F-60 NOTES TO THE ACCOUNTS (CONTINUED) 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:
2003 2002 2001 ---- ---- ---- LM LM LM Net cash provided by operating activities................... 239 334 263 Net cash (used in)/provided by investing activities......... (102) 689 (145) Net cash used in financing activities....................... (164) (819) (182) Foreign exchange differences................................ 14 (14) (10) ---- ---- ---- Net (decrease)/increase in cash and cash equivalents........ (13) 190 (74) Cash and cash equivalents under US GAAP at the beginning of the year.................................................. 571 381 455 ---- ---- ---- Cash and cash equivalents under US GAAP at the end of the year...................................................... 558 571 381 ==== ==== ====
DISCONTINUED OPERATIONS The Group analyses turnover and operating profit between continuing and discontinued operations. Under US GAAP, for transactions occurring in 2003 and 2002, the operating results from discontinued operations have been accounted for under SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and are shown on a separate line in the profit and loss statement below income from continuing operations, net of the related tax impact. Prior to 2002, these transactions have been accounted for in accordance with APB 30 "Reporting the Results of Operations, Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." REVENUE RECOGNITION Revenue from the sale of books is recognized when the goods are shipped (which is also when title passes), persuasive evidence of an arrangement exists, the fee is determinable and collectability is probable. A provision for sales returns is estimated on the basis of historical returns and recorded so as to allocate these returns to the same period as the original sales are recorded. Revenue from long term contracts, such as contracts to process qualifying tests for individual professions and government departments, is recognized as services are delivered. Losses on long-term services contracts are recognized in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. Advertising revenue is recognized when the advertisement appears in the publication. Online advertising revenue is recognized ratably during the period in which the advertising is displayed and obligations are satisfied. Subscription income is recorded as revenue as earned. Deferred subscription revenue, which primarily represents amounts received from customers in advance of newspaper and magazine delivery and the supply of business information, is included in revenue over the subscription term. The Group recognizes software revenue in accordance with the provisions of the Statement of Position 97-2, "Software Revenue Recognition," as amended. The Group recognizes license revenue upon shipment of a product to the customer if a signed contractual agreement exists, the fee is fixed and determinable and collection of the resulting receivables is probable. For contracts with multiple elements, the Group allocates revenue to each F-61 NOTES TO THE ACCOUNTS (CONTINUED) component of the contract based on vendor-specific objective evidence of its fair value. Vendor-specific objective evidence of fair value is determined using the price charged when that element is sold separately. Any significant up-front set-up fees are deferred and recognized ratably over the estimated service period. Revenues for hosting services are recognized monthly as the services are provided. The Group recognizes revenue related to hardware maintenance and software support fees for ongoing customer support and product updates, ratably over the period of the maintenance contract. Payments for these fees are generally made in advance and are non-refundable. Revenues from professional services such as training, implementation, and consulting are recognized as the services are performed. On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue. LEASE COMMITMENTS The following is a summary of future minimum rental payments for all leases with terms greater than one year remaining as at December 31, 2003. All leases have been classified as capital or operating in accordance with UK GAAP:
CAPITAL CAPITAL OPERATING OPERATING LEASES -- LAND & LEASES -- PLANT & LEASES -- LAND & LEASES -- PLANT & BUILDINGS MACHINERY/OTHER BUILDINGS MACHINERY/OTHER ---------------- ----------------- ---------------- ----------------- LM LM LM LM Fiscal year ending December 31, 2004................................ -- 3 99 17 2005................................ -- 2 94 13 2006................................ -- -- 85 8 2007................................ -- -- 79 4 2008................................ -- -- 74 1 Thereafter.......................... -- -- 594 -- -- -- ----- -- TOTAL MINIMUM LEASE PAYMENTS........ -- 5 1,025 43 == == ===== ==
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. 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, useful lives of tangible and intangible assets, income taxes and other items. Actual results could differ from those estimates. F-62 NOTES TO THE ACCOUNTS (CONTINUED) 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, 2003, 2002 and 2001 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 In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, companies could only account for as equity and requires that these instruments be classified as liabilities in statements of financial position. The statement is effective prospectively for financial instruments entered into or modified after May 31, 2003 and otherwise is effective for pre-existing instruments as of January 1, 2004. These requirements currently have no material effect on the financial position and results of the Group under US GAAP. In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities -- an interpretation of ARB No. 51", which clarifies the application of the consolidation rules to certain variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. A revision (FIN 46R) was issued in December 2003 which deferred the effective date for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must, at a minimum, apply the provisions to entities that were previously considered "special-purpose entities' by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R did not have any impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2003 under the transitional arrangements. Currently the Group is evaluating FIN 46R for transactions entered into prior to February 1, 2003 and does not believe there will be any material impact upon full adoption in 2004. In November 2003, the EITF reached a final consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This EITF provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 and will apply to the Group for any arrangements entered into after January 1, 2004. Currently, this is not expected to have a material effect on the financial position and results of the Group under US GAAP. F-63 SIGNATURES The registrant hereby certifies that it meets all the of the requirements for filing on Form 20-F and that it has caused and authorized the undersigned to sign this annual report on its behalf. PEARSON PLC /s/ RONA FAIRHEAD Rona Fairhead Chief Financial Officer Date: May 7, 2004 EX-1.1 2 u47265exv1w1.txt EXHIBIT 1.1 Exhibit 1.1 THE COMPANIES ACT 1985 COMPANY LIMITED BY SHARES ARTICLES OF ASSOCIATION OF PEARSON PLC ------------------------------------- Adopted by special resolution passed on 2 May 1986 and amended by special resolutions passed on 11 May 1990, 10 May 1991, 3 May 1996 and 30 April 2004. 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 ADDRESS: In relation to electronic communications, includes any number or address used for the purposes of such communications. CERTIFICATED SHARE: A share in the capital of the Company that is not an uncertificated share and references in these Articles to a share being held in certificated form shall be construed accordingly. CHAIRMAN: The Chairman of the Board. 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. CREST: The relevant system, as defined in the Regulations, in respect of which CRESTCo is the Operator. DEPUTY CHAIRMAN: The Deputy Chairman of the Board. DIVIDEND: Includes bonus. ELECTRONIC SIGNATURE: Has the meaning given by section 7(2) of the Electronic Communications Act 2000. HOLDER(s) OR SHAREHOLDER(s): In relation to a share in the capital of the Company means the member whose name is entered in the Register as the holder of that share. MEMBER: Means a member of the Company. MONTH: Calendar month. OPERATOR: Has the meaning given by the Regulations. ORDINARY SHARE(s): Has the meaning given by Article 3. PAID UP: Includes credited as paid up. PARTICIPATING SECURITY: Has the meaning given by the Regulations. REGULATIONS: The Uncertificated Securities Regulations 2001 including any modification or re-enactment of them for the time being in force. RESOLUTION: Means a resolution of the members of the Company at a general meeting, unless the context otherwise requires. SATELLITE MEETING PLACE: Subject to the provisions of Article 54.2, any one or more places where a person may attend a general meeting of the Company, other than the place set out in the notice referred to in Article 53. SHARE(S): Means the Ordinary Share(s), unless the context otherwise requires. 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. THE AUDITORS: The auditors 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 DIRECTORS: The directors for the time being of the Company. THE OFFICE: The Registered Office of the Company. THE REGISTER: As appropriate, either or both the register of members of the Company and the Operator register of members of the Company. THE SEAL: The Common Seal of the Company. THE STATUTES OR THE The Companies Act 1985 or any statutory COMPANIES ACT 1985: 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. THE UNITED KINGDOM: Great Britain and Northern Ireland. THESE ARTICLES: These Articles of Association, as originally adopted, as from time to time altered by special resolution. TRANSFER OFFICE: The place where the register of members is situated for the time being. TREASURY SHARES: Has the meaning given by the Companies Act 1985, as amended by The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 and The Companies (Acquisition of Own Shares) (Treasury Shares) No 2 Regulations 2003, as if those Regulations were in force at the date of adoption of these Articles. UNCERTIFICATED SHARE: Means (subject to Regulation 42(11)(a) of the Regulations) a share in the capital of the Company, title to which is recorded on the Operator register of members of the Company and which may, by virtue of the Regulations, be transferred by means of a relevant system and references in these Articles to a share being held in uncertificated form shall be construed accordingly. YEAR: Year from 1 January to 31 December inclusive. 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 as set out in Articles 121-123. Where, in relation to a share, these Articles refer to a RELEVANT SYSTEM, the reference is to the relevant system in which that share is a participating security at the relevant time. References to a DOCUMENT include, unless the context otherwise requires, references to an electronic communication. References to an ELECTRONIC COMMUNICATION mean, unless the contrary is stated, an electronic communication (as defined in the Companies Act 1985) comprising writing. References to a document being EXECUTED include references to its being executed under hand or under Seal or, in the case of an electronic communication, by electronic signature. References to an INSTRUMENT mean, unless the contrary is stated, a written document having tangible form and not comprised in an electronic communication (as defined in the Companies Act 1985). References to a notice or other document being SENT or GIVEN to or by a person mean such notice or other document, or a copy of such notice or other document, being sent, given, delivered, issued or made available to or by, or served on or by, or deposited with or by that person by any method authorised by these Articles, and SENDING and GIVING shall be construed accordingly. References to WRITING mean the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether comprised in an electronic communication or otherwise, and WRITTEN shall be construed accordingly. 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. 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 Pound Sterling 295,500,000 divided into 1,182,000,000 Ordinary Shares of 25p each. VARIATION OF RIGHTS 4. Subject to the provisions of the Statutes, 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: (a) with the consent in writing of the holders of three-fourths of the issued shares of the class (excluding any shares of that class held as treasury shares) which consent shall be by means of any one or more instruments or electronic communications sent to such address (if any) for the time being notified by or on behalf of the Company for that purpose; or (b) 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. 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: (a) the creation or issue of further shares ranking pari passu therewith; or (b) the Company permitting, in accordance with the Regulations, the holding of and transfer of title to shares of that or any other class in uncertificated form by means of a relevant system. 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. 7.1 The Board has general and unconditional authority to exercise all the powers of the Company to allot relevant securities up to an aggregate nominal amount equal to the section 80 amount, for each prescribed period. 7.2 The Board is empowered for each prescribed period to allot equity securities for cash pursuant to the authority conferred by Article 7.1 as if section 89(1) of the Companies Act 1985 did not apply to any such allotment, provided that its power shall be limited to: (a) the allotment of equity securities in connection with a pre-emptive issue; and (b) the allotment (otherwise than pursuant to Article 7.2(a)) of equity securities up to an aggregate nominal amount equal to the section 89 amount. In this Article and Article 7.3, a reference to the allotment of equity securities also includes the sale of any relevant shares in the Company if, immediately before the sale, the shares were held by the Company as treasury shares. Article 7.2 applies in relation to a sale of shares which is an allotment of equity securities by virtue of section 94(3A) of the Companies Act 1985 as if in Article 7.2 the words "pursuant to the authority conferred by Article 7.1" were omitted. 7.3 Before the expiry of a prescribed period the Company may make an offer or agreement which would or might require equity securities or other relevant securities to be allotted after such expiry. The Board may allot equity securities or other relevant securities in pursuance of that offer or agreement as if the prescribed period during which that offer or agreement was made had not expired. 7.4 In this Article and Articles 7.1, 7.2 and 7.3: PRESCRIBED PERIOD means any period for which the authority conferred by Article 7.1 is given by ordinary or special resolution stating the section 80 amount and/or the power conferred by Article 7.2 is given by special resolution stating the section 89 amount; PRE-EMPTIVE ISSUE means an offer of equity securities to holders of Ordinary Shares or an invitation to holders of Ordinary Shares to apply to subscribe for equity securities and, if in accordance with their rights the Board so determines, holders of other equity securities of any class (whether by way of rights issue, open offer or otherwise) where the equity securities respectively attributable to the interests of holders of Ordinary Shares or holders of other equity securities, if applicable are proportionate (as nearly as practicable) to the respective numbers of ordinary shares or other equity securities, as the case may be held by them, but subject to such exclusions or other arrangements as the Board may deem necessary or expedient in relation to fractional entitlements or any legal, regulatory or practical problems under the laws or regulations of any territory or the requirements of any regulatory body or stock exchange; SECTION 80 AMOUNT means, for any prescribed period, the amount stated in the relevant ordinary or special resolution; and SECTION 89 AMOUNT means, for any prescribed period, the amount stated in the relevant special resolution. 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 without prejudice to any relevant special rights attached to any class of shares, the Company may purchase any of its own shares of any class (including without limitation redeemable shares) in any way and at any price (whether at par or above or below par) and may hold such shares as treasury 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. 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: (a) it is a transfer of shares pursuant to acceptance of a takeover offer (within the meaning of section 428(1) of the Companies Act 1985); (b) 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 (c) the transfer results from a sale made through a recognised investment exchange as defined in the Financial Services and Markets Act 2000 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 Article 11.2. 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. UNCERTIFICATED SHARES 11.5 Subject to the provisions of the Regulations, the Board may permit the holding of shares in any class of shares in uncertificated form and the transfer of title to shares in that class by means of a relevant system and may determine that any class of shares shall cease to be a participating security. 11.6 Shares in the capital of the Company that fall within a certain class shall not form a separate class of shares from other shares in that class because any share in that class: (a) is held in uncertificated form; or (b) is permitted in accordance with the Regulations to become a participating security. 11.7 Where any class of shares is a participating security and the Company is entitled under any provision of the Statutes, the Regulations or these Articles to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of or otherwise enforce a lien over a share held in uncertificated form, the Company shall be entitled, subject to the provisions of the Statutes, the Regulations, these Articles and the facilities and requirements of the relevant system: (a) to require the holder of that uncertificated share by notice to change that share into certificated form within the period specified in the notice and to hold that share in certificated form so long as required by the Company; (b) to require the holder of that uncertificated share by notice to give any instructions necessary to transfer title to that share by means of the relevant system within the period specified in the notice; (c) to require the holder of that uncertificated share by notice to appoint any person to take any step, including without limitation the giving of any instructions by means of the relevant system, necessary to transfer that share within the period specified in the notice; (d) to require the Operator to convert that uncertificated share into certificated form in accordance with Regulation 32(2)(c) of the Regulations; and (e) to take any action that the Board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that share or otherwise to enforce a lien in respect of that share. 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 monies 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. 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 monies uncalled and unpaid upon any shares held by him, and upon all or any of the monies 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 monies 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 monies 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 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, if the share is a certificated share, authorise some person to transfer the shares sold to, or in accordance with the directions of, the purchaser thereof. If the share is an uncertificated share, the Board may exercise any of the Company's powers under Article 11.7 to effect the sale of the share 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 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. Where for the purposes of its disposal a forfeited share held in certificated form is to be transferred to any person, the Board may authorise any person to execute an instrument of transfer of the share to that person. Where for the purposes of its disposal a forfeited share held in uncertificated form is to be transferred to any person, the Board may exercise any of the Company's powers under Article 11.7. 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 monies 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 monies 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 certificated 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 certificated 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 certificated 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. 34. The Board may, in its absolute discretion, and without assigning any reason therefor, refuse to register any transfer of certificated 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 of a certificated share, 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 of a share in certificated form, 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. A person becoming entitled by transmission to a share may, on production of any evidence as to his entitlement properly required by the Board, elect either to become the holder of the share or to have another person nominated by him registered as the transferee. If he elects to become the holder he shall send notice to the Company to that effect. If he elects to have another person registered and the share is a certificated share, he shall execute an instrument of transfer of the share to that person. If he elects to have himself or another person registered and the share is an uncertificated share, he shall take any action the Board may require (including without limitation the execution of any document and the giving of any instruction by means of a relevant system) to enable himself or that person to be registered as the holder of the share. All the provisions of these Articles relating to the transfer of shares apply to that notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member or other event giving rise to the transmission had not occurred. 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 monies 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 monies 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 monies 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. (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 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 total 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 amount 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. Whenever any fractions arise as a result of a consolidation or sub-division of shares, the Board may on behalf of the members deal with the fractions as it thinks fit. In particular, without limitation, the Board may sell shares representing fractions to which any members would otherwise become entitled to any person (including, subject to the provisions of the Statutes, the Company) and distribute the net proceeds of sale in due proportion among those members. Where the shares to be sold are held in certificated form the Board may authorise some person to execute an instrument of transfer of the shares to, or in accordance with the directions of, the buyer. Where the shares to be sold are held in uncertificated form, the Board may do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the buyer. The buyer shall not be bound to see to the application of the purchase monies and his title to the shares shall not be affected by any irregularity in, or invalidity of, the proceedings in relation to the sale. (b) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association of the Company, 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; and (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 share capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe. 48.1 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. 48.2 All shares created by ordinary resolution pursuant to Articles 46-47 shall be: (a) subject to all the provisions of these Articles, including without limitation provisions relating to payment of calls, lien, forfeiture, transfer and transmission; and (b) unclassified, unless otherwise provided by these Articles, by the resolution creating the shares or by the terms of allotment of the shares. 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 AND CLASS 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 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. 51.1 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. 51.2 All provisions of these Articles relating to general meetings of the Company or the proceedings thereat shall, mutatis mutandis, apply to every separate general meeting of the holders of any class of shares in the capital of the Company, except that: (a) the necessary quorum shall be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class (excluding any shares of that class held as treasury shares) or, at any adjourned meeting of such holders, one holder present in person or by proxy, whatever the amount of his holding, who shall be deemed to constitute a meeting; (b) any holder of shares of the class present in person or by proxy may demand a poll; and (c) each holder of shares of the class shall, on a poll, have one vote in respect of every share of the class held by him. 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. 54.1 The accidental omission to give notice of any meeting, or to send any notification where required by the Statutes or these Articles in relation to the publication of a notice of meeting on a website, 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, whether or not the Company is aware of such omission or non-receipt, shall not invalidate the proceedings at the meeting. 54.2 The Board may resolve to enable persons entitled to attend a general meeting to do so by simultaneous attendance and participation at a satellite meeting place anywhere in the world. The members present in person or by proxy at a satellite meeting place shall be counted in the quorum for, and entitled to vote at, the general meeting in question, and that meeting shall be duly constituted and its proceedings valid if the chairman of the general meeting is satisfied that adequate facilities are available throughout the general meeting to ensure that members attending at all the meeting places are able to: (a) participate in the business for which the meeting has been convened; (b) hear and see all persons who speak (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place; and (c) be heard and seen by all other persons so present in the same way. The chairman of the general meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place. 54.3 If it appears to the chairman of the general meeting that the facilities at the principal meeting place or any satellite meeting place have become inadequate for the purposes referred to in Article 54.2, then the chairman of the general meeting may, without the consent of the meeting, interrupt or adjourn the general meeting. All business conducted at that general meeting up to the time of that adjournment shall be valid. 54.4 The Board may make arrangements for persons entitled to attend a general meeting or an adjourned general meeting to be able to view and hear the proceedings of the general meeting or adjourned general meeting and to speak at the meeting (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) by attending at a venue anywhere in the world not being a satellite meeting place. Those attending at any such venue shall not be regarded as present at the general meeting or adjourned general meeting and shall not be entitled to vote at the meeting at or from that venue. The inability for any reason of any member present in person or by proxy at such a venue to view or hear all or any of the proceedings of the meeting or to speak at the meeting shall not in any way affect the validity of the proceedings of the meeting. 54.5 The Board may from time to time make any arrangements for controlling the level of attendance at any venue for which arrangements have been made pursuant to Article 54.4 (including without limitation the issue of tickets or the imposition of some other means of selection) if it considers it appropriate, and may from time to time change those arrangements. If a member, pursuant to those arrangements, is not entitled to attend in person or by proxy at a particular venue, he shall be entitled to attend in person or by proxy at any other venue for which arrangements have been made pursuant to Article 54.4. The entitlement of any member to be present at such venue in person or by proxy shall be subject to any such arrangement then in force and stated by the notice of meeting or adjourned meeting to apply to the meeting. 54.6 If, after the sending of notice of a general meeting but before the meeting is held, or after the adjournment of a general meeting but before the adjourned meeting is held (whether or not notice of the adjourned meeting is required), the Board decides that it is impracticable or unreasonable, for a reason beyond its control, to hold the meeting at the declared place (or any of the declared places, in the case of a meeting to which Article 54.2 applies); and/or time, it may as appropriate: (i) change the place (or any of the places, in the case of a meeting to which Article 54.2 applies); and/or (ii) postpone the time at which the meeting is to be held. If such a decision is made, the Board may then change the place (or any of the places, in the case of a meeting to which Article 54.2 applies) and/or postpone the time again if it decides that it is reasonable to do so. In either case: (a) no new notice of the meeting need be sent, but the Board shall, if practicable, advertise the date, time and place of the meeting in at least two newspapers having a national circulation and shall make arrangements for notices of the change of place and/or postponement to appear at the original place and/or at the original time; and (b) a proxy appointment in relation to the meeting may, if by means of an instrument, be delivered to the Office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 74(a) or, if contained in an electronic communication, be received at the address (if any) specified by or on behalf of the Company in accordance with Article 74(b), at any time not less than forty-eight hours before any postponed time appointed for holding the meeting. 54.7 For the purposes of Articles 54.2-54.5, the right of a member to participate in the business of any general meeting shall include without limitation the right to speak, vote on a show of hands, vote on a poll, be represented by a proxy and have access to all documents which are required by the Statutes or these Articles to be made available 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 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 of the meeting, 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 of the Board 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 of the meeting, the Directors present shall choose one of their number to be chairman of the meeting, 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 of the meeting. 59. The chairman of the meeting 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 of the meeting; or (b) (except on the election of the chairman of the meeting or on a question of adjournment) by at least three members present in person or by proxy and entitled to vote; or (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 of the meeting 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 of the meeting 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 of the meeting 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 the chairman of the meeting 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 of the meeting 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. 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 these 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 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. PROXIES 72. The appointment of a proxy, whether by means of an instrument or contained in an electronic communication, shall be executed in such manner as may be approved by or on behalf of the Company from time to time. Subject thereto, the appointment of a proxy shall be executed by the appointor or any person duly authorised by the appointor or, if the appointor is a corporation, executed by a duly authorised person or under its common seal or in any other manner authorised by its constitution. For the purpose of this Article and Articles 73-75.2, an electronic communication which contains a proxy appointment need not comprise writing if the Board so determines and in such a case, if the Board so determines, the appointment need not be executed but shall instead be subject to such conditions as the Board may approve. 73. The appointment of a proxy shall be in any usual form or in any other form which the Board may approve. Subject thereto, the appointment of a proxy may be: (a) by means of an instrument; or (b) contained in an electronic communication, if the Board so determines. The Board may, if it thinks fit, but subject to the provisions of the Statutes, at the Company's expense send forms of proxy for use at a general meeting and issue invitations contained in electronic communications to appoint a proxy in relation to the meeting in such form as may be approved by the Board. The appointment of a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. A member may appoint more than one proxy to attend on the same occasion. 74. The appointment of a proxy shall: (a) in the case of an instrument, be delivered personally or by post to the Office or such other place within the United Kingdom as may be specified by or on behalf of the Company for that purpose: (i) in the notice convening the general meeting; or (ii) in any form of proxy sent by or on behalf of the Company in relation to the meeting, not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; or (b) in the case of an appointment contained in an electronic communication, where an address has been specified by or on behalf of the Company for the purpose of receiving electronic communications: (i) in the notice convening the meeting; or (ii) in any form of proxy sent by or on behalf of the Company in relation to the meeting; or (iii) in any invitation contained in an electronic communication to appoint a proxy issued by or on behalf of the Company in relation to the meeting, be received at that address not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; or (c) in either case, where a poll is taken more than forty-eight hours after it is demanded, be delivered or received 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 (d) in the case only of an instrument, where a poll is not taken forthwith but is taken not more than forty-eight hours after it was demanded, be delivered at the meeting at which the poll was demanded to the chairman of the meeting or to the Secretary or to any Director. 75.1 Where the appointment of a proxy is expressed to have been or purports to have been executed by a person on behalf of the holder of a share: (a) the Company may treat the appointment as sufficient evidence of the authority of that person to execute the appointment on behalf of that holder; (b) that holder shall, if requested by or on behalf of the Company at any time, send or procure the sending of any written authority under which the appointment has been executed, or a copy of such authority certified notarially or in some other way approved by the Board, to such address and by such time as may be specified in the request and, if the request is not complied with in any respect, the appointment may be treated as invalid; and (c) whether or not a request under Article 75.1(b) has been made or complied with, the Company may determine that it has insufficient evidence of the authority of that person to execute the appointment on behalf of that holder and may treat the appointment as invalid. 75.2 A proxy appointment which is not delivered or received in accordance with Article 74 shall be invalid. When two or more valid proxy appointments are delivered or received in respect of the same share for use at the same general meeting, the one which was last delivered or received shall be treated as replacing and revoking the others as regards that share. The Board may determine at its discretion when a proxy appointment shall be treated as delivered or received for the purposes of these Articles. 75.3 A proxy appointment shall be deemed to include the right to demand, or join in demanding, a poll but shall not confer any further right to speak at a meeting, except with the permission of the chairman of the meeting. The proxy appointment shall also, unless it provides to the contrary, be deemed to confer authority on the proxy to vote or abstain from voting as the proxy thinks fit on any amendment of a resolution and on any procedural motion or resolution put to the meeting to which it relates and on any other business not referred to in the notice of meeting which may properly come before the meeting to which it relates. The proxy appointment shall, unless it provides to the contrary, be valid for any adjournment of the meeting as well as for the meeting to which it relates. 75.4 A vote given or poll demanded by a proxy or by the duly authorised representative of a corporation shall be valid notwithstanding the previous determination of the authority of the person voting or demanding the poll unless notice of the determination was either delivered or received as mentioned in the following sentence at least three hours before the start of the meeting or adjourned meeting at which the vote is 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. Such notice of determination shall be either by means of an instrument delivered to the Office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 74(a) or contained in an electronic communication received at the address (if any) specified by or on behalf of the Company in accordance with Article 74(b), regardless of whether any relevant proxy appointment was effected by means of an instrument or contained in an electronic communication. For the purpose of this Article, an electronic communication which contains such notice of determination need not comprise writing if the Board has determined that the electronic communication which contains the relevant proxy appointment need not comprise writing. 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 and 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. QUALIFICATION OF DIRECTORS 81. Unless and until otherwise determined by the Company in a general meeting, the Directors shall not be required to hold any share qualification. 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 a 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 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. 86.2 Pursuant to section 719 of the Companies Act 1985, the Board is 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. 89. All cheques, promissory notes, drafts, bills of exchange and other negotiable or transferable instruments, and all receipts for monies 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 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 monies borrowed by the Company and/or any of its relevant subsidiaries (exclusive of monies 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 1 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 twenty years on a straight line basis but: (a) 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; (b) adjusted as may be appropriate to take account of: (i) 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; (ii) 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; (iii) 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; (c) after excluding any sums provided for taxation (including deferred tax); (d) 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; (e) 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: (a) 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; (b) 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 one hundred and eighty days or less); (c) 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; and (d) the nominal amount of any issued share capital (not being equity share capital) of a relevant 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, 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; and (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 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 taken 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. 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 of the Board 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. 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, sent using electronic communications to such address (if any) for the time being notified by the Director or on his behalf to the Company for that purpose 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 of the Board 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 the Board or of a committee of the Board 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. For the purpose of this Article: (a) a resolution may be by means of an instrument or contained in an electronic communication sent to such address (if any) for the time being notified by the Company for that purpose; (b) a resolution may consist of several instruments or several electronic communications, each executed by one or more Directors, or a combination of both; (c) the signature of an alternate Director shall suffice in lieu of the signature of the Director appointing him; and (d) a resolution executed by a Director who has appointed an alternate Director need not also be executed by the alternate Director in that capacity. 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. 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; and (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; (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; or (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 this Article 101.1 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 of the Board in relation to any resolution on which he is debarred from voting. 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 Article 101.2 above) 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 of the Board 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, such question shall be referred to the Chairman or, if the Chairman 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 (and including any Director who has at the start of the annual general meeting been in office for three years or more since his last appointment or re-appointment). 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, first, those who wish to retire and not be re-appointed to office and, second, 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. 106. The Company at a general 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. Without prejudice to the provisions of Article 114.1, 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). 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. PRESIDENT 113.1 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. 113.2 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. NON-EXECUTIVE DIRECTORS 114.1 Subject to the provisions of the Statutes, the Board may enter into, vary and terminate an agreement or arrangement with any Director who is not an Executive Director for the provision of his services to the Company. Subject to Article 114.2 and 114.3, any such agreement or arrangement may be made on such terms as the Board determines. 114.2 The ordinary remuneration of the Directors who are not Executive Directors for their services (excluding amounts payable under any other provision of these Articles) shall not, subject to Article 114.3, exceed in aggregate Pound Sterling500,000 per annum* or such higher amount as the Company may from time to time by ordinary resolution determine. Subject thereto, each such Director shall be paid a fee for his services (which shall be deemed to accrue from day to day) at such rate as may from time to time be determined by the Board. 114.3 Any Director who is not an Executive Director and who performs special services which in the opinion of the Board are outside the scope of the ordinary duties of a Director, may be paid such extra remuneration by way of additional fee, salary, commission or otherwise as the Board may determine. DIRECTORS' EXPENSES 114.4 The Directors may be paid all travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of the Board or committees of the Board, general meetings or separate meetings of the holders of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties. 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. - -------------------------------------------------------------------------------- * Increased to (pound)250,000 by an ordinary resolution passed on 11 May 1990. * Increased to (pound)300,000 by an ordinary resolution passed on 3 May 1996. * Increased to (pound)500,000 by an ordinary resolution passed on 30 April 2004. 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. 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 and shall take effect in accordance with the terms of the notice: (a) on receipt of such notice by the Company which shall, in the case of a notice contained in an instrument, be at the Office or, in the case of a notice contained in an electronic communication, be at such address (if any) for the time being notified by or on behalf of the Company for that purpose; or (b) 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 meetings of the Board 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 ("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. 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, electronic means, or printed on it or that such certificates need not be signed by any person. 124.3 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. REGISTERS 125.1 Subject to the provisions of the Statutes and the Regulations, the Company may keep an overseas or local or other register in any place, and the Board may make, amend and revoke any regulations it thinks fit about the keeping of that register. 125.2 Any Director or the Secretary or any other person appointed by the Board for the purpose shall have power to authenticate and certify as true copies of and extracts from: (a) any document comprising or affecting the constitution of the Company, whether in physical form or electronic form; (b) any resolution passed by the Company, the holders of any class of shares in the capital of the Company, the Board or any committee of the Board, whether in physical form or electronic form; and (c) any book, record and document relating to the business of the Company, whether in physical form or electronic form (including without limitation the accounts). If certified in this way, a document purporting to be a copy of a resolution, or the minutes or an extract from the minutes of a meeting of the Company, the holders of any class of shares in the capital of the Company, the Board or a committee of the Board, whether in physical form or electronic form, shall be conclusive evidence in favour of all persons dealing with the Company in reliance on it or them that the resolution was duly passed or that the minutes are, or the extract from the minutes is, a true and accurate record of proceedings at a duly constituted meeting. 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 least 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. 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 monies 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 monies, the rate of exchange to be used to determine the foreign currency equivalent of any sum payable as a dividend or payment of redemption monies 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 monies are paid. 135.1 Any general meeting declaring a dividend may upon the recommendation of the Board, direct payment or satisfaction of such dividend 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 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; (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 Share 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 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; (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 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 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 monies 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 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 monies payable in respect of a share, may be paid: (i) in cash; or (ii) 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 (iii) may be paid by inter-bank transfer to the account of the person entitled to such payment; or (iv) by such other means as the Directors may determine or think fit including without limitation in respect of an uncertificated share by means of the relevant system (subject to the facilities and requirements of the relevant system). Where such dividend or other monies 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; or, in respect of an uncertificated share, the making of payment in accordance with the facilities and requirements of the relevant system (which, if the relevant system is CREST, may include the sending by the Company or by any person on its behalf of an instruction to the Operator of the relevant system to credit the cash memorandum account of the holder or joint holders or, if permitted by the Company, of such person as the holder or joint holders may in writing direct) shall be good discharge to the Company. Every such cheque or warrant shall be sent at the risk of the person entitled to the monies 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 monies 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 monies 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 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 (c) 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 (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 to be sent to or by any person pursuant to these Articles (other than a notice calling a meeting of the Board or any committee of the Board) shall be in writing. Any such notice may be sent using electronic communications to such address (if any) for the time being notified for that purpose to the person sending the notice by or on behalf of the person to whom the notice is sent. 148. The Company shall send any notice or other document pursuant to these Articles to a member by whichever of the following methods it may in its absolute discretion determine: (a) by delivering it personally; or (b) by posting the notice or other document in a prepaid envelope addressed, in the case of a member, to his registered address, or in any other case, to the person's usual address; or (c) by leaving the notice or other document at that address; or (d) by sending the notice or other document using electronic communications to such address (if any) for the time being notified to the Company by or on behalf of the member for that purpose; or (e) in accordance with Article 149; or (f) by any other method approved by the Board. 149. Subject to the Statutes, the Company may also send any notice or other document pursuant to these Articles to a member by publishing that notice or other document on a website where: (a) the Company and the member have agreed to him having access to the notice or document on a website (instead of it being sent to him); (b) the notice or document is one to which that agreement applies; (c) the member is notified, in a manner for the time being agreed between him and the Company for the purpose, of: (i) the publication of the notice or document on a website; (ii) the address of that website; and (iii) the place on that website where the notice or document may be accessed, and how it may be accessed; and (d) the notice or document is published on that website throughout the website publication period, provided that, if the notice or document is published on that website for a part, but not all of, the publication period, the notice or document shall be treated as being published throughout that period if the failure to publish that notice or document throughout that period is wholly attributable to circumstances which it would not be reasonable to have expected the Company to prevent or avoid. 150. In Article 149 PUBLICATION PERIOD means: (a) in the case of a notice of an adjourned general meeting, a period of not less than seven clear days before the date of the adjourned meeting, beginning on the day following that on which the notification referred to in sub-paragraph (c) of Article 149 above is sent or (if later) is deemed sent; (b) in the case of a notice of a poll, a period of not less than seven clear days before the taking of the poll, beginning on the day following that on which the notification referred to in sub-paragraph (c) of Article 149 -above is sent or (if later) is deemed sent; and (c) in any other case, a period of not less than twenty-one days, beginning on the day following that on which the notification referred to in sub-paragraph (c) of Article 149 above is sent or (if later) is deemed sent. 151. Unless otherwise provided by these Articles, a member or a person entitled by transmission to a share shall send any notice or other document pursuant to these Articles to the Company by whichever of the following methods he may in his absolute discretion determine: (a) by posting the notice or other document in a prepaid envelope addressed to the Office; or (b) by leaving the notice or other document at the Office; or (c) by sending the notice or other document using electronic communications to such address (if any) for the time being notified by or on behalf of the Company for that purpose. 152.1 In the case of joint holders of a share, all notices or other documents shall be sent to the joint holder whose name stands first in the Register in respect of the joint holding. Any notice or other document so sent shall be deemed for all purposes sent to all the joint holders. 152.2 A member whose registered address is not within the United Kingdom and who sends to the Company an address within the United Kingdom at which a notice or other document may be sent to him by instrument or an address to which a notice or other document may be sent using electronic communications shall be entitled to have notices or other documents sent to him at that address (provided that, in the case of electronic communications, the Company so agrees, which agreement the Company shall be entitled to withhold in its absolute discretion including, without limitation, in circumstances in which the Company considers that the sending of the notice or other document to such address using electronic communications would or might infringe the laws of any other jurisdiction) but otherwise: (a) no such member shall be entitled to receive any notice or other document from the Company; and (b) without prejudice to the generality of the foregoing, any notice of a general meeting of the Company which is in fact sent or purports to be sent to such member shall be ignored for the purpose of determining the validity of the proceedings at such general meeting. 152.3 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 capital of the Company shall be deemed to have been sent notice of the meeting and, where requisite, of the purposes for which it was called. 152.4 The Board may from time to time issue, endorse or adopt terms and conditions relating to the use of electronic communications for the sending of notices, other documents and proxy appointments by the Company to members or persons entitled by transmission and by members or persons entitled by transmission to the Company. 152.5 A notice or other document may be sent by the Company to the person or persons entitled by transmission to a share by sending it in any manner the Company may choose authorised by these Articles for the sending of a notice or other document to a member, addressed to them by name, or by the title of representative of the deceased, or trustee of the bankrupt or by any similar description at the address (if any) in the United Kingdom as may be supplied for that purpose by or on behalf of the person or persons claiming to be so entitled. Until such an address has been supplied, a notice or other document may be sent in any manner in which it might have been sent if the death or bankruptcy or other event giving rise to the transmission had not occurred. 152.6 Every person who becomes entitled to a share shall be bound by any notice in respect of that share which, before his name is entered in the Register, has been sent to a person from whom he derives his title, provided that no person who becomes entitled by transmission to a share shall be bound by any Default Notice sent under Article 11.1 to a person from whom he derives his title. 152.7 Proof that an envelope containing a notice or other document was properly addressed, prepaid and posted shall be conclusive evidence that the notice or document was sent. Proof that a notice or other document contained in an electronic communication was sent in accordance with guidance issued by the Institute of Chartered Secretaries and Administrators current at the date of adoption of these Articles, or, if the Board so resolves, any subsequent guidance so issued, shall be conclusive evidence that the notice or document was sent. A notice or other document sent by the Company to a member by post shall be deemed to be sent: (a) if sent by first class post or special delivery post from an address in the United Kingdom to another address in the United Kingdom, or by a postal service similar to first class post or special delivery post from an address in another country to another address in that other country, on the day following that on which the envelope containing it was posted; (b) if sent by airmail from an address in the United Kingdom to an address outside the United Kingdom, or from an address in another country to an address outside that country (including without limitation an address in the United Kingdom), on the third day following that on which the envelope containing it was posted; and (c) in any other case, on the second day following that on which the envelope containing it was posted. 152.8 A notice or other document sent by the Company to a member contained in an electronic communication shall be deemed sent to the member on the day following that on which the electronic communication was sent to the member. Such a notice or other document shall be deemed sent by the Company to the member on that day notwithstanding that the Company becomes aware that the member has failed to receive the relevant notice or other document for any reason and notwithstanding that the Company subsequently sends a copy of such notice or other document by post to the member. 152.9 Except when the subject or context otherwise requires, in Articles 148 and 151-152.8, references to a notice include without limitation references to any notification required by the Statutes or these Articles in relation to the publication of any notices or other documents on a website. 152.10 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 general meeting may be sufficiently given by advertisement in the United Kingdom. Any notice given by advertisement for the purpose of this Article shall be advertised in at least one newspaper having a national circulation. If advertised in more than one newspaper, the advertisements shall appear on the same date. Such notice shall be deemed to have been sent to all persons who are entitled to have notice of meetings sent to them on the day when the advertisement appears. In any such case, the Company shall send confirmatory copies of the notice by post, if at least seven days before the meeting the posting of notices to addresses throughout the United Kingdom again becomes practicable. 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 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: (a) 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; (b) 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; (c) 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: (a) where the shares are held in certificated form, authorise any 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 of, or person entitled by transmission to, such shares; or (b) where the shares are held in uncertificated form, do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the buyer. 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. INDEX TO ARTICLES OF ASSOCIATION
ARTICLE PAGE ----------------- -------- Accounts, records of 126 40 records of, where kept 127 40 copies of, to be sent to members 129 40 inspection of 127 40 to be submitted in accordance with the Statutes 128 40 Administrators of deceased Members 39 13 Allotment of shares 7.1-7.4 5 Alternate Directors 98,115-120, 155.1 32,37,51 Appointment of Directors 77-80 25 Auditors, appointment 130 40 report 131 40 Bankruptcy, rights of person entitled to shares in consequence of 39-40 13 Borrowing, Board's powers 90.1-90.8 27 definitions related to 90.3-90.4 28 Brokerage on shares 8 6 Calls on shares, Board may make from time to time 14 9 date of call 15 9 differentiation on 19 10 forfeiture of shares, for non-payment of 25-27 11 in arrears 69 22 interest on unpaid calls 17 10 joint holders jointly and severally liable 16 9 made when resolution passed 15 9 monies may be paid up in advance and interest paid thereon 20 10 notice to be given 14 9 procedure to recover money due on calls 25 11 sums deemed to be 18 10 Capital of Company 3 4 Capital of Company, alterations to 46-48 16 cancellation of shares 46(c) 16 conversion of shares into stock and vice versa 42 15 consolidation of shares 46(a) 16 fractions of shares on consolidation 46(a) 16 increase of 47 16 redeemable shares, power to issue 49 17 reduction of by special resolution 48.1 16 rights may be varied 4-5 4 shares created pursuant to alteration to capital 48.2 16 sub-division of shares 46(b) 16 Capitalisation of profits 146.1-146.4 45 Certificates 12-13 9
ARTICLE PAGE ----------------- -------- charges for 12.1 9 lost or destroyed, new may be issued 13 9 may be delivered to any one of joint holders 12.2 9 one to every member 12.1 9 to be sealed, but need not be signed 124.2 39 Chairman of a meeting 57-64 20 acting as 58 20 adjourn meetings, right to 59 20 adjourned meetings, fixing of 57 20 casting vote at general meetings 63 21 declaration of result of vote on a show of hands 60 21 poll, consequence of demand 64 22 poll, on election of chairman 62 21 poll, procedure and effect of 61 21 poll, right to demand 60 21 qualification of vote, decision as to 70 22 Closing of Register 37 13 Commission on shares 8 6 Consolidation of shares 46(a) 16 Conversion of shares into stock and vice versa 42 15 Debentures, etc may be issued 90.1 27 Default notices 11.1-11.4 6 Definitions 2 1 Directors, acting in a professional capacity 102.3 35 acts valid notwithstanding defect in appointment 98 32 alternate 115-120 37 appointment of 77,79 25,26 appointment of, by separate resolution 79 26 Chairman and Deputy Chairman of 93 31 Chairman entitled to take chair at general meetings 58 20 Chairman to have no casting vote 91.1 30 committees, powers may be delegated to 96 32 Company may fill vacancies at general meeting 78 26 continuing Directors may act in case of vacancy 78 26 contracts, interest in to be disclosed 101.1 33 contracts, not disqualified from entering into with Company 101.1 33 contracts, power to vote on 101.2 33 defect in appointment of 98 32 delegation of powers 96 32 disqualification of 100 32 election by general meeting 106 35 Executive 108, 110-112 36 expenses 114.4 37 indemnified against losses, indemnity insurance etc 155.1-155.2 51 Managing 108-109, 111-112 36 may appoint attorneys 87 27
ARTICLE PAGE ----------------- -------- may appoint local Boards and delegate powers 85 26 may become Director of any subsidiary or other company 102.1 35 may provide for local management 85 26 meetings, a Director may at any time convene 91.2 31 meetings, Board may fix a quorum 92 31 meetings, competency to exercise powers 95 32 meetings, Directors may meet as they think fit 91.1 30 meetings, notice of 91.3 31 meetings, proceedings at 91-98 30 meetings, quorum 92 31 no person other than retiring Director eligible for election without notice or Directors' recommendation 80 26 non-executive 114.1-114.3 37 number of 76 25 office, when vacated 104 35 pensions and other benefits determined by the Board 86.1-86.2 27 power to determine manner of endorsement of cheques 89 27 power to make additional appointments 77 25 powers of 84-89 26 powers, general powers of Company vested in Directors 84 26 proceedings 91-98 30 qualification of 81 26 removal of 107 35 remuneration of non executive Directors 114.2 37 remuneration for special services by non executive Directors 114.3 37 report to be submitted in accordance with the Statutes 128-129 40 resolutions of 94 31 retirement of 103-106 35 vacancy may be filled by Directors 77 25 voting by, with regard to interest in contracts 101.2 33 voting by 101.2-101.5 33 voting powers conferred by shares of a subsidiary 102.2 35 Discovery 156 51 Dividends, interim, Board may pay 136 43 in currency other than sterling 134.2 41 from profits 132 40 joint holders 145 45 may be paid in specie or satisfied by allotment or ordinary shares if authorised by general meeting 135.1-135.2 41 may cease to be sent 144 45 method of payment 144 45 no dividends shall bear interest against Company 142 44
ARTICLE PAGE ----------------- -------- no larger than Board recommends 132 40 on shares in proportion to amount paid up 134.1 41 paid to registered holder or entitled to be registered as a holder 140-141 44 production of evidence of entitlement 141 44 reserves 137 44 subject to Statutes 133 41 unclaimed 143 44 when may be retained 21,41,139 10,13,44 Documents, discovery 156 51 power of Company to destroy 157 51 Executive and Managing Directors 108-112 36 Extraordinary general meetings 50, 51.1, 55 17,20 Forfeiture, Board may accept surrender of shares liable to 30 12 day and place, etc, to be named in notice 26 11 forfeited shares 28 11 forfeiture may be cancelled 28 11 if notice not complied with shares may be forfeited 27 11 member liable to pay call notwithstanding 29 11 notice, form of 26 11 notice requiring payment of money due 25 11 statutory declaration conclusive evidence 31 12 General and class meetings 50-64 17 accidental omission of notice of 54.1 18 adjournment of 57,59 20 annual 50 17 business of annual 55 20 chairman has casting vote 63 21 chairman of 58 20 change of time/place of 54.6 19 extraordinary, all other than annual 50 17 extraordinary, may be convened by Board or by requisition 51.1 17 notice of 52-54.7 18 period of notice 52 18 proceedings at 55-64 20 provisions relating to class meetings 51.2 17 quorum 56 20 satellite meeting place 54.2-54.3 18 time and place 53 18 venue not being a satellite meeting place 54.4-54.5 19 voting at 60-63 21 Increase of capital 47 16 Indemnity 155.1-155.2 51
ARTICLE PAGE ----------------- -------- Instalments of a call, failure to pay 25 11 Interpretation of provisions relating to stock 45 15 Lien, application of proceeds of sale 24 11 Board may exempt any share from these provisions 21 10 Company has first lien on shares not fully paid up, and on dividends 21 10 Company may sell shares to enforce lien 22 10 effect of sale 23 10 name of purchaser shall be entered in Register 23 10 Liquidation 153-154 50 Local management 85 26 Managing Director and Executive Directors 108-112 36 appointment of 108 36 power such as Board thinks fit 112 36 remuneration to be fixed by Board 111 36 resignation and removal of 109-110 36 Minutes of Board meetings 99 32 Notices, accidental omission of, not to invalidate resolution 54.1 18 deemed receipt of notice 152.3 49 during disruption of services 152.10 50 includes website notification 152.9 50 methods of Company sending notice 148 47 methods of member etc. sending notice 151 48 proof of sending/when notices etc. deemed sent by post 152.7 49 registered address outside UK 152.2 48 terms and conditions for electronic communications 152.4 49 to joint holders 152.1 48 to persons entitled by transmission 152.5 49 transferees etc. bound by prior notice 152.6 49 website publication by Company 149 47 when notice required to be in writing; use of electronic communications 147 47 when notices etc. deemed sent by electronic communication 152.8 50 Pensions, establishment by Board 86.1 27 Poll, demand of not to prevent transaction of other business 64 22 how to be demanded 60 21 on adjournment or election of chairman 62 21 result of 61 21 to be taken as Chairman directs 62 21 Powers of attorney 74,87 23,27 Powers of Board 84-89 26
ARTICLE PAGE ----------------- -------- President 113.1,113.2 36,37 Proceedings, at general meetings 55-64 20 of Board 91-98 30 Proxies 65-66,68,69, 71-75.4 22,23 Purchase of Company's shares 9 6 Quorum, at Board meetings 92 31 at general meetings 56 20 at meetings of classes of shares 51.2 17 Redeemable shares 49 17 Reduction of capital 48 16 Registers 125.1-125.2 39 Retirement and removal of Directors 103-107 35 Reserves 137 44 Rights of Members, variation of 4-5 4 Seal, affixing of 124.1-124.2 39 in foreign countries 124.3 39 Secretary 121,123 38 Deputy 122 38 if a Director 123 38 Securities Seal, shares warrants, issued under 41(A) 13 Services of notices and other documents 147-152.10 47 Share certificates 12-13 9 Share premium account 138 44 Share warrant, provisions applying to 41(A) 13 Shares, allotment by Board 7.1-7.4 5 cancellation of 46(c) 16 commissions 8 6 Company may purchase its own 9 6 consolidation 46(a) 16 conversion into stock and vice versa 42 15 different clauses of 4 4 new issues of, not a variation of rights attaching to existing shares 6 5 power to deal with fractions on consolidation 46(a) 16 redeemable 49 17 sub-division of 46(b) 16 transfer and transmission of 32-41 12 trusts not recognised 10 6 Uncertificated 11.5-11.7 8 Stock, conversion into 42 15 manner of transfer 43 15 provisions of these Articles applicable to, 45 15 Stockholders, same privileges as shareholders 44 15 'Table A' shall not apply 1 1
ARTICLE PAGE ----------------- -------- Transfer and Transmission 32-41 12 absolute discretion of Board to refuse to register 34 12 Board may refuse to register in certain other cases 35 12 form of transfer 32 12 instrument of transfer of shares to be executed by or on behalf of transferor and (in the case of partly paid shares) transferee 33 12 legal personal representatives of deceased, survivors of joint holders only persons recognised by Company 38 13 notice of refusal to register transfer 36 13 of shares of deceased or bankrupt Member 38 13 registration of transfers may be suspended 37 13 transferor holder until transferee on Register 33 12 Transfer Office 2 1 share warrants, deposited at 41(A) 13 Transmission of shares 38-41A 13 Trusts not to be recognised 10 6 Untraced shareholders 158.1-158.3 52 Variation of rights 4-5 4 Votes of Members 65-75.4 22 by a corporation 67 22 appointment of a proxy 72-75.3 23 chairman's casting vote 63 21 chairman's declaration as to result of votes is final 50 17 evidence of passing resolutions 60 21 members under incapacity 68 22 no member entitled to vote whilst call due, etc. 69 22 no right to vote in case of a Default Notice 11.2 7 objection to qualification 70 22 one vote for each share, at a poll 65 22 personally or by proxy 65 22 right to vote on show of hands and on a poll 65, 71 22,23 vote by proxy 75.4 25 where joint holders 66 22 Winding up 153-154 50
PEARSON PLC ========================================== ARTICLES OF ASSOCIATION INCORPORATING AMENDMENTS MADE UP TO AND INCLUDING 30 APRIL 2004 ========================================== CONTENTS
PAGE PRELIMINARY..........................................................................................1 SHARE CAPITAL........................................................................................4 CAPITAL..............................................................................................4 VARIATION OF RIGHTS..................................................................................4 SHARES...............................................................................................5 UNCERTIFICATED SHARES................................................................................8 CERTIFICATES.........................................................................................9 CALLS ON SHARES......................................................................................9 LIEN................................................................................................10 FORFEITURE OF SHARES................................................................................11 TRANSFER OF SHARES..................................................................................12 TRANSMISSION OF SHARES..............................................................................13 STOCK...............................................................................................15 CONSOLIDATION, SUB-DIVISION AND CANCELLATION OF SHARES..............................................16 INCREASE AND REDUCTION OF CAPITAL...................................................................16 REDEEMABLE SHARES...................................................................................17 MEETINGS OF MEMBERS.................................................................................17 GENERAL AND CLASS MEETINGS..........................................................................17 NOTICE OF GENERAL MEETINGS..........................................................................18 PROCEEDINGS AT GENERAL MEETINGS.....................................................................20 VOTES OF MEMBERS....................................................................................22 PROXIES.............................................................................................23 DIRECTORS...........................................................................................25 NUMBER AND APPOINTMENT OF DIRECTORS.................................................................25 QUALIFICATION OF DIRECTORS..........................................................................26 POWERS OF DIRECTORS.................................................................................26 BORROWING...........................................................................................27 PROCEEDINGS OF THE BOARD............................................................................30 MINUTES.............................................................................................32
PAGE DISQUALIFICATION OF DIRECTORS.......................................................................32 RETIREMENT AND REMOVAL OF DIRECTORS.................................................................35 MANAGING DIRECTOR AND EXECUTIVE DIRECTORS...........................................................36 PRESIDENT...........................................................................................36 NON-EXECUTIVE DIRECTORS.............................................................................37 DIRECTORS' EXPENSES.................................................................................37 ALTERNATE DIRECTORS.................................................................................37 SECRETARY...........................................................................................38 THE SEAL............................................................................................39 REGISTERS...........................................................................................39 ACCOUNTS AND DIVIDENDS..............................................................................40 AUDIT...............................................................................................40 DIVIDENDS AND RESERVES..............................................................................40 CAPITALISATION OF PROFITS...........................................................................45 NOTICES.............................................................................................47 WINDING UP..........................................................................................50 INDEMNITY...........................................................................................51 DISCOVERY...........................................................................................51 DESTRUCTION OF DOCUMENTS............................................................................51 UNTRACED SHAREHOLDERS...............................................................................52 INDEX TO ARTICLES OF ASSOCIATION....................................................................54
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. (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. - -------------------------------------------------------------------------------- (1) Name changed to Pearson plc on 1 June 1984 (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. (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. (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 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 Pound Sterling295,500,000 divided into 1,182,000,000 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 Pound Sterling1,501,000 divided into 150,100 shares of Pound Sterling10 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 Pound Sterling10 each was subdivided by ordinary resolution into 10 Preference Shares, 10 Second Preference Shares or 10 Ordinary Shares all of Pound Sterling1 each respectively. 4. On 30 December 1968 the capital of the Company was increased by ordinary resolution to Pound Sterling1,521,000 by the creation of 20,000 Ordinary Shares of Pound Sterling1 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 Pound Sterling1 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 Pound Sterling16,001,000 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 Pound Sterling18,501,000 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 Pound Sterling21,000,000 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 Pound Sterling33,500,000 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 Pound Sterling67,250,000 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 Pound Sterling75,375,000 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 Pound Sterling79,000,000 by the creation of 14,500,000 Ordinary Shares of 25p each. 13. On 12 May 1989 the capital of the Company was increased by ordinary resolution to Pound Sterling94,885,000 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 Pound Sterling199,695,000 by the creation of 19,240,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of Pound Sterling1 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 Pound Sterling1 each, to Pound Sterling199,194,000 divided into 396,776,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of Pound Sterling1 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 Pound Sterling199,500,000 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 Pound Sterling299,750,000 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 Pound Sterling302,000,000 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 Pound Sterling302,750,000 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 Pound Sterling1 each and the 50,000 Preference Shares of US$100 each and then the capital of the Company was increased by ordinary resolution to Pound Sterling204,000,000 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 Pound Sterling209,500,000 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 Pound Sterling211,500,000 by the creation of 8,000,000 Ordinary Shares of 25p each. 23. On 30 April 1999 the capital of the Company was increased by ordinary resolution to Pound Sterling223,500,000 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 Pound Sterling229,000,000 by the creation of 22,000,000 Ordinary Shares of 25p each. 25. On 27 April 2001 the capital of the Company was increased by ordinary resolution to Pound Sterling292,500,000 by the creation of 254,000,000 Ordinary Shares of 25p each. 26. On 26 April 2002 the capital of the Company was increased by ordinary resolution to Pound Sterling293,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each. 27. On 25 April 2003 the capital of the Company was increased by ordinary resolution to Pound Sterling294,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each. 28. On 30 April 2004 the capital of the Company was increased by ordinary resolution to Pound Sterling295,500,000 by the creation of 1,000,000 Ordinary Shares of 25p each. 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
Names, addresses and descriptions of subscribers Number of Preference Shares taken by each Subscriber - ---------------------------------------------------------------- --------------------------------------- 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. PEARSON PLC =========================================== MEMORANDUM OF ASSOCIATION INCORPORATING AMENDMENTS MADE UP TO AND INCLUDING 30 APRIL 2004 =========================================== EX-2.2 3 u47265exv2w2.txt EXHIBIT 2.2 Exhibit 2.2 EXECUTION COPY PEARSON PLC AND THE BANK OF NEW YORK, AS TRUSTEE, PAYING AGENT AND CALCULATION AGENT 4.625% SENIOR NOTES DUE 2018 INDENTURE DATED AS OF JUNE 23, 2003 SIDLEY AUSTIN BROWN & WOOD, LONDON TABLE OF CONTENTS
PAGE ----- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions...............................................................................................1 Section 1.2 Rules of Construction.....................................................................................8 ARTICLE II THE NOTES Section 2.1 Form and Dating...........................................................................................8 Section 2.2 Execution and Authentication .............................................................................9 Section 2.3 Registrar and Paying Agent; Calculation Agent............................................................11 Section 2.4 Paying Agent to Hold Money in Trust .....................................................................11 Section 2.5 Holder Lists.............................................................................................12 Section 2.6 Global Note Provisions ..................................................................................12 Section 2.7 Legends .................................................................................................13 Section 2.8 Transfer and Exchange....................................................................................13 Section 2.9 Mutilated, Destroyed, Lost or Stolen Notes...............................................................15 Section 2.10 Cancellation.............................................................................................16 Section 2.11 Add On Notes.............................................................................................16 Section 2.12 Default Interest.........................................................................................17 Section 2.13 CUSIP Numbers ...........................................................................................18 ARTICLE III COVENANTS Section 3.1 Payment of Notes ........................................................................................18 Section 3.2 Maintenance of Office or Agency..........................................................................18 Section 3.3 Corporate Existence .....................................................................................18 Section 3.4 Payment of Taxes and Other Claims........................................................................19 Section 3.5 Further Instruments and Acts ............................................................................19 Section 3.6 Waiver of Stay, Extension or Usury Laws..................................................................19 Section 3.7 Payment of Additional Amounts ...........................................................................19 Section 3.8 Limitation on Liens .....................................................................................20 Section 3.9 Reports to Holders.......................................................................................20 ARTICLE IV SUCCESSOR CORPORATION Section 4.1 Consolidation, Merger and Sale of Assets ................................................................21 ARTICLE V OPTIONAL REDEMPTION OF NOTES Section 5.1 Optional Tax Redemption .................................................................................21 Section 5.2 Optional Redemption......................................................................................22 Section 5.3 Election to Redeem.......................................................................................22 Section 5.4 Notice of Redemption ....................................................................................22 Section 5.5 Selection of Notes to be Redeemed in Part Pursuant to an Optional Redemption ............................23 Section 5.6 Deposit of Redemption Price..............................................................................24 Section 5.7 Notes Payable on Redemption Date.........................................................................24
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PAGE ----- Section 5.8 Unredeemed Portions of Partially Redeemed Note...........................................................24 ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 Events of Default .......................................................................................24 Section 6.2 Acceleration.............................................................................................25 Section 6.3 Other Remedies...........................................................................................26 Section 6.4 Waiver of Past Defaults .................................................................................26 Section 6.5 Control by Majority......................................................................................26 Section 6.6 Limitation on Suits .....................................................................................26 Section 6.7 Rights of Holders to Receive Payment.....................................................................27 Section 6.8 Collection Suit by Trustee...............................................................................27 Section 6.9 Trustee May File Proofs of Claim, etc ...................................................................27 Section 6.10 Priorities ..............................................................................................28 ARTICLE VII TRUSTEE Section 7.1 Duties of Trustee .......................................................................................28 Section 7.2 Rights of Trustee .......................................................................................29 Section 7.3 Individual Rights of Trustee.............................................................................30 Section 7.4 Trustee's Disclaimer.....................................................................................30 Section 7.5 Notice of Defaults.......................................................................................30 Section 7.6 Reports by Trustee to Holders............................................................................31 Section 7.7 Compensation and Indemnity ..............................................................................31 Section 7.8 Replacement of Trustee...................................................................................31 Section 7.9 Successor Trustee by Merger .............................................................................32 Section 7.10 Eligibility; Disqualification............................................................................33 Section 7.11 Preferential Collection of Claims Against Company .......................................................33 Section 7.12 Paying Agent and Calculation Agent ......................................................................33 ARTICLE VIII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES Section 8.1 Satisfaction and Discharge ..............................................................................33 Section 8.2 Application by Trustee of Funds Deposited for Payment of Notes ..........................................33 Section 8.3 Repayment of Monies Held by Paying Agent ................................................................34 Section 8.4 Return of Monies Held by Trustee and Paying Agent Unclaimed for Two Years ...............................34 ARTICLE IX AMENDMENTS Section 9.1 Without Consent of Holders...............................................................................34 Section 9.2 With Consent of Holders..................................................................................35 Section 9.3 Compliance with Trust Indenture Act......................................................................36 Section 9.4 Acts of Holders; Record Dates............................................................................36 Section 9.5 Notation on or Exchange of Notes ........................................................................37 Section 9.6 Trustee to Sign Amendments ..............................................................................37 ARTICLE X MISCELLANEOUS Section 10.1 Trust Indenture Act Controls.............................................................................37
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PAGE ----- Section 10.2 Notices..................................................................................................37 Section 10.3 Communication by Holders with Other Holders..............................................................38 Section 10.4 Certificate and Opinion as to Conditions Precedent.......................................................38 Section 10.5 Statements Required in Certificate or Opinion............................................................39 Section 10.6 Form of Documents Delivered to Trustee...................................................................39 Section 10.7 Rules by Trustee, Paying Agent and Registrar.............................................................39 Section 10.8 Payment on Business Days.................................................................................40 Section 10.9 Governing Law, etc.......................................................................................40 Section 10.10 Successors...............................................................................................41 Section 10.11 Duplicate and Counterpart Originals......................................................................41 Section 10.12 Severability.............................................................................................41 Section 10.13 Currency Indemnity.......................................................................................41 Section 10.14 Benefits of Indenture....................................................................................42 Section 10.15 Table of Contents; Headings..............................................................................42 EXHIBITS Exhibit A Form of Notes ...........................................................................................44 Exhibit B Form of Transfer Certificate for Transfer to QIB ........................................................55 Exhibit C Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S................56 Exhibit D Form of Rule 144 Certification...........................................................................58
iii This INDENTURE, dated as of June 23, 2003, among Pearson PLC, a public company incorporated with limited liability under the laws of England and Wales (the "Company") and The Bank of New York, a New York banking corporation (the "Trustee"), as Trustee, Paying Agent, and Calculation Agent in New York. Each party agrees as follows for the benefit of the other parties and for the benefit of the Holders of the Company's 4,625% Notes due 2018 issued hereunder (the "Notes"). ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Actual Knowledge" means, with respect to the Trustee, actual knowledge of any Trust Officer of the Trustee, which shall include within its scope any matter which shall have been notified in writing to the Trustee. "Additional Amounts" has the meaning assigned to it in Section 3.7. "Add On Note Board Resolutions" means resolutions duly adopted by the Board of Directors of the Company and delivered to the Trustee in an Officers' Certificate providing for the issuance of Add On Notes. "Add On Note Supplemental Indenture" means a supplement to this Indenture duly executed and delivered by the Company and the Trustee pursuant to Section 2.11 providing for the issuance of Add On Notes. "Add On Notes" means any Notes originally issued after the Issue Date pursuant to Section 2.11, including any replacement Notes as specified in the relevant Add On Note Board Resolutions or Add On Note Supplemental Indenture issued therefor in accordance with this Indenture. "Affiliate" shall have the meaning provided in Rule 405 of the Securities Act. "Agent Members" has the meaning assigned to it in Section 2.6(b). "Authenticating Agent" has the meaning assigned to it in Section 2.2(d). "Authorized Agent" has the meaning assigned to it in Section 10.9(d). "Bankruptcy Default" means any of the Events of Default specified in Section 6.1(a)(v) (with respect to the dissolution, winding up or reorganization of the Company). "Bankruptcy Law" means, with respect to any jurisdiction in which the Company or any of its Principal Subsidiaries are incorporated, any laws or regulations and any judicial decisions pertaining to proceedings that are initiated either by an entity or by creditors thereof seeking a general moratorium in relation to such entity's debts, to appoint a receiver for such entity, to have such insolvent entity's assets or businesses sold or distributed among such entity's creditors or to restructure and reorganize the entity's debts for the benefit of such creditors. "Board of Directors" means, as to any Person, the board of directors, management committee or similar governing body of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by an Officer or the General Counsel of such Person to have been duly adopted by the Board of Directors of 1 such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a Saturday or Sunday or a day on which commercial banks and trust companies located in New York City, London or the Place of Payment with respect to the Notes are authorized or required by law, regulation or executive order to be closed. "Calculation Agent" means the calculation agent appointed by the Company, who shall initially be The Bank of New York. "Capital Employed" means, in respect of the Company and for the purposes of Section 3.8 herein, the amount of the issued and paid-up share capital plus or minus: (i) the aggregate amount standing to the credit or debit of the consolidated reserves (including profit and loss account and any share premium account), plus (ii) the amount of minority interests in any Subsidiary, plus (iii) any reserves for deferred tax, plus (iv) all gross borrowings, whether such borrowing is made within the Group or otherwise, but excluding all such borrowings other than borrowings within the Group repayable on demand or repayable within one year, all of the foregoing as included in the Company's latest published audited consolidated balance sheet or the latest audited balance sheet of such Subsidiary or pro forma consolidated financial statements, as the case may be. For the purpose of this definition only, borrowings shall be construed in accordance with normal accounting principles in the relevant jurisdiction as adopted from time to time in preparing the relevant companies' audited financial statements. "Certificated Note" means any Note issued in fully-registered certificated form (other than a Global Registered Note), which shall be substantially in the form of Exhibit A, with appropriate legends as specified in Section 2.7 and Exhibit A. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the party named as such in the introductory paragraph to this Indenture and its successors and assigns, including any Successor Corporation that becomes such in accordance with Article IV. "Company Order" has the meaning assigned to it in Section 2.2(c). "Comparable Treasury Issue" means, with respect to any Redemption Date for any Notes being redeemed, the United States Treasury security selected by an Independent Investment Banker as having the maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Comparable Treasury Price" means, with respect to any Redemption Date for any of the Notes being redeemed: (i) the average of four Reference Treasury Dealer Quotations for the Redemption Date, after excluding the highest and lowest of those Reference Treasury Dealer Quotations, or (ii) if the Calculation Agent obtains fewer than four Reference Treasury Dealer Quotations, the average of all Reference Treasury Dealer Quotations obtained. "Corporate Trust Office" means the corporate trust office of the Trustee at which at any particular time its corporate trust business shall be administered, which office on the date of execution of this Indenture is located at One Canada Square, 48th floor, London, E14 5AL, England, telephone number +44 207 964 6402, Attention: Alison Mitchell. 2 "Default" means an event or condition the occurrence of which is, or with the lapse of time or giving of notice or both would be, an Event of Default. "Directive" has the meaning assigned to it in Section 3.7(d). "Distribution Compliance Period" means, in respect of any Regulation S Global Note, the 40 consecutive days beginning on and including the later of (a) the day on which any Notes represented thereby are offered to persons other than distributors (as defined in Regulation S under the Securities Act) pursuant to Regulation S and (b) the Issue Date for such Notes. "DTC" means The Depository Trust Company, its nominees and their respective successors and assigns, or such other depositary institution hereinafter appointed by the Company that is a clearing agency registered under the Exchange Act. "Event of Default" has the meaning assigned to it in Section 6.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting practices in the United Kingdom. "Global Registered Note" means any Note issued in fully-registered prepared form to DTC (or its nominee), which shall be substantially in the form of Exhibit A, with appropriate legends as specified in Section 2.7 and Exhibit A. "Group" means, together, the Company and its Subsidiaries. "Holder" means the Person in whose name a Note is registered in the Note Register. "Indenture" means this Indenture as amended or supplemented from time to time. "Independent Investment Banker" means one of the Reference Treasury Dealers selected by the Trustee in consultation with the Company. "Interest Payment Date" means June 15 and December in each year, commencing on December 15, 2003 and ending on the Maturity Date. "Issue Date" means June 23, 2003. "Issue Date Notes" means the Notes originally issued on the Issue Date, and any replacement Notes issued therefor in accordance with this Indenture. "Lien" has the meaning assigned to it in Section 3.8. "Maturity Date" means June 15, 2018. "Non-U.S. Person" means a person who is not a U.S. person, as defined in Regulation S under the Securities Act. "Note Register" has the meaning assigned to it in Section 2.3(a). "Noteholder Meeting" means a meeting of Holders of Outstanding Notes. "Notes" has the meaning assigned to the preamble hereto. "Obligor" of the Notes means the Company and any other obligor of the Notes. 3 "Officer" means, when used in connection with any action to be taken by the Company, the Chairman of the Board, the Chief Executive Officer, any executive Director of the Company or any authorized representative of such persons. "Officers' Certificate" means, when used in connection with any action to be taken by the Company, a certificate signed by an Officer or Officers that complies with the requirements of Section 10.4 and is delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of or counsel for the Company. "Optional Redemption" has the meaning assigned to it in Section 5.2. "Optional Tax Redemption" has the meaning assigned to it in Section 5.1. "Outstanding" means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as Paying Agent) for the Holders of Notes; provided that, if the Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Notes which have been surrendered pursuant to Section 2.9 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands such Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Trust Officer of the Trustee actually knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor. "Paying Agent" has the meaning assigned to it in Section 2.3(a). "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof, or any other entity. "Place of Payment" means, with respect to a Note, the place or places where the principal of or any interest on the Notes are payable as specified in the Notes. 4 "Principal Subsidiary" means any Subsidiary at any relevant time of the Company: (a) whose Capital Employed or unconsolidated profit before tax and extraordinary items, calculated by reference to such Subsidiary's latest audited financial statements, is 10% or more of the Group's consolidated Capital Employed or consolidated profit before tax and extraordinary items, as the case may be, calculated by reference to the latest audited financial statements of the Group, provided that if a Subsidiary itself has Subsidiaries, the reference above to Capital Employed of such Subsidiary shall be construed as a reference to the consolidated Capital Employed of such Subsidiary and its Subsidiaries, or (b) to which is transferred the whole or substantially the whole of the assets and undertakings of a Subsidiary which immediately prior to such transfer is a Principal Subsidiary, provided that the transferor Subsidiary shall upon such transfer forthwith cease to be a Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary pursuant to this paragraph (b) on the date on which the audited consolidated financial statements of the Group for the financial period current at the date of such transfer are published, but such transferor Subsidiary or such transferee Subsidiary may be a Principal Subsidiary on or at any time after such date by virtue of the provisions of paragraph (a) above, provided that references to the audited consolidated financial statements of any Subsidiary shall be construed as references to the audited consolidated financial statements of such Subsidiary and its subsidiaries for the relevant financial period if such audited consolidated financial statements were produced (or, if no such audited consolidated financial statements were produced, to pro forma consolidated financial statements produced on the basis of the relevant audited financial statements of such Subsidiary and its subsidiaries), and further provided that if a Subsidiary is acquired after the end of the financial period to which the latest audited consolidated financial statements relate, references to such audited consolidated financial statements for the purpose of the calculations above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited, be deemed to refer to such first-mentioned financial statements as it such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Company's auditors. "Private Placement Legend" has the meaning assigned to it in Section 2.7. "Purchase Agreement" means the purchase agreement, dated as of June 18, 2003, between the Company and Deutsche Bank Securities Inc. as initial purchaser. "QIB" means any "qualified institutional buyer" (as defined in Rule 144A under the Securities Act). "Qualified Majority" means a vote of a majority of the aggregate principal amount of Notes at a Noteholder Meeting at which more than one-half of the aggregate principal amount of the Outstanding Notes are represented or voting pursuant to a written instrument; provided, however, that if representation, including representation pursuant to a written instrument, of the Notes does not reach a majority of the aggregate principal amount of the Outstanding Notes at the initial Noteholder Meeting, a Qualified Majority will nonetheless exist if at a second Noteholder Meeting a majority vote is cast with respect to the aggregate principal amount of the Outstanding Notes represented and voting at such meeting, provided that such amount voting at such meeting shall not be less than 25% in aggregate principal amount of the Outstanding Notes at such date. "Record Date" means any of the dates indicated under the heading "Record Dates" on the face of any of the Global Registered Notes. "Redemption Date" means, with respect to any redemption of the Notes, the date of redemption with respect thereto. "Reference Treasury Dealer" means Deutsche Bank Securities Inc. and three additional primary US Government securities dealers in New York City selected by the Trustee in consultation with the Company. If any Reference Treasury Dealer ceases to be a primary U.S. government 5 securities dealer, the Trustee will substitute another primary U.S. government securities dealer for that dealer. "Reference Treasury Dealer Quotations" means, with respect to any Redemption Date, the average, as determined by the Calculation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted to the Calculation Agent by that Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding the Redemption Date. "Registrar" has the meaning assigned to it in Section 2.3(a). "Regulation S" means Regulation S under the Securities Act or any successor regulation. "Regulation S Global Note" has the meaning assigned to it in Section 2.1(e). "Relevant Date" means, in relation to any Note, the later of (a) the date on which the payment of an Additional Amount in question first becomes due, and (b) if the full amount of the monies payable has not been duly received in New York by the Paying Agent on or prior to such due date, Relevant Date means the date on which the full amount of such monies have been so received, provided notice to that effect is duly given to the holders of the Notes in the manner set forth in Section 10.2. "Relevant Indebtedness" means any indebtedness for borrowed money which is in the form of, or represented or evidenced by, bonds, notes, debentures, loan stocks, depositary receipts or other securities issued otherwise than to constitute or represent advances made by banks and/or other lending institutions; and at its date of issue is, or is intended by the Company to become, quoted or listed on or by, or dealt in or traded on, any stock exchange, over-the-counter market or other organized securities market (whether or not initially distributed by means of private placement). "Resale Restriction Termination Date" means, (i) for any Restricted Note (or beneficial interest therein) sold pursuant to Rule 144A, two years (or such other period specified in Rule 144(k) under the Securities Act) from the Issue Date or, if any Add On Notes that are Restricted Notes have been issued before the Resale Restriction Termination Date for any Restricted Notes, from the latest such original issue date of such Add On Notes and (ii) for any Restricted Note sold pursuant to Regulation S, 40 days after the later of the Issue Date with respect to the Restricted Note and the day on which such Restricted Notes are offered to persons other than distributors (as defined in Regulation S). "Restricted Note" means each Issue Date Note and each Add On Note until the Resale Restriction Termination Date with respect thereto. "Rule 144" means Rule 144 under the Securities Act (or any successor rule). "Rule 144A" means Rule 144A under the Securities Act (or any successor rule). "Rule 144A Global Note" has the meaning assigned to it in Section 2.1(d). "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Special Record Date" has the meaning assigned to it in Section 2.12. 6 "Subsidiary" means one of the Company's subsidiaries within the meaning of Section 736 of the United Kingdom Companies Act 1985, as modified or re-enacted from time to time, and any orders or regulations made under that Section. "Successor Company" has the meaning assigned to it in Section 4.1(a). "Taxes" has the meaning assigned to it in Section 3.7. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in effect on the date of this Indenture (except as otherwise provided in this Indenture). "Treasury Rate" means, with respect to any Redemption Date for Optional Redemption: (a) the yield for the maturity corresponding to the Comparable Treasury Issue under the heading that represents the average for the immediately preceding week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication that is published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," provided, that if no maturity is within three months before or after the Maturity Date for the Notes being redeemed the yields for the two published maturities most closely corresponding to the Comparable Treasury Issue will be determined and the Treasury Rate shall be interpolated or extrapolated from those yields on a straight line basis, rounding to the nearest month; or (b) if the release referred to in (a) (or any successor release) is not published during the week preceding the calculation date or does not contain the yields referred to above, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that Redemption Date, as calculated on the third Business Day preceding the Redemption Date. "Trustee" means the Person named as such in the introductory paragraph of this Indenture until a successor replaces it in accordance with the terms of this Indenture and, thereafter, means the successor. "Trust Officer" means, when used with respect to the Trustee, any vice president, assistant vice president, assistant treasurer, trust officer or any other officer of such Trustee customarily performing corporate trust functions on behalf of the Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "U.S. Government Securities" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "U.S. dollars" and "U.S.$" mean the lawful currency of the United States of America that as at the time of payment shall be legal tender for the payment of public and private debts. All TIA terms used in this Indenture that are defined by the TIA, defined in the TIA by reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. Section 1.2 Rules of Construction. Unless the context otherwise requires: 7 (a) a term has the meaning assigned to it in this Indenture; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; (f) references to the payment of principal of the Notes shall include applicable premium, if any; (g) references to payments of interest on the Notes shall include Additional Amounts pursuant to Section 3.7, if any; and (h) references to England and Wales or to English law shall be deemed to be a reference to the jurisdiction of incorporation of the Company or the law of the jurisdiction of incorporation of the Company in the event the Company changes its jurisdiction of incorporation. ARTICLE II THE NOTES Section 2.1 Form and Dating. (a) The Issue Date Notes are being originally offered and sold by the Company pursuant to the Purchase Agreement. The Notes will be issued in fully-registered global form without coupons, and only in denominations of U.S.$ 1,000 and any integral multiples thereof in excess thereof The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. (b) The terms and provisions of the Notes, the form of which is in Exhibit A, shall constitute, and are hereby expressly made, a part of this Indenture and the Company by its execution and delivery of this Indenture, expressly agrees to such terms and provisions and to be bound thereby. In the event of an inconsistency between the terms of the Notes set forth in Exhibit A hereto and other terms of this Indenture, the terms set forth in any part of this Indenture other than in Exhibit A shall govern. Except as otherwise expressly permitted in this Indenture, all Notes shall be identical in all respects. Notwithstanding any differences among them, all Notes issued under this Indenture shall vote and consent together on all matters as one class. (c) The Notes may have notations, legends or endorsements as specified in Section 2.7 or as otherwise required by law, stock exchange rule, DTC rule or usage. The Company and the Trustee shall approve the form of the Notes and any notation, legend or endorsement on them. Each Note shall be dated the date of its authentication. The Notes shall be dated the date of their authentication. (d) Notes originally offered and sold to QIBs in reliance on Rule 144A will be initially issued in the form of one or more permanent Global Registered Notes (each, a "Rule 144A Global Note"). 8 (e) Notes originally offered and sold outside the United States of America in accordance with Regulation S under the Securities Act will be initially issued in the form of one or more permanent Global Registered Notes (each, a "Regulation S Global Note"). Section 2.2 Execution and Authentication. (a) Any Officer shall sign the Notes for the Company, which may be via facsimile. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless. (b) A Note shall not be valid or enforceable unless and until an authorized signatory of the Trustee, upon Company Order, authenticates the Note substantially in the form of the Trustee's certificate of authentication provided for in Section 2.2(d) hereof. The signature of the Trustee on a Note shall be conclusive evidence that such Note has been duly and validly authenticated and issued under this Indenture. (c) At any time and from time to time after the execution and delivery of this Indenture, the Trustee shall authenticate and make available for delivery Notes upon a written order of the Company signed by an Officer (the "Company Order"). A Company Order shall specify the amount of the Notes to be authenticated and the date on which the original issue of Notes is to be authenticated. (d) The Trustee may appoint an agent or agents with respect to the Notes which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon original issue and upon exchange, registration of transfer or partial conversion or partial redemption thereof or pursuant to Section 5.8 (an "Authenticating Agent"), and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and enforceable for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be either (i) a branch of the Trustee or (ii) a Person organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than U.S.$150,000,000 and subject to supervision or examination by any federal or state authority in the United States. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent reports of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any Person into which an Authenticating Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent, provided such Person shall be otherwise eligible under this Section. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the 9 Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 10.2 to all Holders of Notes with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Indenture. If an appointment is made pursuant to this Section, the Notes may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: "This is one of the Notes referred to in the within-mentioned Indenture. The Bank of New York, as Trustee By:_____________________________ as Authenticating Agent By:_____________________________ Authorized Signatory Date: ____________________" If all of the Notes may not be originally issued at one time, and if the Trustee does not have an office capable of authenticating Notes upon original issuance located in a Place of Payment where the Company wishes to have Notes authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not be an Officers' Certificate or be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent having an office in a Place of Payment designated by the Company with respect of such Notes. (e) In case the Company: (i) shall be consolidated with or merged into any other Person, or (ii) shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the Successor Corporation resulting from such consolidation, or surviving such merger, or which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall assume the rights, responsibilities and obligations of the Company pursuant to Article IV, any of the Notes authenticated or delivered prior to such transaction may, from time to time, at the request of the Successor Corporation, be exchanged for other Notes executed in the name of the Successor Corporation with such changes in phrasing and form as may be appropriate (but which shall not affect the rights or duties of the Trustee), but otherwise identical to the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Order of the Successor Corporation, shall authenticate and deliver Notes as specified in such order for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a Successor Corporation pursuant to this Section 2.2 in exchange or substitution for or upon registration of transfer of any Notes, such Successor Corporation, at the option of the Holders of Notes but without expense to them, 10 shall provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. Section 2.3 Registrar and Paying Agent; Calculation Agent. (a) The Company shall cause to be maintained an office or agency in the Borough of Manhattan, City of New York, where Global Registered Notes and Certificated Notes may be presented for registration of transfer or for exchange (a "Registrar"), for the service of notices and demands to or upon the Company in respect of the Notes and this Indenture, and where Notes may be presented for payment (a "Paying Agent"). The Registrar shall keep a register of the Global Registered Notes and Certificated Notes and of their transfer and exchange (the "Note Register") and shall maintain such Note Register outside the United Kingdom. The Company may have one or more co-Registrars and one or more additional Paying Agents. The term "Paying Agent" includes any additional Paying Agent. The Company shall inform the Trustee in writing of any appointment or payment with respect to the Notes made to any Paying Agent or co-Registrar. (b) The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-Registrar not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee in writing of the name and address of each such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company may act as Paying Agent, Registrar, co-Registrar or transfer agent. (c) The Company initially appoints the Trustee at its Corporate Trust Office as Registrar, Paying Agent, Calculation Agent and agent for service of demands and notices in connection with the Notes and this Indenture, and shall also appoint ING Luxembourg in Luxembourg as an additional Paying Agent with respect to any Certificated Notes, until such time as another Person is appointed as such. For so long as any Notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Company shall maintain a Paying Agent in Luxembourg with respect to any Certificated Notes if any, where such Certificated Notes. (d) The Company initially appoints the Trustee as Calculation Agent. For so long as any Notes are Outstanding, the Company shall maintain a Calculation Agent. (e) The Company undertakes that, as an agreement has been reached by the ECOFIN Council in a meeting of June 3 to adopt the Directive (as defined in Section 3.7(d)), it will ensure that it maintains a paying agent in an EU Member State that will not be obliged to withhold or deduct tax pursuant to the Directive. Section 2.4 Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by such Paying Agent for the payment of principal of or interest on the Notes and shall notify the Trustee in writing of any Default by the Company in making any such payment. If the Company or an Affiliate of the Company acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust account. The Company at any time may require a Paying Agent (other than the Trustee) to pay all money held by it to the Trustee and to account for any funds disbursed by such Paying Agent. Upon complying with this Section 2.4, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. Upon any proceeding under any Bankruptcy Law with respect to the Company or any Affiliate of the Company, if the Company or such Affiliate is then acting as Paying Agent, the Trustee shall replace the Company or such Affiliate as Paying Agent. Section 2.5 Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of Notes. If the 11 Trustee is not the Registrar, or to the extent otherwise required under the TIA, the Company shall furnish to the Trustee, in writing at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of Notes. Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of any of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. Section 2.6 Global Note Provisions. (a) Each Global Registered Note initially shall (i) be registered in the name of DTC or the nominee of DTC and (ii) bear the appropriate legend, as set forth in Section 2.7 and Exhibit A. The Notes may be represented by one or more Global Registered Notes. The aggregate principal amount of each Global Registered Note may from time to time be increased or decreased by adjustments made on the records of the Paying Agent, as provided in this Indenture. (b) Members of, or participants in, DTC ("Agent Members") shall have no rights under this Indenture with respect to any Global Registered Note held on their behalf by DTC and DTC may be treated by the Company, the Trustee, the Paying Agent and the Registrar and any of their agents as the absolute owner of such Global Registered Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee, the Paying Agent or the Registrar or any of their agents from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of an owner of a beneficial interest in any Global Registered Note. The Holder of a Global Registered Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action that a Holder is entitled to take under this Indenture or the Notes. (c) Except as provided below, owners of beneficial interests in Global Registered Notes will not be entitled to receive Certificated Notes. Certificated Notes shall be issued to all owners of beneficial interests in a Global Registered Note in exchange for such interests if: (i) DTC, as depositary for the Global Registered Notes, has discontinued providing its services as a securities depositary and the Company fails to appoint a successor within 90 days of notice of the foregoing or if DTC or any successor depositary ceases to he a clearing agency registered under the Exchange Act, at a time when DTC or such successor depositary is required to be so registered in order to act as depositary and a successor securities clearing system with respect to such Global Registered Note is not appointed by the Company within 90 days of such notice, or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Holder of the Global Registered Note. In connection with the exchange of an entire Global Registered Note for Certificated Notes pursuant to this paragraph (c), such Global Registered Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and upon Company Order the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary for such Global Registered Note in exchange for its beneficial interest in such Global Registered Note, an equal aggregate principal amount of Certificated Notes of authorized denominations. (d) In connection with the exchange of a portion of a Certificated Note for a beneficial interest in a Global Registered Note, the Trustee shall cancel such Certificated Note, and 12 the Company shall execute, and upon Company Order the Trustee shall authenticate and deliver to the exchanging Holder, a new Certificated Note representing the principal amount not so exchanged. Section 2.7 Legends. Each Global Registered Note shall bear the applicable legend or legends specified therefor in Exhibit A on the face thereof (the "Private Placement Legend"). Section 2.8 Transfer and Exchange. (a) The following provisions shall apply with respect to any proposed transfer of an interest in a Rule 144A Global Note that is a Restricted Note: If (1) the owner of a beneficial interest in a Rule 144A Global Note wishes to transfer such interest (or portion thereof) to a Non-U.S. Person pursuant to Regulation S and (2) such Non-U.S. Person wishes to hold its interest in the Notes through a beneficial interest in the Regulation S Global Note, (x) upon receipt by the Registrar of: (A) written instructions from the Holder of the Rule 144A Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Regulation S Global Note equal to the principal amount of the beneficial interest in the Rule 144A Global Note to be transferred, and (B) a certificate in the form of Exhibit C from the transferor, and (y) subject to the rules and procedures of DTC with respect to the Rule 144A and the Regulation S Global Note, the Registrar shall increase the Regulation S Global Note and decrease the Rule 144A Global Note by such amount in accordance with the foregoing. (b) If the owner of an interest in a Regulation S Global Note wishes to transfer such interest (or any portion thereof) to a QIB pursuant to Rule 144A prior to the expiration of the Distribution Compliance Period therefor, (x) upon receipt by the Registrar of: (A) written instructions from the Holder of the Regulation S Global Note directing the Registrar to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the principal amount of the beneficial interest in the Regulation S Global Note to be transferred, and (B) a certificate in the form of Exhibit B duly executed by the transferor, and (y) in accordance with the rules and procedures of DTC with respect to the Rule 144A and the Regulation S Global Note, the Registrar shall increase the Rule 144A Global Note and decrease the Regulation S Global Note by such amount in accordance with the foregoing. (c) Certificated Notes, if issued, may be exchanged or transferred in whole or in part in the principal amount of authorized denominations by surrendering such Certificated Notes at the Corporate Trust Office or the office of a Paying Agent with a written instrument of transfer as set forth in Exhibit A duly executed by the Holder thereof or its attorney duly authorized in writing. In exchange for any Certificated Note properly presented for exchange or transfer, the Trustee will promptly, upon Company Order, authenticate and deliver or cause to be authenticated and delivered at the Corporate Trust Office of the Trustee, to the Holder entitled to such Certificated Note, or send by mail (at the risk of such Holder) to such address as such Holder may request in writing, a Certificated Note or Notes. The costs and expenses of effecting any exchange or transfer pursuant to this paragraph will be borne by the Company, except that the expense of delivery by other than regular mail (if any) and the payment of a sum sufficient to cover any tax or other government charges or 13 insurance that may be imposed in relation thereto, will be borne solely by the Holder requesting such transfer or exchange. Any transfer or exchange by a Holder of a Certificated Note must occur in accordance with applicable law. (d) Any transfer of Restricted Notes not described above (other than a transfer of a beneficial interest in a Global Registered Note that does not involve an exchange of such interest for a Certificated Note or a beneficial interest in another Global Registered Note, which must be effected in accordance with applicable law and the rules and procedures of DTC with respect to a Restricted Note, but is not subject to any procedure required by this Indenture), shall be made only upon receipt by the Registrar of such Opinions of Counsel, certificates and/or other information reasonably required to ensure compliance with the Securities Act or in accordance with paragraph (e) of this Section 2.8. (e) Upon the transfer, exchange or replacement of Notes (or beneficial interests in a Global Registered Note) not bearing a Private Placement Legend, the Registrar shall exchange such Notes (or beneficial interests) for beneficial interests in a Global Registered Note (or Certificated Notes if they have been issued pursuant to Section 2.6(d)) that does not bear a Private Placement Legend. Upon the transfer, exchange or replacement of Notes (or beneficial interests in a Global Registered Note) bearing a Private Placement Legend, the Registrar shall deliver only Notes (or beneficial interests in a Global Registered Note) that bear a Private Placement Legend unless: (i) such Notes (or beneficial interests) are transferred pursuant to Rule 144 upon delivery to the Registrar of a certificate of the transferor in the form of Exhibit D and an Opinion of Counsel; (ii) such Notes (or beneficial interests) are transferred, replaced or exchanged after the Resale Restriction Termination Date therefor; or (iii) in connection with such transfer, exchange or replacement the Registrar shall have received an Opinion of Counsel and other evidence reasonably requested by it to the effect that neither such Private Placement Legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. The Private Placement Legend on any Note shall be removed at the written request of the Holder on or after the Resale Restriction Termination Date thereof. The Holder of a Global Registered Note may exchange an interest therein for an equivalent interest in a Global Registered Note not bearing a Private Placement Legend (other than a Regulation S Global Note) upon transfer of such interest pursuant to any of clauses (i) through (iii) of this paragraph (e). (f) The Registrar shall retain copies of all letters, notices and other written communications received pursuant to this Article II. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications during the Registrar's normal business hours upon the giving of reasonable written notice to the Registrar. (g) (i) Subject to the other provisions of this Section 2.8, when Notes are presented to the Registrar or a co-Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided that any Notes presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument in the form of Exhibit B, C or D, as applicable, to the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges and subject to the other terms and conditions of this Article II, the Company will execute and upon Company Order the Trustee will authenticate Certificated Notes and Global Registered Notes. 14 (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charges payable upon exchange or transfer pursuant to Article IV or Section 5.1 or Section 9.5). (iii) The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Note for a period beginning: (1) 15 days before the mailing of a notice of an offer to repurchase or redeem Notes and ending at the close of business on the day of such mailing or (2) 15 days before an Interest Payment Date and ending on such Interest Payment Date. (iv) Prior to the due presentation for registration of transfer of any Note, the Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar and any agent of any of them may deem and treat the Person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar and any agent of any of them shall be affected by notice to the contrary. (v) All Notes issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Notes surrendered upon such transfer or exchange. (h) The Trustee shall have no responsibility or obligation to and shall not incur any liability with respect to any beneficial owner of an interest in a Global Registered Note, a member of, or a participant in, DTC or any other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice (including any notice of redemption) or the payment of any amount or delivery of any Notes (or other security or property) under or with respect to such Notes. All notices and communications to be given to the Holders and all payments to be made to Holders in respect of the Notes shall be given or made only to or upon the order of the registered Holders (which shall be DTC or its nominee in the case of a Global Registered Note). The Trustee may rely and shall be fully authorized and protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners. (i) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among DTC participants, members or beneficial owners in any Global Registered Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Section 2.9 Mutilated, Destroyed, Lost or Stolen Notes. (a) If a mutilated Note is surrendered to the Paying Agent in New York City or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Company shall execute and upon Company Order the Trustee shall authenticate a replacement Note if such Holder shall furnish an affidavit of loss and indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-Registrar from any loss that any of them may suffer if a Note is replaced, and, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and make 15 available for delivery, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously Outstanding. (b) Upon the issuance of any new Note under this Section 2.9, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the reasonable fees and expenses of the Trustee, its agents and counsel) in connection therewith. (c) Every new Note issued pursuant to this Section 2.9 in exchange for any mutilated Note, or in lieu of any destroyed, lost or stolen Note, shall constitute an original additional contractual obligation of the Company and any other obligor upon the Notes, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. Section 2.10 Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and dispose of cancelled Notes in accordance with its policy of disposal. The Company may not issue new Notes to replace Notes it has paid or delivered to the Trustee for cancellation for any reason other than in connection with a transfer or exchange upon Company Order. Section 2.11 Add On Notes. (a) The Company may, from time to time, subject to compliance with any other applicable provisions of this Indenture, without the consent of the Holders, create and issue pursuant to this Indenture additional notes ("Add On Notes") having terms and conditions identical to those of the Outstanding Notes, except that Add On Notes: (i) may have a different issue date from other Outstanding Notes; (ii) may have a different amount of interest payable on the first Interest Payment Date after issuance than is payable on other Outstanding Notes; and (iii) may have terms specified in the Add On Note Board Resolution or Add On Note Supplemental Indenture for such Add On Notes making appropriate adjustments to this Article II and Exhibit A (and related definitions) applicable to such Add On Notes in order to conform to and ensure compliance with the Securities Act (or other applicable securities laws) which are not adverse in any material respect to the Holder of any Outstanding Notes (other than such Add On Notes) and which shall not affect the rights or duties of the Trustee. (b) In authenticating any Add On Notes, and accepting the additional responsibilities under this Indenture in relation to such Add On Notes, the Trustee shall be entitled to receive, and shall be fully protected in relying upon: (i) Company Order; (ii) the Add On Note Board Resolutions or Add On Note Supplemental Indenture relating thereto; (iii) an Officers' Certificate complying with Section 10.4; and (iv) an Opinion of Counsel complying with Section 10.4 stating, 16 (A) that the forms of such Notes have been established by or pursuant to Add On Note Board Resolutions or by an Add On Note Supplemental Indenture, as permitted by this Section 2.11 and in conformity with the provisions of this Indenture; (B) the terms of such Notes have been established by or pursuant to Add On Note Board Resolutions or by an Add On Note Supplemental Indenture, as permitted by this Section 2.11 and in conformity with the provisions of this Indenture; (C) that such Notes, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any customary conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company entitled to the benefits provided in the Indenture, enforceable in accordance with their respective terms, except to the extent that the enforcement of such obligations may be subject to bankruptcy laws or insolvency laws or other similar laws, general principles of equity and such other qualifications as such counsel shall conclude are customary or do not materially affect the rights of the Holders of such Notes; (D) that all laws and requirements in respect of the execution and delivery of the Notes have been complied with; and (E) such other matters as the Trustee may reasonably request. (c) If such forms or terms have been so established by or pursuant to Add On Note Board Resolutions or an Add On Note Supplemental Indenture, the Trustee shall have the right to decline to authenticate and deliver any Notes: (i) if the Trustee, being advised by counsel, determines that such action may not lawfully be taken; (ii) if the Trustee by its committee of Trust Officers in good faith determines that such action would expose the Trustee to personal liability to Holders of any Outstanding Notes; or (iii) if the issue of such Add On Notes pursuant to this Indenture will affect the Trustee's own rights, duties and immunities under the Notes and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Notwithstanding anything in this Section 2.11, the Company may not issue Add On Notes if an Event of Default shall have occurred and be continuing. Section 2.12 Defaulted Interest If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted amounts to the persons who are Holders on a subsequent Special Record Date. The Company shall fix the Special Record Date and payment date in a manner satisfactory to the Trustee and provide the Trustee at least 20 days notice of the proposed date. At least 15 days before the Special Record Date, the Company shall mail or cause to be mailed to Holder at its address as it appears on the Notes Register maintained by the Registrar a notice that states the Special Record Date, the payment date (which shall be not less than five nor more than ten days after the Special Record Date), and the amount to be paid. In lieu of the foregoing procedures, the Company may pay defaulted interest in any other lawful manner satisfactory to the Trustee. 17 Section 2.13 CUSIP Numbers The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE III COVENANTS Section 3.1 Payment of Notes. (a) The Company shall pay the principal of and interest on the Notes in U.S. dollars on the dates and in the manner provided in the Notes and in this Indenture. On or prior to 10:00 a.m. local time on each Interest Payment Date and the Maturity Date, the Company shall deposit or have deposited with the Paying Agent in the Place of Payment with respect to such Notes immediately available U.S. dollar funds sufficient to make cash payments due on such Interest Payment Date or Maturity Date, as the case may be. If the Company or an Affiliate of the Company is acting as Paying Agent, the Company or such Affiliate shall, prior to 10:00 a.m. local time in the Place of Payment with respect to the Notes on each Interest Payment Date and the Maturity Date, segregate and hold in trust U.S. dollar funds sufficient to make cash payments due on such Interest Payment Date or Maturity Date, as the case may be, with respect to the Notes. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent (other than the Company or an Affiliate of the Company) holds in accordance with this Indenture U.S. dollar funds designated for and sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders of Notes on that date pursuant to the terms of this Indenture. (b) Each Paying Agent shall notify the Trustee promptly in writing when it has received from the Company payment of the principal and/or interest on the Notes with respect to each Interest Payment Date and/or Maturity Date. (c) Notwithstanding anything to the contrary contained in this Indenture, the Company may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. Section 3.2 Maintenance of Office or Agency. (a) The Company shall maintain each office or agency required under Section 2.3. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. (b) The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York or Luxembourg) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York and Luxembourg 18 for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 3.3 Corporate Existence. Subject to Article IV, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. Section 3.4 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Company or any Principal Subsidiary or for which it or any of them are otherwise liable, or upon the income, profits or property of the Company or any Principal Subsidiary and (ii) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a liability or security interest upon the property of the Company or any Principal Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate reserves, if necessary (in the good faith judgment of management of the Company), are being maintained in accordance with GAAP or where the failure to effect such payment will not be disadvantageous to the Holders. Section 3.5 Further Instruments and Acts. The Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. Section 3.6 Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture. The Company hereby expressly waives (to the extent that it may lawfully do so) all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 3.7 Payment of Additional Amounts. The Company shall make all payments of principal and interest in respect of the Notes without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by the United Kingdom or any political subdivision or any authority thereof or therein having power to tax ("Taxes") with respect to payments of interest and principal on the Notes, unless such withholding or deduction is required by law; provided, however, that if the law of the United Kingdom should require that any payments in respect of the Notes be subject to withholding or deduction with respect to any Taxes imposed or levied by, or on behalf of, such jurisdiction or any authority therein or thereof having power to tax, the Company shall, to the fullest extent then permitted by law, pay such additional amounts as may be necessary in order that the net amounts received by a Holder of Notes who is not resident in the United Kingdom for tax purposes after such withholding or deduction shall equal the respective amounts of principal and interest, if any, that would otherwise have been receivable in respect of the Notes in the absence of such withholding or deduction (the "Additional Amounts"); except that no such Additional Amounts shall be payable with respect to any Note presented for payment: (a) by or on behalf of a Holder of a Note (including a beneficial owner) who is liable for such Taxes in respect of such Note by reason of such Holder having some connection with the United Kingdom other than the mere holding of such Note; 19 (b) where such withholding or deduction could have been avoided by the Holder making a declaration of non-residence or other similar claim for exemption to any authority of or in the United Kingdom; (c) where (in the case of a payment of principal or interest on final redemption) the relevant Note is surrendered for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder would have been entitled to such Additional Amounts if such Holder had surrendered the relevant Note on the last day of such period of 30 days; (d) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to any European Union Directive on the taxation of savings implementing the conclusions of the ECOFIN Council meeting of June 3, 2003 (the "Directive"), or any law implementing or complying with, or introduced in order to conform to, the Directive; or (e) where the relevant Note is surrendered for payment by or on behalf of a Holder who would have been able to avoid such withholding or deduction by presenting the relevant Note to another Paying Agent in a member state of the European Union. If the Directive is promulgated, the Company undertakes to maintain a Paying Agent in a European Union member state that will not be obliged to withhold or deduct Taxes pursuant to the Directive if such a member state exists. If the Company, or its successor, becomes subject at any time to any taxing jurisdiction other than the United Kingdom, references in this Section to the United Kingdom with respect to Additional Amounts shall be construed as references to the United Kingdom and/or such other successor jurisdiction. Section 3.8 Limitation on Liens. So long as any Notes remain outstanding, the Company will not, and will not permit any Principal Subsidiary to, create, assume or permit to arise or to exist any mortgage, pledge, charge, lien, security interest or other encumbrance (other than a lien or other encumbrance arising by operation of law) (a "Lien") upon the whole or any part of its present or future property, assets or revenues to secure (i) payment of any Relevant Indebtedness or (ii) payment under any guarantee or indemnity granted by the Company or any Principal Subsidiary in respect of any Relevant Indebtedness, without in any such case at the same time affording to the Notes the same security as the Lien created or subsisting to secure any such Relevant Indebtedness, guarantee or indemnity or such other security as the Company, by an Officers' Certificate, shall confirm to the Trustee is not materially less beneficial to the Holders of the Notes or as shall be approved by Holders of a majority in aggregate principal amount of the Outstanding Notes; provided, however, that a Lien existing to secure Relevant Indebtedness of, or in respect of the payment of which there is granted a guarantee or an indemnity by, a Principal Subsidiary and which Lien existed prior to the time of such Principal Subsidiary becoming a Subsidiary (other than a Lien created or assumed in contemplation of such company becoming a Subsidiary), shall be permitted and neither the Company nor such Principal Subsidiary shall be required to extend the security of such Lien to the Holders of the Notes. Section 3.9 Reports to Holders. At any time when the Company is not subject to Section 13 or Section 15(d) of the Exchange Act (or is not current in its reporting obligations thereunder nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder), the Company will make available, upon request, to any Holder and any prospective purchaser of Notes the information required pursuant to Rule 144A(d)(4) under the Securities Act. 20 ARTICLE IV SUCCESSOR CORPORATION Section 4.1 Consolidation, Merger and Sale of Assets. The Company may consolidate or merge with or into any other entity and may convey, transfer or lease its property as an entirety or substantially as an entirety to any entity, provided that: (a) the entity (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received such property (the "Successor Company") shall expressly assume by a supplemental agreement the obligations of the Company under the Notes and this Indenture; (b) such agreement shall be in form reasonably satisfactory to the Trustee, shall be duly executed by the Successor Company and, when so executed, shall constitute a valid and legally binding agreement of such Successor Company, and shall be delivered to the Trustee; (c) subject to exceptions (a) through (e) in Section 3.7 herein, such Successor Company shall agree that all payments made by it under the Notes in respect of principal of, or premium, if any, or interest on, any Note will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of a taxing authority of the jurisdiction in which such Successor Company is incorporated, or any political subdivision thereof or authority or agency thereof or therein having power to levy the same, unless such withholding or deduction is required by law or by the official, judicial or administrative interpretation thereof, and if withholding or deduction is so required, such Successor Company will pay to a Holder of a Note such Additional Amounts as may be necessary so that the net amounts paid to such Holder who is not resident for tax purposes in the jurisdiction in which such Successor Company is incorporated, after such deduction or withholding, shall be not less than the amounts specified in such Note to which such Holder is entitled; and (d) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing. The Company also shall deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to such consolidation, merger, conveyance, transfer or lease have been satisfied. ARTICLE V OPTIONAL REDEMPTION OF NOTES Section 5.1 Optional Tax Redemption. The Notes may be redeemed on not less than 30 nor more than 60 days' prior written notice to the Trustee and, in accordance with Section 5.4 and in the manner provided in Section 10.2, the Holders of the Notes, at the option of the Company, in whole, but not in part, at any time, if: (a) on the occasion of the next payment of interest due under the Notes, the Company has or will become obliged to pay Additional Amounts as a result of any change in, or amendment to, the laws or regulations of the United Kingdom or any authority in or of the United Kingdom, having power to tax, or any change in the application or official interpretation of these laws or regulations, which change or amendment becomes effective on or after the date upon which the Notes are issued; and 21 (b) the Company cannot avoid this obligation by taking reasonable measures available to it, (an "Optional Tax Redemption"), provided that no notice of Optional Tax Redemption shall be given earlier than 90 days prior to the earliest date on which the Company would be obliged to pay such Additional Amounts were a payment in respect of the Notes then due. Notes redeemed pursuant to an Optional Tax Redemption will be redeemed at an amount equal to the principal amount of the Notes being redeemed together with Additional Amounts, if any, plus any accrued and unpaid interest to (but excluding) the Redemption Date. Section 5.2 Optional Redemption. The Company may redeem the Notes, as a whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the greater of: (a) 100% of the principal amount of the Notes being redeemed; or (b) as determined by the Calculation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed not including any portion of such payment of interest accrued on the Redemption Date, from the Redemption Date to the Maturity Date, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 20 basis points (an "Optional Redemption") plus any accrued and unpaid interest to (but excluding) the Redemption Date and Additional Amounts, if any. Notice of any redemption will be mailed at least 30 days but no more than 60 days before the Redemption Date to the Trustee and, in accordance with Section 5.4 and in the manner provided in Section 10.2, to each Holder of Notes to be redeemed. Section 5.3 Election to Redeem. The Company shall evidence its election to redeem any Notes pursuant to Section 5.1 or Section 5.2 by a Board Resolution. Section 5.4 Notice of Redemption. (a) The Company shall give or cause the Trustee to give written notice of redemption not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed at the address appearing in the Notes Register. If the Company itself gives the notice, it shall also deliver a copy to the Trustee. (b) If either (i) the Company is not redeeming all Outstanding Notes, or (ii) the Company elects to have the Trustee give notice of redemption, then the Company shall deliver to the Trustee, at least 45 days prior to the Redemption Date (unless the Trustee is satisfied with a shorter period), an Officers' Certificate requesting that the Trustee select the Notes to be redeemed and/or give notice of redemption and setting forth the information required by paragraph (c) of this Section 5.4. If the Company elects to have the Trustee give notice of redemption, the Trustee shall give the notice in the name of the Company and at the Company's expense. (c) All notices of redemption shall state: (i) whether the Company is redeeming the Notes pursuant to an Optional Tax Redemption or an Optional Redemption; (ii) the Redemption Date, (iii) the redemption price and the amount of any accrued interest payable as provided in Section 5.7, 22 (iv) in the case of an Optional Redemption, whether or not the Company is redeeming all Outstanding Notes, (v) in the case of an Optional Redemption, if the Company is not redeeming all Outstanding Notes, the aggregate principal amount of Notes that the Company is redeeming and the aggregate principal amount of Notes that will remain Outstanding after the partial redemption, as well as the identification of the particular Notes, or portions of the particular Notes, that the Company is redeeming, (vi) in the case of an Optional Redemption, if the Company is redeeming only a portion of the principal amount of a Note or Notes, the notice that relates to such Note or Notes shall state that on and after the Redemption Date, upon surrender of such Note or Notes, the Holder will receive, without charge, a new Note or Notes of authorized denominations for the principal amount of the Note or Notes remaining unredeemed, (vii) that on the Redemption Date the redemption price and any accrued interest payable to the Redemption Date as provided in Section 5.7 will become due and payable in respect of each Note to be redeemed, and, unless the Company defaults in making the redemption payment, that interest on each Note, to be redeemed, will cease to accrue on and after the Redemption Date, (viii) the place or places where a Holder must surrender the Holder's Notes for payment of the redemption price, and (ix) the CUSIP or ISIN number, if any, listed in the notice or printed on the Notes, and that no representation is made as to the accuracy or correctness of such CUSIP or ISIN number. Section 5.5 Selection of Notes to be Redeemed in Part Pursuant to an Optional Redemption. (a) If the Company is not redeeming all Outstanding Notes, the Trustee shall, so long as the Notes are listed on the Luxembourg Stock Exchange, select the Notes to be redeemed in compliance, based on an Opinion of Counsel furnished to the Trustee by the Company prior to the Redemption Date, with the requirements of the Luxembourg Stock Exchange, and in all cases, on a pro rata basis, by lot or in another fair and reasonable manner chosen by the Trustee. The Trustee shall make the selection from the Outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount of the Notes to he redeemed. In the event of a partial redemption by lot, the Trustee shall select the particular Notes to be redeemed not less than 30 nor more than 60 days prior to the relevant Redemption Date from the Outstanding Notes not previously called for redemption. The Company may redeem Notes in those denominations specified for such Notes only in whole. The Trustee may select for redemption portions (equal to the denomination(s) specified for such Notes or any integral multiple thereof) of the principal of Notes that have denominations larger than a denomination specified for such Notes, provided that after such partial redemption the remaining principal amount of any such Note shall be a denomination specified for such Notes or any integral multiple thereof. (b) For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of that Note which has been or is to be redeemed. Section 5.6 Deposit of Redemption Price. Prior to 10:00 a.m. local time in the city in which the office of the Trustee or the Paying Agent with respect to the Notes being redeemed is located on the relevant Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent 23 (or, if the Company is acting as Paying Agent, segregate and hold in trust as provided in Section 2.4) an amount of money in immediately available funds sufficient to pay the redemption price of, and accrued interest on, all the Notes that the Company is redeeming on that date. Section 5.7 Notes Payable on Redemption Date. If the Company, or the Trustee on behalf of the Company, gives notice of redemption in accordance with this Article V, the Notes, or the portions of Notes (in the case of an Optional Redemption), called for redemption, shall, on the Redemption Date, become due and payable at the redemption price specified in the notice (together with accrued interest, if any, to (but excluding) the Redemption Date), and from and after the Redemption Date (unless the Company shall default in the payment of the redemption price and accrued interest) the Notes or the portions of the Notes shall cease to bear interest. Upon surrender of any Note for redemption in accordance with the notice, the Company shall pay the Notes at the redemption price, together with accrued, but unpaid, interest, if any, to (but excluding) the Redemption Date and any Additional Amounts, if any, (subject to the rights of Holders of record in the case of a Global Registered Note on the relevant Record Date to receive interest due on the relevant Interest Payment Date). If the Company shall fail to pay any Note called for redemption upon its surrender for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate borne by the Notes. Section 5.8 Unredeemed Portions of Partially Redeemed Note. In the case of an Optional Redemption, upon surrender of a Note that is to be redeemed in part, the Company shall execute, and upon Company Order the Trustee shall authenticate and make available for delivery to the Holder of the Note at the expense of the Company, a new Note or Notes, of any authorized denomination as requested by the Holder, in an aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Note surrendered, provided that each new Note will be in a principal amount of $1,000 and integral multiples of $1,000 in excess thereof. ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 Events of Default. (a) An "Event of Default" occurs if one or more of the following events shall occur: (i) if the Company defaults in the payment of any interest on any of the Notes when due and payable, and such default continues for a period of 30 days; (ii) if the Company defaults in the payment of the principal of any Note when due and payable, and such default continues for a period of two Business Days; (iii) if the Company defaults in the performance of, or breaches, any covenant or warranty contained in this Indenture or the Notes, and such default or breach continues for a period of 30 days after written notice of such default or breach shall have been given to the Company by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then Outstanding; (iv) if any event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or indebtedness of any Principal Subsidiary for money borrowed, whether such indebtedness now exists or shall hereafter be created, shall occur and shall result in such indebtedness in principal amount in excess of $30,000,000 (or the equivalent thereof in other currencies) becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and such acceleration shall not 24 be rescinded or annulled, or such indebtedness shall not have been discharged, within a period of 30 days after written notice thereof shall have been given to the Company by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then Outstanding; or (v) if proceedings are initiated against the Company or any Principal Subsidiary under any applicable liquidation, insolvency, re-organization or any other similar laws, or an application is made for the appointment of an administrative or other receiver, manager or administrator, or any such or other similar official is appointed, in relation to the Company or any Principal Subsidiary, as the case may be, in relation to the whole or a part of the undertakings or assets of the Company or any Principal Subsidiary, or an encumbrancer takes possession of the whole or a part of the applicable company's undertakings or assets, or a distress, execution, attachment, sequestration or other process is levied, enforced upon, sued out or put in force against the whole or a part of its undertakings or assets; and in any case (other than the appointment of an administrator) are not discharged within 28 days; provided that this paragraph (v) shall not apply to any proceedings against the Company or a Principal Subsidiary brought by a third party other than an administrative or judicial authority where the Company can demonstrate that any such proceedings are being contested by the Company or the Principal Subsidiary in good faith, diligently and by appropriate proceedings in a competent court. Any of the foregoing will constitute an Event of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. (b) The Company shall deliver to the Trustee within five days after the occurrence of any Default or Event of Default written notice in the form of an Officers' Certificate of any Default or Event of Default, their status and what action the Company proposes to take in respect thereof. Section 6.2 Acceleration. If an Event of Default occurs and is continuing (other than one relating to the matters referred to in Section 6.1(v), in which case, the principal of all Outstanding Notes shall become due and payable immediately), then the Trustee or Holders of at least 25% in aggregate principal amount of Outstanding Notes may declare the principal amount of all of the Outstanding Notes to be due and payable immediately, together with accrued and unpaid interest, Additional Amounts, if any, accrued to the date of repayment by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration, such principal amount and accrued and unpaid interest shall become immediately due and payable_ At any time after such a declaration of acceleration with respect to the Notes subject to such declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee or the Holders as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Notes, by written notice to the Company and the Trustee, may rescind and annul such declaration of acceleration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay: (i) all overdue interest on all Notes subject to such declaration of acceleration, (ii) the principal of any Notes subject to such declaration of acceleration which become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Notes, 25 (iii) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates therefor in such Notes, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursement and advances of the Trustee, its agents and counsel, and any other amounts due to the Trustee under Section 7.7; and (b) all Events of Default with respect to Notes subject to such declaration of acceleration, other than the non-payment of the principal of Notes subject to such declaration of acceleration which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.4. Section 6.3 Other Remedies. (a) If all Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. (b) The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 6.4 Waiver of Past Defaults. The Holders of not less than a Qualified Majority in aggregate principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any Event of Default hereunder with respect to such Notes and its consequences, except (i) a default in the payment of the principal of, or premium, if any, or interest on, the Notes, or (ii) a Default in respect of a covenant or agreement that cannot be modified or amended without the consent of the Holder of each such Note affected thereby. Upon any such waiver, such Default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. Section 6.5 Control by Majority. The Holders of a majority in principal amount of the Outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. Subject to Sections 7.1 and 7.2, however, the Trustee may refuse to follow any direction that (i) conflicts with law or this Indenture, (ii) exposes the Trustee to personal liability for which the Trustee would not be indemnified pursuant to Section 7.7 hereof or (iii) is unduly prejudicial to Holders not joined therein; provided, further, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Section 6.6 Limitation on Suits. No Holder of any Notes will have any right to institute any proceeding with respect to this Indenture for any remedy hereunder, unless: (a) such Holder has previously given to the Trustee written notice of a continuing Event of Default; (b) Holders of at least 25% in principal amount of the then Outstanding Notes shall have made a written request to the Trustee to pursue the remedy in its own name as trustee hereunder; 26 (c) such Holders of the Notes have provided to the Trustee reasonable indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee does not comply within 60 days after its receipt of such notice, request and offer of indemnity; and (e) during such 60 day period the Holders of a majority in principal amount of the Outstanding Notes have not given the Trustee a written direction which is inconsistent with the request. Otherwise, no Holder of any Note will have any right to institute any proceeding with respect to this Indenture or for any remedy hereunder, except: (f) a Holder of a Note may institute suit for enforcement of payment of the principal of and premium, if any, or interest on such Note on or after the respective due dates expressed in such Note, or (g) for the institution of any proceeding with respect to this Indenture or any remedy thereunder, including, without limitation, acceleration, by the Holders of a majority in principal amount of the Outstanding Notes; provided, that upon institution of any proceeding or exercise of any remedy, such Holder or Holders provide the Trustee with prompt written notice thereof. Section 6.7 Rights of Holders to Receive Payment. Notwithstanding ally other provision of this Indenture (including, without limitation, Section 6.6), the right of any Holder to receive payment of principal of or interest on the Notes held by such Holder, on or after the respective due dates, Redemption Dates or repurchase date expressed in this Indenture or the Notes, or tri bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. Section 6.8 Collection Suit by Trustee. If an Event of Default occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with applicable interest on any overdue principal and, to the extent lawful, interest on overdue interest) and the amounts provided for in Section 7.7. Section 6.9 Trustee May File Proofs of Claim, etc. (a) The Trustee may (irrespective of whether the principal of the Notes is then due): (i) file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders under this Indenture and the Notes allowed in any bankruptcy, insolvency, liquidation or other judicial proceedings relative to the Company or any Subsidiary of the Company or their respective creditors or properties; and (ii) collect and receive any monies or other property payable or deliverable in respect of any such claims and distribute them in accordance with this Indenture. Any receiver, trustee, liquidator, sequestrator (or other similar official) in any such proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, taxes, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due to the Trustee pursuant to Section 7.7. 27 (b) Nothing in this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money or property pursuant to this Article VI, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.7; SECOND: if the Holders proceed against the Company directly without the Trustee in accordance with this Indenture, to the Holders for their collection costs; THIRD: to the Holders for amounts due and unpaid on the Notes for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively; and FOURTH: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may, upon notice to the Company, fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by the Company, a suit by a Holder pursuant to Section 6.7 or a suit by Holders of more than 10% in principal amount of the Outstanding Notes. ARTICLE VII TRUSTEE Section 7.1 Duties of Trustee. (a) If a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall examine such certificates and opinions to determine whether or not they reasonably conform to the 28 requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph (c) does not limit the effect of paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.2, 6.4 or 6.5. (d) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (e) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) Whether or not expressly provided herein, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article VII and to the provisions of the TIA. (h) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (i) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses (including reasonable attorneys' fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction. Section 7.2 Rights of Trustee. Subject to Section 7.1: (a) The Trustee may conclusively rely and shall be fully protected in acting or refraining from acting on any document (whether in original or facsimile form) reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee need not investigate any fact or matter stated in the document. (b) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on an Officers' Certificate or Opinion of Counsel. 29 (c) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its attorneys and agents and shall not be responsible for the misconduct or negligence on the part of any agent or attorney appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute willful misconduct or negligence (as finally determined by a court of competent jurisdiction). (e) The Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) If the Trustee shall determine, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (g) The Trustee shall not be deemed to have knowledge of any Default or Event of Default unless a Trust Officer of the Trustee has Actual Knowledge thereof or unless written notice of any event which is in fact such a Default or Event of Default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Notes and this Indenture. (h) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. (i) The Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of Officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any Person authorized to sign an Officers' Certificate, including any Person specified as so authorized in any such certificate previously delivered and not superseded. (j) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Order and any resolution of the Board of Directors of the Company shall be sufficiently evidenced by a Board Resolution. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. Any Authenticating Agent, Paying Agent, Registrar or co-Registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11 and the Authenticating Agent must comply with Section 2.2(d). Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Trustee's certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if a Trust Officer has Actual Knowledge thereof, the Trustee shall mail to each Holder notice of the Default or Event of Default within 30 days after the Trustee obtains Actual Knowledge thereof. Except in the case of a Default or Event of Default in payment of principal of or interest on any Note (including payments pursuant to the Optional Redemption, Optional Tax Redemption or required 30 repurchase provisions of such Note, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of the Holders. Section 7.6 Reports by Trustee to Holders. The Trustee shall comply with TIA Section 313. The Company agrees to notify promptly the Trustee whenever the Notes become listed, quoted and/or traded on or by any stock exchange, competent listing authority and/or quotation system and of any delisting thereof. Section 7.7 Compensation and Indemnity. (a) The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder as the Company and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by it, including, without limitation, costs of collection, costs of preparing and reviewing reports, certificates and other documents, costs of preparation and mailing of notices to Holders. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. (b) The Company shall indemnify the Trustee against any and all loss, liability, claim, damage or expense (including reasonable attorneys' fees and expenses) incurred by it without negligence, willful misconduct or bad faith on its part arising out of or in connection with the acceptance and administration of this trust and the performance of its duties hereunder, including the costs and expenses of enforcing this Indenture (including this Section 7.7) and of defending itself against any claims or liabilities (whether asserted by any Holder, the Company or otherwise). The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee may, upon written request to the Company, have separate counsel and the Company shall upon such event pay the fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own negligence, willful misconduct or bad faith. (c) To secure the Company's payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Notes. The Trustee's right to receive payment of any amounts due under this Section 7.7 shall not be subordinate to any other liability or indebtedness of the Company. (d) The Company's payment obligations pursuant to this Section 7.7 shall survive the discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses after the occurrence of a Bankruptcy Default, the expenses are intended to constitute expenses of administration under any Bankruptcy Law; provided, however, that this shall not affect the Trustee's rights as set forth in this Section 7.7 or Section 6.10. Section 7.8 Replacement of Trustee. (a) The Trustee may resign at any time by notifying the Company. The Holders of a majority in principal amount of the Outstanding Notes may remove the Trustee at any time by so notifying the Trustee in writing and may appoint a successor Trustee reasonably acceptable to the Company. The Company shall remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; 31 (ii) the Trustee is adjudged bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee otherwise becomes incapable of acting. (b) If the Trustee resigns or is removed by the Company or by the Holders of a majority in principal amount of the Outstanding Notes (and such Holders do not reasonably promptly appoint a successor Trustee), or if a vacancy exists in the office of the Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. (c) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. (d) If a successor Trustee does not deliver a written acceptance of its appointment within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Outstanding Notes may petition, at the Company's expense, any court of competent jurisdiction for the appointment of a successor Trustee. (c) If the Trustee fails to comply with Section 7.10, any Holder of Notes may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) Notwithstanding the replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. (g) In the event of the resignation, termination or removal of the Trustee, the Company shall within 30 days mail written notice thereof to the Holders of Notes. Section 7.9 Successor Trustee by Merger. (a) If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another Person, the resulting, surviving or transferee Person without any further act shall be the successor Trustee. (b) In case at the time such successor or successors to the Trustee shall succeed to the trusteeship created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have. Section 7.10 Eligibility; Disqualification. The Trustee and the Authenticating Agent shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least U.S.$150,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other 32 securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. Section 7.11 Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. Section 7.12 Paying Agent and Calculation Agent. All rights, duties and immunities of the Trustee under this Indenture shall apply to any Paying Agent and Calculation Agent under this Indenture. ARTICLE VIII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONIES Section 8.1 Satisfaction and Discharge. The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture and except as to the Company's obligations under Section 7.7) as to all Outstanding Notes when: (a) either: (i) the Notes theretofore executed, authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation, or (ii) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable, or by their terms are due and payable within one year (or scheduled for Optional Redemption or Optional Tax Redemption within one year) and the Company has irrevocably deposited or caused to be deposited with the Trustee U.S. dollar funds sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of and interest on the Notes to the date of deposit (or until their redemption, as confirmed by the opinion of an internationally recognized firm of independent public accountants), together with irrevocable written instructions from the Company directing the Trustee to apply such funds to the payment; (b) the Company has paid all other sums payable under: (i) this Indenture with respect to the Notes and (ii) the Notes; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with. Section 8.2 Application by Trustee of Funds Deposited for Payment of Notes. Subject to Section 8.4, all monies deposited with the Trustee pursuant to Section 8.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company acting as its own paying agent), to the Holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. 33 Section 8.3 Repayment of Monies Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to the Notes, all monies then held by any paying agent under the provisions of this Indenture with respect to such series of Notes shall, upon written demand of the Company, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 8.4 Return of Monies Held by Trustee and Paying Agent Unclaimed for Two Years. Any monies deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest (including Additional Amounts) on any Note and not applied but remaining unclaimed for two years after the date upon which such principal or interest (including Additional Amounts) shall have become due and payable, shall, upon the written request of the Company and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Company by the Trustee or such paying agent, and the Holder of the Notes shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Company for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such monies shall thereupon cease. ARTICLE IX AMENDMENTS Section 9.1 Without Consent of Holders. (a) The Company and the Trustee may amend this Indenture or the Notes without notice to or consent of any Holder: (i) to cure any ambiguity, omission, defect or inconsistency, provided that such action shall not adversely affect the interests of the Holders in any material respect; (ii) to comply with Article IV in respect of the assumption by a Successor Corporation of the obligations of the Company under the Notes and this Indenture; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes; provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code; (iv) to add guarantees with respect to the Notes or to secure the Notes; (v) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (vi) to add any additional Events of Default for the benefit of the Holders of the Notes; (vii) to make any change that does not adversely affect the rights of any Holder in any material respect; (viii) to provide for the issuance of Add On Notes as permitted by Section 2.11, which will have terms substantially identical to the other Outstanding Notes except as specified in Section 2.11, and which will be treated, together with any other Outstanding Notes, as a single issue of securities. 34 (b) After an amendment under this Section 9.1 becomes effective, the Company shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.1. Section 9.2 With Consent of Holders. (a) The Company and the Trustee may amend this Indenture with respect to any Notes or the Notes themselves without notice to any Holder but with the written consent of the Holders of at least a Qualified Majority in principal amount of the Outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), which consent(s) shall be delivered to the Company and the Trustee. However, without the consent of each Holder affected, an amendment may not: (i) reduce the principal amount of Notes the Holders of which must consent to an amendment or waiver; (ii) reduce the rate of, or change, or have the effect of changing the time for payment of, interest, including Additional Amounts, if any, on any Notes or change in any adverse respect the obligation of the Company to pay Additional Amounts; (iii) reduce the principal of, or change, or have the effect of changing the time for payment of principal or the fixed maturity of, any Notes or the amount due upon an Event of Default, or change the date on which any Notes may be subject to acceleration or redemption, or reduce the redemption price therefor; (iv) make any Notes payable in a currency or at a location other than that stated in the Notes or at a place other than stated in the Notes; (v) make any change in the provisions of this Indenture entitling each Holder to receive payment of principal of and interest on such Notes on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a Qualified Majority in principal amount of Outstanding Notes to waive compliance with various provisions of this Indenture or Defaults or Events of Default; (vi) reduce the percentage of Holders of Notes whose consent is needed to modify or amend the provisions of this Indenture with respect to the Notes or the Notes themselves; or (vii) make any changes to this Section 9.2. (b) It shall not be necessary for the consent of the Holders under this Section 9.2 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (c) After an amendment under this Section 9.2 becomes effective, the Company shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.2. Section 9.3 Compliance with Trust Indenture Act. Every amendment to this Indenture or the Notes shall comply with the TIA as then in effect. 35 Section 9.4 Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing as herein otherwise expressly provided. Such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 7.1) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. (c) The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Notes represented by Global Registered Notes or Certificated Notes entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Notes (for the purposes of this Section 9.4 only, a "record date"); provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Notes represented by Global Registered Notes or Certificated Notes on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable expiration date by Holders of the requisite principal amount of Outstanding Notes on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and be of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Notes on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable expiration date to be given to the Trustee in writing and to each Holder of Notes in the manner set forth in Section 10.2. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Notes represented by Global Registered Notes or Certificated Notes entitled to join in the giving or making of (i) any request to institute proceedings referred to in Section 6.6 or (ii) any direction referred to in Section 6.5, in each case with respect to the Notes. If any record date is set pursuant to this paragraph, the Holders of Outstanding Notes on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable expiration date by Holders of the requisite principal amount of Outstanding Notes on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and be of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holder of the requisite principal amount of Outstanding Notes on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the expense of the Company, shall cause notice of such record date, the proposed action by Holders and the applicable expiration date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 10.2. 36 With respect to any record date set pursuant to this Section, the party hereto which sets such record date may designate any day as the "expiration date" and from time to time may change the expiration date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new expiration date is given to the other parties hereto in writing and to each Holder of Notes in the manner set forth in Section 10.2, on or prior to the existing expiration date. Notwithstanding the foregoing, no expiration date shall be later than the 180th day after the applicable record date and, if an expiration date is not designated with respect to any record date set pursuant to this Section, the party or parties hereto which set such record date shall be deemed to have designated the 180th day after such record date as the expiration date with respect thereto. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Note may do so with regard to all or any part of the principal amount of such Note or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. Section 9.5 Notation on or Exchange of Notes. If an amendment changes the terms of a Note, the Trustee may require the Holder of the Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Note will execute and upon Company Order the Trustee will authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or to issue a new Note shall not affect the validity of such amendment. Section 9.6 Trustee to Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article IX; provided that the Trustee may, but shall not be obligated to, sign any amendment that adversely affects its own rights, duties, liabilities or immunities. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and shall be provided with, and (subject to Sections 7.1 and 7.2) shall be fully authorized and protected in relying upon an Opinion of Counsel and an Officers' Certificate, each stating that such amendment is authorized or permitted by this Indenture. ARTICLE X MISCELLANEOUS Section 10.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required or deemed to be included in this Indenture by the TIA, the required or deemed provision shall control. Section 10.2 Notices. Any notice or communication provided or permitted by this Indenture to be given to the Company, the Trustee or the Paying Agent may be given to the Company, the Trustee or any Paying Agent, as the case may be, and shall be made in writing by hand-delivery, first-class mail, facsimile or air courier guaranteeing next-day delivery: if to the Company: Pearson PLC 80 Strand London WC2R ORL United Kingdom Attention: Group Treasurer 37 With a copy to: Pearson PLC 80 Strand London WC2R ORL United Kingdom Attention: General Counsel if to the Trustee and Paying Agent: The Bank of New York One Canada Square London E14 5AL United Kingdom Attention: Alison Mitchell All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being timely delivered to a next-day air courier; five business days after being deposited in the mail postage prepaid; and when receipt is acknowledged by the recipient's facsimile machine, if sent by facsimile. The Company, the Trustee or the Paying Agent by notice to the others may designate additional or different addresses for subsequent notices or communications. Such notices or communications may also be given by any Holder of Notes to the Trustee or any Paying Agent through DTC in such manner that such Trustee or Paying Agent, as the case may be, and DTC may approve for such purpose. (b) All notices regarding the Notes shall be published (i) in a leading English language daily newspaper of general circulation in New York City and (ii) if and for so long as the Notes are listed on the Luxembourg Stock Exchange, and for so long as the Luxembourg Stock Exchange rules so require, a daily newspaper of general circulation in Luxembourg. Such publications will initially be made in The Wall Street Journal in New York City and the Luxemburger Wort in Luxembourg. The Company shall also ensure that such notice is duly published in a manner that complies with the rules and regulations of any other stock exchange, competent listing authority and/or quotation system on or by which the Notes are for the time being listed, quoted and/or traded. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in each such newspaper. Furthermore, the Company shall send all notices via first class mail or a courier delivery service to the Trustee and the nominee of DTC. Section 10.3 Communication by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 10.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signer or signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and 38 (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with. Section 10.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition and the definitions relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. In giving such Opinion of Counsel, counsel may rely as to factual matters on an Officers' Certificate or on certificates of public officials unless such counsel knows, or in the exercise of reasonable care, should know that the Officers' Certificate or certificates of public officials or the representations with respect to such matters are erroneous. Section 10.6 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an Officer or Officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows or in the exercise of reasonable care should know, that the opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 10.7 Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by, or a meeting of, Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. Section 10.8 Payment on Business Days. If any Interest Payment Date would fall on a day that is not a Business Day, the interest payment shall be made on the next Business Day. If the Maturity Date falls on a day that is not a Business Day, the payment of interest and principal may be 39 made on the next succeeding Business Day, and no interest on such payment shall accrue for the period from and after the Maturity Date. If a regular Record Date is not a Business Day, the Record Date shall not be affected. Section 10.9 Governing Law, etc. (a) THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT THAT THE AUTHORIZATION AND EXECUTION BY THE COMPANY OF THE INDENTURE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND AND WALES, WITHOUT GIVING EFFECT TO ANY CONTRARY CONFLICT OF LAWS OR CHOICE OF LAW PROVISIONS OF THE LAWS OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION. (b) To the extent that the Company or any of its properties, assets or revenues may have or may hereafter become entitled to, or have attributed to it, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution of judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Indenture or the Notes, the Company hereby irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity and consents to such relief and enforcement. (c) The Company hereby irrevocably consents and agrees, for the benefit of the Holders and the Trustee, that any legal action, suit or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with this Indenture or the Notes may be brought in any United States federal court or New York state court, in each case located in the Borough of Manhattan, The City of New York, and hereby irrevocably consents and submits to the non-exclusive jurisdiction of each such court in personam, generally and unconditionally with respect to any action, suit or proceeding for itself and in respect of its properties, assets and revenues. (d) The Company hereby irrevocably designates, appoints, and empowers Pearson Inc., with an office at 1330 Avenue of the Americas, New York, New York 10019, as its designee, appointee and agent (the "Authorized Agent") to receive, accept and acknowledge for and on its behalf, and its properties, assets and revenues, service of any and all legal process, summons, notices and documents which may be served in any such action, suit or proceeding brought in any United States federal court or New York state court which may be made on such Authorized Agent in accordance with legal procedures prescribed for such courts. If for any reason such Authorized Agent hereunder shall cease to be available to act as such, the Company agrees to designate a new designee, appointee and agent in The City of New York on the terms and for the purposes of this clause satisfactory to the Trustee. The Company further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents out of any of the aforesaid courts in any such action, suit or proceeding by serving a copy thereof upon the relevant agent for service of process referred to in this clause (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) or by mailing copies thereof by registered or certified air mail, first class, postage prepaid, to each of them at their respective addresses specified in or designated pursuant to this Indenture. The Company further agrees that the failure of any such Authorized Agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon. Nothing herein shall in any way be deemed to limit the ability of the Trustee or any Holder to serve any such legal process, summons, notices and documents in any 40 other manner permitted by applicable law or to obtain jurisdiction over the Company or bring actions, suits or proceedings against the Company in any jurisdiction, and in any manner, as may be permitted by applicable law. The Company hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions, suits or proceedings arising out of or in connection with this Indenture or the Notes brought in any United States federal court or New York state court, in each case located in the Borough of Manhattan, The City of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. (e) Nothing in this Section 10.9 shall affect the right of the Trustee or any Holder of the Notes to serve process in any other manner permitted by law. Section 10.10 Successors. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. Section 10.11 Duplicate and Counterpart Originals. This Indenture may be executed in any number of counterparts, each of which so executed shall be an original, but all of them together represent the same agreement. Section 10.12 Severability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.13 Currency Indemnity. (a) The U.S. dollar is the sole currency of account and payment for all sums payable by the Company under or in connection with the Notes or this Indenture with respect to the Notes, including damages. Any amount received or recovered in currency other than U.S. dollars in respect of the Notes (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Company, any Subsidiary or otherwise) by any Holder of the Notes in respect of any sum expressed to be due to it from the Company shall only constitute a discharge of them under the Notes and this Indenture with respect to the Notes only to the extent of the U.S. dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that U.S. dollar amount is less than the U.S. dollar amount expressed to be due to the recipient under the Notes or this Indenture with respect to the Notes, the Company shall indemnify and hold harmless the recipient against any loss or cost sustained by it in making any such purchase. For the purposes of this Section 10.13, it will be sufficient for the Holder of a Note to certify that it would have suffered a loss had an actual purchase of U.S. dollars been made with the amount so received in that other currency on the date of receipt or recovery (or, if a purchase of U.S. dollars on such date had not been practicable, on the first date on which it would have been practicable). (b) The indemnities of the Company contained in this Section 10.13, to the extent permitted by law: (i) constitute a separate and independent obligation from the other obligations of the Company under the Notes and this Indenture with respect to the Notes; (ii) shall give rise to a separate and independent cause of action against the Company; (iii) shall apply irrespective of any waiver granted by any Holder of the Notes or the Trustee with respect to the Notes from time to time; and (iv) shall continue in full force and effect notwithstanding any other judgment, order, claim or proof of claim for a liquidated amount in respect of any sum due under the Notes or this Indenture with respect to the Notes or any other judgment or order. 41 Section 10.14 Benefits of Indenture. Nothing in this Indenture or the Notes, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit of any legal or equitable right, remedy or claim under this Indenture. Section 10.15 Table of Contents; Headings. The table of contents and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 42 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. PEARSON PLC By: /s/ Michael Day ------------------------------------------ Name: Michael Day Title: Group Treasurer THE BANK OF NEW YORK as Trustee, Paying Agent and Calculation Agent By: ------------------------------------------ Name: Title: IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. PEARSON PLC By: ------------------------------------------ Name: Title: THE BANK OF NEW YORK as Trustee, Paying Agent and Calculation Agent By: /s/ Trevor Blewer ------------------------------------------ Name: Trevor Blewer Title: Vice President EX-8.1 4 u47265exv8w1.txt EXHIBIT 8.1 . . . EXHIBIT 8.1 LIST OF SIGNIFICANT SUBSIDIARIES
PERCENTAGE INTEREST/ VOTING NAME COUNTRY OF INCORPORATION POWER - ------------------------------------- ------------------------ ---------- Pearson Education Inc. United States 100% Pearson Education Ltd England and Wales 100% NCS Pearson Inc. United States 100% Pearson Longman Inc. United States 100% Pearson Education Holdings Inc. United States 100% PN Holdings Inc. United States 100% The Financial Times Limited England and Wales 100% Financial Times Business Ltd England and Wales 100% Interactive Data Corporation United States 61% Recoletos Grupo de Comunicacion SA Spain 79% Les Echos SA France 100% Penguin Group (USA) Inc. United States 100% The Penguin Publishing Co Ltd England and Wales 100% Dorling Kindersley Holdings Ltd England and Wales 100% Pearson Inc. United States 100% Pearson Holdings Inc. England and Wales 100% Pearson Overseas Holdings Ltd England and Wales 100% Pearson International Finance Ltd England and Wales 100% West Thurrock Estates Ltd England and Wales 100% Pearson Capital Company LLC United States 100% Pearson Finance Partnership (Bermuda) Bermuda 100% Testchange Ltd England and Wales 100% Pearson Netherlands BV Netherlands 100% Pearson AG Switzerland 100%
EX-12.1 5 u47265exv12w1.txt EXHIBIT 12.1 EXHIBIT 12.1 CERTIFICATIONS I, Marjorie Scardino, certify that: 1. I have reviewed this annual report on Form 20-F of Pearson plc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report; 4. Pearson plc's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Pearson plc's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in Pearson plc's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc's internal control over financial reporting. 5. Pearson plc's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc's auditors and the audit committee of Pearson plc's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc's internal control over financial reporting. Date: May 7, 2004 /s/ Marjorie Scardino Marjorie Scardino Chief Executive Officer EX-12.2 6 u47265exv12w2.txt EXHIBIT 12.2 EXHIBIT 12.2 CERTIFICATIONS I, Rona Fairhead, certify that: 1. I have reviewed this annual report on Form 20-F of Pearson plc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report; 4. Pearson plc's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Pearson plc and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of Pearson plc's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in Pearson plc's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc's internal control over financial reporting. 5. Pearson plc's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc's auditors and the audit committee of Pearson plc's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc's internal control over financial reporting. Date: May 7, 2004 /s/ Rona Fairhead Rona Fairhead Chief Financial Officer EX-13.1 7 u47265exv13w1.txt EXHIBIT 13.1 EXHIBIT 13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Pearson plc (the "Company") for the fiscal year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marjorie Scardino, Chief Executive Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 7, 2004 /s/ Marjorie Scardino ----------------------------- Marjorie Scardino Chief Executive Officer EX-13.2 8 u47265exv13w2.txt EXHIBIT 13.2 EXHIBIT 13.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Pearson plc (the "Company") for the fiscal year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rona Fairhead, Chief Financial Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 7, 2004 /s/ Rona Fairhead --------------------------- Rona Fairhead Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----