AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 2004
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the SEC.
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Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
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Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
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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 ___
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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
i
PAGE
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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