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)

	*Restatement*

~~YEAR ENDED DECEMBER 31 ---------------------------------------------------------~~£14 million in 2004 (a loss of £7 million in 2003 and a loss of £15 million in 2002) on the sale of fixed assets and investments. Additionally, the US GAAP operating profit includes the operating profit impact of the GAAP adjustments discussed in note 34 in “Item 17. Financial Statements”.

(3)	Discontinued operations under both UK GAAP and US GAAP comprise the results of Recoletos for all years presented and the results of 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 also include the results of the Forum Corporation for 2003, 2002, 2001 2000 1999 ------ ------ ------ -------- ------ ----- $ L L L L L (IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS) ~~~~US GAAP INFORMATION(5): Profit/(loss)~~and 2000.~~

(4)	Basic earnings/loss per equity share is based on profit/loss for the financial ~~year(6)............................. 326 183 198 (1,500) 1,362 198 Profit/(loss) from continuing operations~~period and the weighted average number of ordinary shares in issue during the period.

(5)	Diluted earnings/loss per equity share is based on diluted earnings/loss for the financial year (1)................................. 331 186 257 (475) (30) 177 (Loss)/profit from discontinued operations(1)....................... -- -- (37) (40) 1,403 21 Loss on disposalperiod and the diluted weighted average number 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 28.9pordinary shares in issue during the period. Diluted earnings/~~(loss) per equity share(3)............................ 40.9C 23.0P 24.9p (188.6)p 185.0p 28.7p Basic~~loss comprise 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)/earningsloss 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 both 2002 and 2001, the Group made a retained loss for the financial year. Consequently the effect of share options is anti-dilutive for those years and there is no difference between the basic loss 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~~and the diluted loss 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 share.

(6)	Long-term obligations are comprised of medium and long-term borrowings, amounts falling due after more than one year related to obligations under finance leases and amounts falling due after more than one year in respect of pension obligations.

(7)	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”.

(8)	The loss of £1,500 million in 2001 and profit of £1,362 million in 2000 are after charging goodwill amortization of £527 million and £288 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 £21 million in respect of the cumulative effect of a change in accounting principle. See note 34 in “Item 17. Financial Statements”.

management to more easily track the 2003 ~~OPERATING PROFIT~~ Education ~~- --------------- (1) Discontinued operations contributed Lnil to both operating results from operations in 2003. The equivalent figures and a loss of L3 million respectively. See Note 2. 22~~
      Pearson ~~Education Pearson Education's~~Education’s sales underlying operational performance of the group. A reconciliation of results from operations to operating profit is included in the table below:

Year Ended December
31

2002

2003

£m % £m %
Results from operations

Pearson Education 313 68 326 70
FT Group 58 12 51 11
The Penguin Group 91 20 87 19

Pearson Group 462 100 464 100

Less:

1) Goodwill Amortization

Pearson Education 207 244
FT Group 30 49
The Penguin Group 21 18

Pearson Group 258 311

2) Goodwill Impairment

Pearson Education — —
FT Group — 10
The Penguin Group — —

Pearson Group — 10

3) Integration Costs

Pearson Education — 7
FT Group — —
The Penguin Group — 3

Pearson Group — 10

Operating profit from continuing operations

Pearson Education 106 52 75 56
FT Group 28 14 (8 ) (6 )
The Penguin Group 70 34 66 50

Pearson Group 204 100 133 100

Discontinued Operations (Recoletos and Television) 22 10
Total operating profit
226 143

Non operating items 6 (37 )
Net Finance Costs (80 ) (131 )
Profit/(Loss) before taxation
152 (25 )

~~YEAR ENDED DECEMBER 31 -------------------------- 2002 ----------- ----------- LM % LM % ---- --- ---- --- class="fgs">~~
Pearson Education........................................... 106 47 75 51 5 4 66 45 ---- --- ---- --- 146 100 ==== === ==== === (244) (65) (18) ---- (327) ==== -- (10) -- ---- (10) ==== (7) -- (3) ---- (10) ==== 64 326 66 80 16 87 18 ---- --- ---- --- 493 100 ==== === ==== === profit and in 2002 were Lnil decreased by ~~L305~~£305 million, or 11%, to ~~L2,451~~£2,451 million in 2003 from ~~L2,756~~£2,756 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~~did not fill the gap left by the absence of the TSA contract. Pearson ~~Education's~~Education’s 2003 sales comprised 61% of ~~Pearson's~~Pearson’s total sales. Results from operations decreased by ~~L13~~£13 million or 4% from ~~L326~~£326 million in 2002 to ~~L313~~£313 million in 2003. The decrease can be
37
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~~reduced losses at FT Knowledge following disposals and reorganization of that business.
      The School business sales increased by ~~L25~~£25 million, or 2%, to ~~L1,176~~£1,176 million in 2003, from ~~L1,151~~£1,151 million in 2002 and results from operations increased by ~~L12~~£12 million, or 10%, to ~~L127~~£127 million in 2003 from ~~L115~~£115 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~~£72 million higher than reported and results from operations L8£8 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~~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,~~Edexcel, contributed sales of ~~L89~~£89 million following its acquisition in the first half of 2003.
      The Higher Education business saw a decline in sales of L3£3 million, to ~~L772~~£772 million in 2003, from ~~L775~~£775 million in 2002. Results from operations increased by L6£6 million, to ~~L148~~£148 million in 2003, from ~~L142~~£142 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~~£49 million higher than reported and results from operations ~~L10~~£10 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~~Faigley’s Penguin Handbook in English Composition, Wood & ~~Wood's~~Wood’s Mastering World Psychology and Jones & ~~Wood's~~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~~£281 million, to ~~L503~~£503 million in 2003, from ~~L784~~£784 million in 2002. Results from operations decreased by ~~L43~~£43 million, to ~~L38~~£38 million in 2003, from ~~L81~~£81 million in 2002. ~~The $151 million receivable previously reported as outstanding from~~Excluding the effect of 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 Human Services 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~~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
38
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.~~ United States.
FT Group
      Sales at the FT Group (excluding discontinued businesses) increased ~~L31~~£10 million or 4%2%, from ~~L726~~£578 million in 2002 to ~~L757~~£588 million in 2003 and results from operations increased by L6£7 million, or 8%14%, from ~~L80~~£51 million in 2002 to ~~L86~~£58 million in 2003. The main contributors to the sales increase ~~were~~was Interactive ~~Data and Recoletos.~~Data. 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~~FT’s cost base by more than ~~L100~~£100 million over the same period.
      Results from operations at the Financial Times ~~("FT"~~(“FT”) decreased by L9£9 million over 2002 as advertising revenues fell by ~~L23m~~£23m and we invested some ~~L10m~~£10m in the ~~newspaper's~~newspaper’s continued expansion around the world. Advertising revenues were down 15% as industry conditions remained tough for the ~~FT's~~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~~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~~FT.com’s subscribers are some 50% higher at 74,000. The launch of our Asian edition in September 2003 completed the ~~FT's~~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~~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~~FT’s associates and joint ventures showed a profit of L3£3 million ~~(L6~~(£6 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~~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~~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~~ComStock’s real-time market data services.
      In December 2004 we announced our intention to sell our shareholding in Recoletos, our 79%-owned Spanish media group. The sale was completed in early April 2005. The results of Recoletos have been included as a discontinued business in the financial statements.
39
The Penguin Group
      The Penguin Group increased sales to ~~L840~~£840 million in 2003 from ~~L838~~£838 million in 2002 and increased its results from operations to ~~L91~~£91 million in 2003 from ~~L87~~£87 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~~BBC’s The Big Read. ~~Penguin's~~
      Penguin’s best-selling books included Sue Monk ~~Kidd's~~Kidd’s debut novelThe Secret Life of Bees ~~(2.3~~(2.3 million copies sold), John ~~Steinbeck's~~ Steinbeck’sEast of Eden ~~(1.5~~(1.5 million), Al ~~Franken's~~ Franken’sLies and the Lying Liars Who Tell Them ~~(1.1~~(1.1 million), Scott ~~Berg's~~ Berg’sKate Remembered ~~(0.5~~(0.5 million), Paul ~~Burrell's~~ Burrell’sA Royal Duty ~~(0.9~~(0.9 million), ~~Madonna's~~ Madonna’sThe English RosesandMr ~~Peabody's~~Peabody’s Apples ~~(1.2~~(1.2 million) and Michael ~~Moore's~~ Moore’sStupid White Men ~~(0.8~~(0.8 million). Dorling Kindersley faced a tough backlist market but benefited from three major new ~~titles:~~titles: America 24/7, Tom ~~Peters'~~ Peters’Re-Imagine!and ane-Encyclopaediapublished in association with Google.
      We increased spending on ~~authors'~~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 ==== === ==== ===
Cash Flows and Financing
- --------------- (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 increased by £171 million, or 48%, to £530 million in 2004, from £359 million in 2003. This cash inflow was aided by collection of the $151 million receivable in respect of the TSA contract. Cash flows within Pearson Education and IDC in particular continued to be strong despite the weakness of the US dollar reducing the value of our cash flows in sterling terms. Even excluding the impact of collecting the TSA receivable, working capital continued to improve. On an average basis, the working capital to sales ratio for our book publishing businesses improved from 32.8% to 32.3%. Compared to 2002, the net cash inflow from operating activities in 2003 decreased by ~~L170~~£170 million, or 32%, to ~~L359~~£359 million from £529 million. This reflected close-out payments to creditors in ~~2003, from L529 million in 2002. The main reasons for this decrease were~~respect of the TSA contract ~~where we incurred additional close-out expenditure (payment of TSA creditors) without receiving the $151 million outstanding receivable,~~and the concentration of the Penguin publishing schedule in the fourth quarter which pushed cash ~~collections~~collection 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.2004.
      Net interest paid ~~reduced~~was £85 million in 2004 compared to ~~L76~~£76 million in 2003 ~~from L140~~and £140 million in 2002. The 12% increase in 2004 over 2003 reflected the year on year increase in interest rates, while the 2003 decrease compared to 2002 ~~and L156 million in 2001 as~~benefited from the full year effect of the 2002 debt repayment using the proceeds of the RTL Group sale ~~flowed through~~ and the ~~L37~~non recurrence of £37 million of swap close-out ~~costs did not recur.~~costs.
      In ~~2003 we again held~~2004 capital expenditure ~~below the level~~was in excess of depreciation ~~while continuing~~due to ~~upgrade~~up-front expenditure on our Professional testing contracts and continued upgrading of our facilities and equipment. Capital expenditure ~~reduced~~was £125 million in 2004 compared to ~~L105~~£105 million in 2003 ~~from L126~~and £126 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.2002.
      The acquisition of subsidiaries accounted for a cash outflow of ~~L94~~£35 million in 2004 against £94 million in 2003 ~~against L87~~and £87 million in ~~2002~~2002. The principal acquisitions in 2004 were of KAT and ~~L128~~Dominie Press for £10 million ~~in 2001.~~each by Pearson Education and FutureSource by Interactive Data for £9 million. The principal acquisitions in 2003 were of ComStock by Interactive Data for net cash of ~~L68~~£68 million and 75% of ~~London Qualifications~~Edexcel by Pearson Education for net cash of ~~L16~~£16 million. The largest acquisition in 2002 was the purchase of Merrill ~~Lynch's~~Lynch’s Securities Pricing Services by Interactive Data for net cash of ~~L30~~£30 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~~£24 million in 2004 against £53 million in 2003 ~~against L923~~and £923 million in ~~2002 and L42 million~~2002. All the proceeds in ~~2001.~~2004 relate to the sale of Argentaria Cartera by Recoletos. 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~~Group.
40
      The cash outflow from financing of £59m in 2004 reflects the repayment of one€550 bond offset by the proceeds ~~in 2001 to~~from the ~~sale~~issue of ~~FT Energy.~~new $350 million and $400 million bonds. The cash inflow from financing of ~~L65~~£64 million in 2003 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~~€250 million bond. The outflow of ~~L663~~£663 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~~
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 for the group’s present requirements, 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,~~2004, our net debt (excluding finance leases) was ~~L1,361~~£1,206 million compared to net debt of ~~L1,408~~£1,361 million at December 31, ~~2002.~~2003. 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~~£1,819 million at December 31, ~~2003,~~2004, compared to ~~L1,983~~£1,922 million at December 31, ~~2002.~~2003. At December 31, ~~2003,~~2004, cash and liquid resources were ~~L561~~£613 million, compared to ~~L575~~£561 million at December 31, ~~2002.~~2003.
      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 ===== === === === =====

At December 31, 2004

Two to After
Less Than One to Five Five
Total One Year Two Years Years Years

£m £m £m £m £m
Gross borrowings:
Bank loans, overdrafts and commercial paper 169 107 — 62 —
Variable rate loan notes — — — — —
Bonds 1,650 — 130 671 849
Lease obligations 1,051 115 101 250 585

Total
2,870 222 231 983 1,434

      The group had capital commitments for fixed assets, including finance leases already under contract, of L9£6 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~~“Disclosure in ~~Management's~~Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual ~~Obligations"~~Obligations”,that have or are reasonably likely to have a material current or future effect on the ~~Group's~~Group’s financial position or results of operations.
      The group is committed to a quarterly fee of ~~0.1875%~~0.125% on the unused amount of the ~~group's~~group’s bank facility. ~~BORROWINGS~~
41
Borrowings
      We have in place a ~~$1,850 million~~$1.85 billion term revolving credit facility, which matures in July ~~2005.~~2009. At December 31, ~~2003,~~2004, approximately ~~$1,701 million~~$1.23 billion 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"~~“EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We are currently in compliance with these covenants. ~~TREASURY POLICY~~
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~~“Item 11. Quantitative and Qualitative Disclosures About Market ~~Risk"~~Risk”. ~~RELATED PARTIES~~
Related Parties
      There were no significant or unusual related party transactions in 2004, 2003 ~~2002~~ or ~~2001.~~2002. Refer to ~~Note~~note 30 ~~of the financial statements. ACCOUNTING PRINCIPLES~~in “Item 17. Financial Statements.”.
Accounting Principles
      The following summarizes the principal differences between UK GAAP and US GAAP in respect of our financial statements. ~~See Note~~For further details refer to note 34 ~~to our consolidated financial statements appearing elsewhere~~ in ~~this Annual Report.~~“Item 17. Financial Statements”.
      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
42
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~~2004, 2003 and 2002. ~~For further details refer to Note 34 in "Item 17. Financial Statements."~~
      Under UK GAAP, FRS 19, ~~"Deferred Taxation"~~“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~~“Accounting for Income ~~Taxes"~~ 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~~“Accounting for Derivative Instruments and Hedging ~~Activities".~~Activities”and its related guidance. During 2003 ~~2002~~ and ~~2001,~~2002, 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. In 2004 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAP for certain of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset.
      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 over the period of the lease (if in respect of property) or the useful economic life of the asset (if in respect of plant and equipment). 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 charged to the profit and loss on a straight-line basis over the duration of each lease term.
Under UK GAAP, the cost of providing pension benefits is expensed over the average expected ~~useful~~remaining 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~~if the fair value of a pension plan’s assets is below the ~~difference between plan assets and plan liabilities~~plan’s accumulated benefit obligation, a minimum pension liability is required to be recognized onin the balance sheet. Unrecognized gains or losses outside the 10% corridor are spread over the ~~employees'~~employees’ remaining service lifetimes.
      Under UK GAAP, no compensation costs associated with non-qualified stock option plans are recognized if the ~~value~~exercise price of the option at the date of grant is equal to or greater than the market value on that date.
43
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~~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%~~5% of market value at the date of grant.
      For a further explanation of the differences between UK GAAP and US GAAP see ~~Note~~note 34 to the consolidated financial statements. ~~RECENT U.S. ACCOUNTING PRONOUNCEMENTS~~
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 JanuaryDecember 2003, the FASB issued FIN ~~46 "Consolidation~~46R“Consolidation of Variable Interest Entities --— an interpretation of ARB No. ~~51"~~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 4646R 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~~entity’s activities or entitled to receive a majority of the ~~entity's~~entity’s residual returns, or both. ~~A revision (FIN 46R) was issued in December 2003 which deferred the~~The effective date for public companies tois 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'~~“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~~a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, ~~2003 under~~2004.
      In May 2004, the ~~transitional arrangements. Currently~~FASB issued FSP No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the ~~Group is evaluating FIN 46R for transactions entered into prior~~Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to ~~February 1,~~the Medicare Prescription Drug, Improvement and Modernization Act of 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 authoritative guidance on ~~when and how to separate elements of an arrangement that may involve~~accounting for the ~~delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance~~federal subsidy specified in the ~~consensus is effective~~Medicare Act. The Medicare Act provides for ~~revenue arrangements entered into~~a federal subsidy equal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning 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~~2006. The adoption of FSP 106-2 did not ~~expected to~~ have a material ~~effect~~impact on the financial position, ~~and~~cash flows or results of the Group under US ~~GAAP. RECENT UK AND INTERNATIONAL ACCOUNTING PRONOUNCEMENTS~~GAAP as at December 31, 2004.
      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Group is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material impact.
      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non monetary Assets — An Amendment of APB Opinion No. 29, Accounting for Non monetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after
44
June 15, 2005. The Group is currently evaluating the effect that the adoption of SFAS 153 will have but does not expect it to have a material impact.
      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Group is currently evaluating the impact of adoption of SFAS 123(R) will have, but because it already applies the requirements SFAS 123 it does not expect adoption of the new standard to have a material impact.
Recent UK and International Accounting Pronouncements
      In December, 2003, UITF 38 ~~"Accounting~~, “Accounting for ESOP ~~trusts"~~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'~~shareholders’ funds rather than being held as fixed asset investments. ~~This extract should be~~The Group adopted UITF 38 in 2004 and has re-stated the 2003 and 2002 comparatives accordingly (seen notes 24 and 34 in “Item 17. Financial Statements”).
      FRS 20 (IFRS 2), “Share-based payment”, was issued by the ASB on April 7, 2004. It is effective for ~~financial statements relating to~~listed entities for accounting periods ~~ending~~beginning on or after ~~June 22, 2004. The Group will adopt~~January 2005. It deals with the accounting ~~treatment required by this Abstract~~for transactions where an entity obtains goods or services from other parties (including employees or suppliers) in ~~its financial statements~~consideration for the ~~period ending December 31, 2004.~~entity’s equity instruments (including shares or share options) or cash-settled amounts based on the value of the entity’s equity instruments. It represents a significant change from current practice in the UK under UITF Abstract 17, where the charge is based on the intrinsic value of the share option (fair value of the share at the date of grant less exercise price). Use of the fair value of share options is expected to generally result in higher charges in the profit and loss account for share compensation. We are currently considering the impact of this standard.
      The following Financial Reporting Standards have recently been issued by the ASB. These accounting standards all mirror International Accounting Standards and will be adopted by the group as part of the transition to IFRS as noted below:
• FRS 21 (IAS 10), “Events after the balance sheet date”;
• FRS 22 (IAS 33), “Earnings per share”;
• FRS 23 (IAS 21), “The effects of changes in foreign exchange rates”;
• FRS 24 (IAS 29), “Financial reporting in hyperinflationary economies”;
• FRS 25 (IAS 32), “Financial instruments; presentation and disclosure”;
• FRS 26 (IAS 39), “Financial instruments; measurement”.
      In common with other listed companies governed by the law of an EU member state, for financial years beginning on or after January 1, 2005 the Group will be required to ~~comply~~prepare its financial statements in accordance with ~~International Financial Reporting Standards ("IFRS") with effect from January 1,~~international accounting standards adopted at the European level (endorsed IAS’s or IFRS’s). This requirement will therefore first be applicable to the Group’s financial statements for the year ended December 31, 2005. ~~An initial evaluation~~
      Full details of the impact of IFRS on the Group’s 2004 financial statements ~~of Pearson plc has been made. A program of work~~are available on our website,www.pearson.com/ifrs. The information on this website 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. not incorporated by reference into this report.
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ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ~~DIRECTORS AND SENIOR MANAGEMENT~~
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"~~“senior management”. 36
      The following table sets forth information concerning senior management, as of April ~~2004.~~ 2005.
~~NAME AGE POSITION - ---- --- --------~~
Name Age Position
Dennis ~~Stevenson.......................... 58~~ Stevenson 59 Chairman
Marjorie ~~Scardino......................... 57~~ Scardino 58 Chief Executive
David ~~Bell................................ 57~~ Bell 58 Director for People and Chairman of the FT Group
Terry ~~Burns............................... 60~~ Burns 61 Non-executive Director
Patrick ~~Cescau............................ 55~~ Cescau 56 Non-executive Director
Rona ~~Fairhead............................. 42~~ Fairhead 43 Chief Financial Officer ~~Peter Jovanovich.......................... 55 Chief Executive, Pearson Education~~
Susan Fuhrman 61 Non-executive Director
John ~~Makinson............................. 49~~ Makinson 50 Chairman and Chief Executive Officer, Penguin Group
Reuben ~~Mark............................... 65~~ Mark 66 Non-executive Director
Vernon ~~Sankey............................. 54~~ Sankey 55 Non-executive Director
Rana ~~Talwar............................... 56~~ Talwar 57 Non-executive Director
~~DENNIS STEVENSON~~
Dennis Stevensonwas appointed a non-executive director in 1986 and became chairman in 1997. He is a member of our treasury committee and chairman of the nomination committee. He is also chairman of HBOS plc and a non-executive director of Manpower Inc. in the US. ~~MARJORIE SCARDINO~~ On February 27, 2005 Pearson announced that Dennis intends to retire later in the year.
Marjorie Scardinojoined the board and became chief executive in January 1997. She is a member of our nomination committee. 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~~
David Bellbecame a director in March 1996. He is chairman of the FT Group, having been chief executive of theFinancial Timesfrom 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~~
Terry Burnsbecame a non-executive director in May 1999 and our senior independent director in February ~~this year.~~2004. He currently serves on the audit, nomination and personnel committees. He was the UK ~~government's~~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 Banco Santander Central Hispana and The British Land Company PLC. ~~PATRICK CESCAU~~
Patrick Cescaubecame a non-executive director in April 2002. He joined our audit committee in January this year, and is also a member of the nomination committee. 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~~Unilever’s Foods Division. He is ~~a director of Unilever plc and Unilever NV, and will become~~currently chairman of ~~Unilever plc and vice chairman of Unilever NV with effect from 30 September 2004. RONA FAIRHEAD~~ Unilever.
Rona Fairheadbecame 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.
46
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~~plc.
Susan Fuhrmanbecame a non-executive director in July 2004. She is a member of ~~Harvard Business School Publishing in~~our nomination committee. Susan is dean of Penn Graduate school of Education at the ~~US. PETER JOVANOVICH was appointed to the board in June 2002. He became chief executive~~University of ~~Pearson Education in 1998. Prior to this he was president~~Pennsylvania. She is a member of the ~~McGraw-Hill Educational and Professional Group, chairman~~Board of ~~Harcourt Brace Jovanovich and chief executive of Addison Wesley Longman Inc. He also serves on the board~~Trustees of the ~~Association~~Carnegie Foundation for the Advancement of ~~American Publishers~~Teaching, and ~~the board~~a member of the ~~Alfred Harcourt~~Council for Corporate and School Partnerships of the Coca-Cola Foundation. ~~JOHN MAKINSON~~
John Makinsonbecame 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.~~2002. He served as Pearson Finance Director from March 1996 until June 2002. From 1994 to 1996 he was managing 37 director of theFinancial 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~~
Reuben Markbecame a non-executive director in 1988 and currently serves on the audit ~~committee~~and nomination committees 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~~
Vernon Sankeybecame a non-executive director in 1993 and currently serves as chairman of the audit committee and as a member of the treasury ~~committee.~~and nomination committees. 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 and Zurich Financial Services ~~AG and a board member of the UK's Food Standards Agency. RANA TALWAR~~ AG.
Rana Talwarbecame a non-executive director in March 2000 and currently serves on the personnel, nomination 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~~
Compensation of Senior Management
      It is the role of the ~~Personnel Committee~~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~~
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~~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~~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~~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.
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      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~~
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
      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~~company’s policy that its benefit programs should be competitive in the context of the local ~~labour~~labor market, but as an international company we recognize the requirements, circumstances and mobility of individual executives. ~~ANNUAL BONUS~~
Annual Bonus
      The committee establishes the annual bonus plans for the executive directors, chief executives of the ~~company's~~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~~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,~~
      For 2005, the performance measures for Pearson plc are ~~likely to be drawn from those in previous years, namely~~sales, growth in underlying ~~sales and~~ adjusted earnings per share, ~~operating~~ cash ~~conversion~~flow and working capital as a ratio to ~~sales, and return on invested capital.~~sales. For subsequent years, the measures will be set at the time. ~~The~~
      For 2005, the committee reviewed the target annual bonus opportunity for the CEO, based on an assessment of market practice by Towers Perrin, and increased it from 75% to 100% of base salary.
      The committee is satisfied with the CEO’s resulting target total direct compensation relative to the market and the increase in the proportion of her compensation that is performance-related. The target annual incentive opportunity for the other executive directors and other members of the Pearson Management Committee isremains 75% of salary. ~~Individuals may receive up to twice their target~~The maximum bonus ~~(i.e. a maximum of 150% of salary) based on~~for performance in excess of ~~target.~~target remains in all cases, including the CEO, 150% of salary.
      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~~
Bonus Share Matching
      The company encourages executive directors and other senior executives to hold Pearson shares in many ways.
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      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~~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~~
The Long-Term Incentive Plan
      Executive directors, senior and other executives and managers are eligible to participate in ~~Pearson's~~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~~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 -
• 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;
• 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~~company’s earnings per share performance. No options may be granted unless the ~~company's~~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~~
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~~
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 terms of the agreements permit the company ~~may~~to terminate these agreements by giving 12 ~~months'~~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.
      For health reasons, 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 appointmentJovanovich stood down as a director of the company on January 31, 2005, but remains entitled to contractual short- and long-term disability and other benefits. These arrangements are set out in ~~June 2002. RETIREMENT BENEFITS~~an agreement dated January 28, 2005 between the company and Mr Jovanovich. The major terms of this agreement are set forth in “Item 10. Additional Information — material contracts”.
49
Retirement Benefits
      We describe ~~in turn~~ the retirement benefits for each of the executive directors. ~~MARJORIE SCARDINO has both~~
      Executive directors participate in the approved pension arrangements set up for Pearson employees. Marjorie Scardino, John Makinson, Rona Fairhead and Peter Jovanovich will also receive benefits under unapproved arrangements because of the cap on the amount of benefits that can be provided from the approved arrangements in the US and the UK.
      The pension arrangements for all the executive directors include life insurance cover while in employment, and entitlement to a pension in the event of ill-health or disability. A pension for their spouse and/or dependents is also available on death.
      In the US, the approved defined benefit ~~and defined contribution pension arrangements. The~~arrangement is the Pearson Inc. Pension ~~Plan (the US Plan) is an approved defined benefit~~Plan. This plan ~~providing~~provides a lump sum convertible to a pension on retirement.
      The lump sum is accrued at 6% of capped compensation ~~but~~until December 31, 2001 when further benefit 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 normalceased. Normal retirement is age ~~of 65. Early~~65 although early retirement ~~after age 55~~ is possible ~~with the company's consent and on~~subject to a ~~reduced pension. The US plan also provides~~reduction for early payment. No increases are guaranteed for pensions in payment. There is a ~~spouse's~~spouse’s pension on death in service ~~from age 55~~ and the option to provide a death in retirement ~~broadly equivalent to 50% of~~pension by reducing the ~~member's early retirement~~member’s pension.
      The ~~US plan does not guarantee any increases to~~approved defined contribution arrangement in the ~~pension once it comes into payment. DAVID BELL~~US is a ~~member~~401(k) plan. At retirement, the account balances will be used to provide benefits. In the event of death before retirement, the ~~Final Pay Section of~~account balances will be used to provide benefits for dependants.
      In the UK, the approved scheme is the Pearson Group Pension Plan ~~(the UK Plan), to which he contributes 5% of his pensionable salary. He is eligible for a pension from~~and executive directors participate in the ~~UK Plan of two-thirds of his final base salary at normal~~Final Pay section. Normal retirement age ~~(age 62) due~~is 62 but, subject to ~~his previous service with the Financial Times. Early~~company consent, retirement is possible after age 5050. The accrued pension is ~~possible, with company consent, and~~reduced on ~~a pension from the plan that is scaled down~~retirement prior 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.60. 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~~if lower. Pensions for a member’s spouse, dependent children and/or nominated financial dependent are payable in the event of death.
Marjorie Scardino
      Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan. Additional pension benefits will be provided through an unfunded unapproved defined contribution plan and a funded defined contribution plan approved by the UK Inland Revenue as a corresponding scheme to replace part of the unfunded plan. The account balance of the unfunded unapproved defined contribution plan is ~~lower. RONA FAIRHEAD~~determined by reference to the value of a notional cash account that increases annually by a specified notional interest rate. This plan provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is ~~also~~determined by reference to the market value of Pearson shares at the date of conversion.
David Bell
      David Bell is a member of the ~~Final Pay Section~~Pearson Group Pension Plan. He is eligible for a pension of two-thirds of his final base salary at age 62 due to his long service but early retirement with a reduced pension before that date is possible, subject to company consent.
Rona Fairhead
      Rona Fairhead is a member of the ~~UK Plan, but her~~Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary isper annum, restricted to the earnings cap introduced by the Finance Act 1989. ~~In addition, the~~The company also contributes ~~into~~to a Funded Unapproved Retirement Benefits Scheme ~~or FURBS. The UK Plan provides~~(FURBS) on her ~~with a pension that accrues at one-thirtieth~~behalf. In the event 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 account will be ~~paid at retirement. PETER JOVANOVICH has both defined benefit and defined contribution pension arrangements in~~used to provide benefits for her dependants.
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Peter Jovanovich
      Peter Jovanovich is a member of the ~~US. The~~ Pearson Inc. Pension Plan ~~(the US Plan) is an~~and the 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~~401(k) plan. He also participates in ~~this plan ceased on 31 December 2001. In addition, there is~~ an unfunded, unapproved Supplemental Executive Retirement Plan ~~(the US SERP) providing~~(SERP) that provides an annual ~~pension~~ accrual of 2% of final average earnings, less benefits accrued in the USPearson Inc. Pension Plan and US Social Security. ~~The~~He ceased to build up further benefits in the SERP at December 31, 2002. Additional defined contribution ~~arrangements~~benefits are ~~an approved 401(k) plan and~~provided through a funded, unapproved 401(k) excess ~~plan. For 2003, Peter Jovanovich's pension arrangements included a new~~plan and an unfunded, unapproved arrangement. In the event of death while in receipt of disability benefits, the account balances in the defined contribution ~~plan as his participation in the US~~arrangements will be used to provide benefits for dependants. The SERP ~~ceased. The US Plan has~~arrangement provides 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~~spouse’s pension on death while in ~~service from age 55~~receipt of disability benefits and the option of a death in retirement ~~broadly equivalent to 50% of~~pension by reducing the ~~member's early retirement~~member’s pension. ~~The US Plan does not guarantee any increases to the pension once it comes into payment. JOHN MAKINSON~~
John Makinson
      John Makinson is ~~also~~ a member of the ~~Final Pay Section of the UK~~Pearson Group Pension Plan ~~and~~under which his pensionable salary is ~~also~~ restricted to the earnings cap. The company ~~has been paying~~ceased contributions ~~into a FURBS, but the contributions ceased~~ on 31 December ~~2001.~~2001 to his FURBS arrangement. During 2002 ~~the company established~~it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pensions payable from the UKPearson Group Pension Plan and the closed FURBS to target a ~~target~~ pension of two-thirds of ~~Revalued Base Salary~~a revalued base salary on retirement at age 62. ~~Revalued Base Salary~~The revalued base salary is defined as ~~L450,000 indexed in line with~~£450,000 effective at June 1, 2002, increased at January 1, each year by reference to the increase in the Index of Retail Prices. ~~Early retirement after age 50 is possible, with company consent and based on~~In the event of his death a ~~uniform accrual from 1 April 1994. In that event, the~~ pension from the UKPearson Group Pension Plan, the FURBS and the UURBS ~~in aggregate~~ will be ~~scaled down 41~~ paid to his spouse or nominated financial dependant. Early retirement is possible from age 50, with company consent. The pension is reduced to reflect the shorter ~~period of~~ service, ~~completed. If retiring~~and 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 REMUNERATIONearly payment.
Chairman’s Remuneration
      Our policy is that the ~~chairman's~~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~~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~~
      For 2004, the ~~long-term incentive plans~~committee’s view was 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 intaking into account 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~~£425,000 per year.
      Having been informed of the ~~committee's~~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~~that the committee accepted. Instead, the committee recommended to the board that the ~~chairman's~~chairman’s salary should be ~~increased to L325,000 with effect from January 1,~~£325,000 for 2004, an increase of £50,000, and that he should receive a one-off restricted share award of 30,000 ~~shares in 2004.~~shares. This award is linked to the ~~company's~~company’s share price and will not be released to him unless the Pearson share price reaches ~~L9.00~~£9.00 within a maximum period of three years. ~~NON-EXECUTIVE DIRECTORS~~
      For 2005, the committee recommended to the board that the chairman’s salary should be increased towards the appropriate total pay level of £425,000 previously noted and that this increase should be delivered in Pearson shares purchased in the market at the prevailing share price. No awards of performance-related restricted shares will be granted. Full details will be set out in the report on directors’ remuneration for 2005.
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~~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~~company’s equity-based incentive plans. ~~Since January 2000,~~
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      For 2004, the non-executive directors ~~have~~ received an annual fee of ~~L35,000~~£35,000 each. ~~One overseas-based director is~~Two non-UK based directors were paid a supplement of ~~L7,000~~£7,000 per annum. The non-executive directors who ~~chair~~chaired the personnel and audit committees each ~~receive~~received an additional fee of ~~L5,000~~£5,000 per annum.
      In the case of Patrick Cescau, his fee iswas paid over to his employer. For those non-executive directors who ~~retain~~retained their fees personally, ~~L10,000~~£10,000 of the total fee, or all of the fee in the case of Rana Talwar, iswas payable in the form of Pearson shares which the non-executive directors have committed to retain for the period of their directorships.
      For 2005, the chairman and the executive directors of the board reviewed the level and structure of non-executive directors’ fees, which had not been changed since January 2000. After reviewing external benchmarks, they agreed an increase in the basic fee, an increase in the fee for the committee chairmen, the introduction of separate fees for committee membership and the senior independent director and the replacement of the fee for non-UK based directors with a fee for overseas meetings. One-third of the basic fee will be paid in Pearson shares. Full details will be set out in the report on directors’ remuneration for 2005.
      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~~
Remuneration of Senior Management
      Excluding contributions to pension funds and related benefits, senior management remuneration for ~~2003~~2004 was as follows:

Salaries/Fees Bonus(1) Other(2) Total

£’000 £’000 £’000 £’000
Chairman

Dennis Stevenson 325 — — 325
Executive directors

Marjorie Scardino 645 831 62 1,538
David Bell 375 483 16 874
Rona Fairhead 390 503 14 907
Peter Jovanovich 473 571 8 1,052
John Makinson 460 119 212 791

Senior management as a group
2,668 2,507 312 5,487

SALARIES/FEES BONUS(1) OTHER(2) TOTAL ------------- -------- -------- ----- L'000 L'000 L'000 L'000 ~~CHAIRMAN Lord Stevenson...................................... 275 -- -- 275 EXECUTIVE DIRECTORS~~
(1) For Marjorie ~~Scardino................................... 625 200 54 879~~Scardino, David ~~Bell.......................................... 360 115 16 491~~Bell and 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 ===== === === ===== Fairhead, bonuses were related to the performance of Pearson plc.
- --------------- (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,~~respectively and part to the performance ~~measures were~~of Pearson plc.
      For Pearson plc, growth in ~~underlying sales, trading margin, trading cash conversion~~adjusted earnings per share at constant exchange rates and average working capital as a ratio to ~~sales. (2) Other emoluments include company car~~sales were above maximum, and ~~healthcare benefits~~growth in underlying sales and operating cash conversion were above target but below maximum.
      For Pearson Education, average working capital as a ratio to sales and operating cash conversion were above maximum, and sales and operating margin were above target but below maximum.
      For Penguin Group, growth in underlying sales, operating margin, working capital as a ratio to sales and operating cash conversion were below threshold.
      In the case of ~~Marjorie Scardino, include L37,030~~Pearson plc and Pearson Education, cash received in ~~respect of housing costs. John Makinson is entitled to a location and market premium~~2004 in relation to the outstanding receivable due from the TSA contract in 2002 was not included for bonus purposes.
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(2) Other emoluments include company car and healthcare benefits and, in the case of Marjorie Scardino, include £37,955 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 £184,517 for 2004.
Share Options of ~~the business of the Penguin Group in the US. He received L206,586 for 2003. SHARE OPTIONS OF SENIOR MANAGEMENT~~Senior Management
      This table sets forth for each director the number of share options held as of December 31, ~~2003~~2004 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~~
Number of Exercise Earliest
Director Options (1) ~~EXERCISE PRICE EXERCISE DATE EXPIRY DATE - -------- --------- --- -------------- ------------- -----------~~ Price Exercise Date Expiry Date
Dennis ~~Stevenson..................... 2,512~~ Stevenson 3,556 b ~~687p~~ 494.8p 01/08/03 11 01/02/~~04 ------- TOTAL................................ 2,512 -- =======~~ 12
Total
3,556 —
Marjorie ~~Scardino....................~~ Scardino 176,556 a* a * 974p 14/09/01 14/09/08
5,660 a* 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* d * 1421p 09/05/02 09/05/11
41,550 d* 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................................~~
Total
540,194 ~~-- =======~~
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NUMBER OF EARLIEST DIRECTOR OPTIONS (1) EXERCISE PRICE EXERCISE DATE EXPIRY DATE - -------- --------- --- -------------- ------------- -----------
—
David ~~Bell...........................~~ Bell 20,496 a* 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
1,142 b 494.8p 01/08/07 01/02/08
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* d * 1421p 09/05/02 09/05/11
16,350 d* 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
Total
181,627 —
53

Number of Exercise Earliest
Director Options (1) Price Exercise Date Expiry Date

Rona Fairhead 1,904 b 494.8p 01/08/07 01/02/08
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
61,904 —

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 —

John Makinson 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
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
351,853 —

(1) Shares under option are designated as:aexecutive;bworldwide save for shares;cpremium priced; andd 822p 01/11/04 01/11/11 ------- TOTAL................................ 60,000 -- -------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.
54
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 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..................... 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 -- ======= Jovanovich participate in the Pearson US Employee Stock Purchase Plan saving the maximum amount of US$12,000 per annum.
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
Share Ownership 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 MANAGEMENTSenior 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.~~2005. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in ~~"Remuneration~~“Remuneration of Senior ~~Management"~~Management” and ~~"Share~~“Share Options for Senior ~~Management"~~Management”. The total number of ordinary shares held by senior management as of March 31, ~~2004~~2005 was ~~444,497~~571,754 representing less than 1% of the issued share capital on March 31, ~~2004.~~ 2005.

As at March 31, 2005 Ordinary Shares(1) Restricted Shares(2)

Dennis Stevenson 168,190 30,000
Marjorie Scardino 145,044 975,648
David Bell 84,106 455,969
Terry Burns 4,432 —
Patrick Cescau — —
Rona Fairhead 15,660 444,803
Susan Fuhrman 992 —
John Makinson 124,127 511,184
Reuben Mark 15,245 —
Vernon Sankey 4,287 —
Rana Talwar 9,671 —
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.
- --------------- (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
55
(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
Worldwide Save for Shares & US Employee Share Purchase Plans
      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~~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~~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~~over six month periods, at the end of ~~this period, the employee has~~which they have 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~~
Board Practices
      Our board currently comprises the chairman, who is part-time, ~~five~~four executive directors and ~~five~~six 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~~
Audit Committee
      Vernon Sankey chairs this committee and Terry Burns, Patrick Cescau 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~~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~~
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~~chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans. ~~NOMINATION COMMITTEE~~
56
Nomination Committee
      This committee is chaired by Dennis Stevenson and comprises Marjorie Scardino and all of the non-executive 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~~
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~~
Employees
      The average numbers of persons employed by us during each of the three fiscal years ended ~~2003~~2004 were as follows: ~~- 30,868 in fiscal 2003 - 30,359 in fiscal 2002, and - 29,027 in fiscal 2001. 47~~
• 33,389 in fiscal 2004
• 30,868 in fiscal 2003, and
• 30,359 in fiscal 2002.
      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~~2004 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 ===== ====== ===== ======

Business Unit UK US Other Total

Pearson Education 2,071 16,133 4,080 22,284
FT Group 1,709 1,352 2,594 5,655
The Penguin Group 1,067 2,026 992 4,085
Other 792 572 1 1,365

Total Pearson
5,639 20,083 7,667 33,389

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
      To our knowledge, as of March 31, ~~2004,~~2005, 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~~120,639,432 ordinary shares representing ~~14.0%~~15.0% of our outstanding ordinary shares, Franklin Resources Inc. which owned ~~56,515,055~~96,437,794 ordinary shares representing ~~7.04% of our outstanding ordinary shares, Telefonica Contenidos SA, which owned 38,853,403 ordinary shares representing 4.84%~~12.0% 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,~~March 31, 2005, record holders with registered addresses in the United States held ~~16,482,527~~20,196,877 ADRs, which represented ~~2.05%~~2.5% 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.
      Loans and equity advanced to joint ventures and associates during the year and as at December 31, 2004 are shown in notes 13 and 14 in “Item 17. Financial Statements.”. Amounts due from joint ventures and associates are set out in note 17 and dividends receivable from joint ventures and associates are set out in notes 13 and 14 in “Item 17. Financial Statements”. There were no other related party transactions in 2004.
57
ITEM 8.     FINANCIAL INFORMATION
      The financial statements filed as part of this Annual Report are included on pages F-1 through ~~F-63~~F-69 hereof.
      Other than those events described in ~~Note~~note 31 in “Item 17. Financial Statements” 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~~“Item 3. Key ~~Information"~~Information” above. ~~LEGAL PROCEEDINGS~~
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"~~“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 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.
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Ordinary Shares
Average Daily
Reference Period High Low Trading Volume

(Ordinary
(In pence) shares)
Five Most Recent Fiscal Years

2004 682 579 6,219,200
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
Most Recent Quarter and Two Most Recent Fiscal Years

2005 First quarter 662 608 5,626,100
2004 Fourth quarter 640 590 5,020,800
Third quarter 657 579 5,864,300
Second quarter 682 623 6,993,900
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
Most Recent Six Months

May 2005 666 635 7,486,700
April 2005 655 628 6,085,700
March 2005 647 626 7,654,100
February 2005 662 623 4,800,100
January 2005 638 608 4,124,200
December 2004 630 603 3,122,200
ITEM 10.     ADDITIONAL INFORMATION
Memorandum 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~~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~~our annual ~~report.~~report on Form 20-F for the year ended December 31, 2003. The summary below is qualified entirely by reference to the Memorandum and Articles of Association. 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~~
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~~
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
59
director so contracting or being interested shall be liable to account to us for any profit ~~realised~~realized 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~~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 -
• 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~~
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~~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~~
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~~£500,000 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'~~
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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 -
• 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~~
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~~
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'~~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'~~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
61
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~~
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 -
• 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~~
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
• 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~~
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~~
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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 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 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~~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~~
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~~
Material Contracts
      The following summaries are not intended to be complete and reference is made to the contracts themselves, which are included, or incorporated by reference, 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~~
Issuance of $350,000,000 4.70% Guaranteed Senior Notes due 2009 and $400,000,000 5.70% Guaranteed Senior Notes due 2014
      Our wholly-owned subsidiary, Pearson Dollar Finance plc, issued $350 million principal amount of 4.70% senior notes due 2009 and $400 million principal amount of 5.70% senior notes due 2014, in each case
63
fully and unconditionally guaranteed by Pearson plc, under an indenture dated May 25, 2004 between Pearson Dollar Finance plc, Pearson plc and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 1, 2004. Pearson Dollar Finance may redeem the notes at any time, in whole or in part, at its option.
      The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), 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. In the event of an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the principal of all outstanding notes shall become due and payable immediately.
      The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.
Issuance of $300,000,000 4.625% ~~SENIOR NOTES DUE~~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 insolvency or bankruptcy of us or a principal subsidiary (as defined in the indenture), 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 listed or traded on an exchange. ~~EXECUTIVE EMPLOYMENT CONTRACTS~~
Agreement to Sell Shares of Recoletos Grupo de Comunicación, S.A. to Retos Cartera, S.A.
      We entered into an irrevocable undertaking on December 14, 2004 with Retos Cartera, S.A., with respect to the sale of our 79% stake in Recoletos Grupo de Comunicacion, S.A. Pursuant to the irrevocable undertaking, we agreed to sell our shares in Recoletos to Retos Cartera for the price set forth in its concurrent tender offer to all shareholders of Recoletos. On April 8, 2005, Retos Cartera successfully completed its tender for 100% of the shares of Recoletos, and paid us net cash proceeds of £372 million for our 79% stake.
      Retos Cartera also agreed to pay us additional deferred consideration in the event that it, or one of its affiliates, disposes of its shares in, or the assets of, Recoletos, for a period of 18 months after the closing of the tender offer. The obligation to pay deferred consideration is subject to certain limitations. The parties have made representations and warranties to each other that are customary for a transaction of this type. We have agreed to indemnify Retos Cartera for any breach of a representation or warranty, and both parties have agreed to be liable for losses associated with a breach of its obligations in the irrevocable undertaking.
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~~“Item 6. Directors, Senior Management & Employees --— Compensation of Senior ~~Management"~~Management”. Each agreement may be terminated by us on 12 ~~months'~~months’ notice or by the executive director on six ~~months'~~months’ notice. In the event we terminate any executive director without giving the full 12 ~~months'~~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~~
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Agreement with Peter Jovanovich
      On January 28, 2005, we entered into a letter agreement with Peter Jovanovich with respect to his ~~service~~employment with Pearson Education and its affiliates. Due to poor health, Mr. Jovanovich terminated his employment with us. The letter 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~~sets forth the terms ~~agreed with him in~~of his ~~employment~~disability leave and ~~confirmed in October 2000 before~~confirms his ~~appointment as a director~~existing disability benefits, including benefits under our short term disability plan, long-term disability plan, and supplemental long-term disability plan. Under the terms of the ~~company. EXCHANGE CONTROLS~~agreement, Mr. Jovanovich will receive standard benefits (except awards under Pearson plc stock plans), and thereafter, will receive coverage under our medical, dental and vision plans and our life insurance plan, plus a payment for unused vacation days. We have agreed to continue to credit Mr. Jovanovich’s individual defined contribution arrangement. We also agreed to pay him his 2004 annual bonus. The value of Mr. Jovanovich’s disability package, and his total remuneration for our 2004 financial year, is included in “Item 6. Directors and Senior Management”.
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"~~Considerations” below. ~~TAX CONSIDERATIONS~~
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
• 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.
      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"
• 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
65
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~~“New Income Tax ~~Treaty"~~Treaty”). The ~~New Income Tax Treaty replaced~~discussions below regarding US residents are based on 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 datesarticles 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~~
Because US ~~AND~~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 THEtax 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,~~federal, state and local, UK ~~AND OTHER, INCLUDING FOREIGN, TAX CONSEQUENCES OF INVESTING IN THE ORDINARY SHARES OR ADSS. THE STATEMENTS OF~~and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. The statements of US ~~AND~~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.~~ 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~~Income Taxation of Distributions
      The United Kingdom does not impose dividend withholding tax on dividends paid to US holders.
US ~~INCOME TAXATION OF DISTRIBUTIONS~~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~~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~~
      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~~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.
66
US ~~INCOME TAXATION OF CAPITAL GAINS~~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~~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~~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~~
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~~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~~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~~
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~~£5.00 per instrument of transfer. ~~CLOSE COMPANY STATUS~~
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~~
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.
67
ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~INTRODUCTION~~
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~~2004 we ~~sought to gain qualification~~qualified for hedge accounting under US GAAP ~~for~~on a limited number of our key derivative ~~contracts, but did not meet the prescribed hedge designation requirements.~~contracts.
      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~~note 19 in “Item 17. Financial Statements” for discussion of treasury policy in these areas. 57 ~~INTEREST RATES~~
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~~
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.
68
      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~~2004 the split of aggregate net borrowings in core currencies was US dollar ~~81%~~88%, euro ~~10%~~7% and sterling 9%5%. 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~~
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'~~shareholders’ funds and other accounting values.
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 2004, unlike 2003 and 2002, the Group qualified for hedge accounting under US GAAP in respect of a number of its key derivative contracts. The remainder of our derivatives did not meet the prescribed designation requirements and hedge effectiveness tests under US GAAP, 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, none of these were trading instruments and each was transacted solely to match an underlying financial exposure.
69
ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
      Not applicable. 59
PART II ~~ITEM 13.~~
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
      None. ~~ITEM 14.~~
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
      Not applicable. ~~ITEM 15.~~
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~~2004 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~~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~~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. We recently identified a US GAAP adjustment, to reflect the correct accounting treatment of incentives and fixed rental escalations under one of our leases, which we consider to be material. The US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 have been restated accordingly. This restatement is discussed on page F-56 and has the effect of reducing our US GAAP profit for the 2003 and 2002 financial years by £14 million and £12 million pre tax (£10 million and £9 million post tax), respectively, and reducing the Company’s shareholders’ funds reported as of December 31, 2003 and 2002 by £26 million and £12 million pre tax (£19 million and £9 million post tax), respectively, from amounts previously reported. No adjustments are required in respect of the Company’s primary UK GAAP financial statements and no issues of governance arise as a consequence of making these adjustments. The Chief Executive Officer and Chief Financial Officer believe that the need for this restatement constitutes a significant control deficiency but not a material control weakness (as such terms are used in the US federal securities laws) for the period under review. This conclusion is based on the fact that control procedures have improved year on year leading to the identification and correction of the issues for the 2004 year end.
      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~~or 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.~~Officer and other senior financial
70
management. 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~~Deputy Chief Financial Officer can procure pre-approved services, as defined in the audit ~~committee's~~committee’s policy for auditor services, of up to amount of ~~L100,000~~£100,000 per engagement, subject to a cumulative limit of ~~L500,000~~£500,000 per year. The limit of ~~L100,000~~£100,000 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~~audit committee prior to the engagement of our auditor.

Auditors’ Remuneration 2004 2003

£m £m
Statutory audit and audit-related regulatory reporting services 4 3
Non-audit services 2 2
Non-audit services were as follows:
Tax compliance services 1 1
Tax advisory services 1 1
AUDITORS' REMUNERATION 2003 2002 - ---------------------- ---- ---- LM LM ~~Statutory~~
Note Included in statutory audit ~~and audit-related~~fees are amounts relating to the parent company of £20,000 (2003: £20,000). Audit-related regulatory reporting ~~services.................................................. 3 3~~fees are £225,000 (2003: £200,000). Non-audit ~~services.......................................... 2 3 Non-audit~~fees in the UK in 2004 are £1,000,000 (2003: £341,000) and are in respect of tax advisory and tax compliance services ~~were as follows: Tax compliance services..................................... 1 2 Tax~~and other advisory ~~services....................................... 1 1~~ services. The remainder of the non-audit fees relate to overseas subsidiaries.
- --------------- 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~~
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
Maximum number
Total number of of shares that
units purchased may yet be
as part of publicly purchased under
Total number of Average price announced plans the plans or
Period shares purchased paid per share or programs programs
April 1, 2004 - April 30, 2004 170,850 £6.65 N/A N/A
May 1, 2004 - May 31, 2004 85,510 £6.75 N/A N/A
      Purchases of shares were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None of the foregoing share purchases was made as part of a publicly announced plan or program.
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~~F-69 hereof.
71
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.†
2.2 Indenture dated May 25, 2004 among Pearson Dollar Finance plc, as Issuer, Pearson plc, Guarantor, and the Bank of New York, as Trustee, Paying Agent and Calculation Agent.
4.1 Letter Agreement dated ~~October 9, 2000~~January 28, 2005 between Pearson plc and Peter ~~Jovanovich.#~~ Jovanovich.
4.2 Irrevocable undertakings in respect of an offer by Retos Cartera, for the shares of Recoletos Grupo de Communicación, dated December 14, 2004 between Pearson plc and Retos Cartera.
8.1 List of Significant Subsidiaries.
10 Consent of PricewaterhouseCoopers LLP.
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
† Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004.
72
~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~PAGE ----~~
Page
Report of Independent ~~Auditors..............................~~ Registered Public Accounting Firm F-2
Consolidated Profit and Loss Account for the Year Ended December 31, ~~2003.........................................~~ 2004 F-3
Consolidated Balance Sheet as at December 31, ~~2003..........~~ 2004 F-4
Consolidated Cash Flow Statement for the Year Ended December 31, ~~2003..................................................~~ 2004 F-5
Statement of Total Recognized Gains and Losses for the Year Ended December 31, ~~2003...................................~~ 2004 F-6
Reconciliation of Movements in Equity ~~Shareholders'~~Shareholders’ Funds for the Year Ended December 31, ~~2003......................~~ 2004 F-6
Notes to the ~~Accounts....................................... F-7~~ Accounts F-8
~~F-1~~
~~REPORT OF INDEPENDENT ~~AUDITORS~~ REGISTERED PUBLIC ACCOUNTING FIRM~~
~~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'~~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~~2004 and ~~2002,~~2003, and the results of their operations and their cash flows for each of the three years in the period ended 31 December ~~2003,~~2004, in conformity with accounting principles generally accepted in the United Kingdom. These financial statements are the responsibility of the ~~Company's~~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~~of the ~~United States of America, which~~Public Company Accounting Oversight Board (United States). Those standards 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~~audits provide a reasonable basis for our opinion.
      As discussed in note 1, the Company changed its method of accounting for employee share ownership trusts and employee share schemes in accordance with the accounting principles generally accepted in the United Kingdom. The change has been accounted for by restating comparative information at December 31, 2003 and 2002 and for the years then ended.
      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~~note 34, as restated, 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~~~~
~~June 27, ~~2004~~ 2005~~
~~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
2004
~~(All figures in £ millions)~~

Note 2004 2003 2002

Sales (including share of joint ventures)
3,940 4,066 4,331
Less: share of joint ventures (21 ) (18 ) (11 )

Sales of which
2a 3,919 4,048 4,320
Continuing operations 3,729 3,879 4,172
Discontinued operations 31 190 169 148
Group operating profit of which
221 226 194
Continuing operations 210 206 180
Discontinued operations 31 11 20 14
Share of operating profit of joint ventures and associates of which
2c/d 10 — (51 )
Continuing operations 8 (2 ) (47 )
Discontinued operations 31 2 2 (4 )

Total operating profit
2b 231 226 143

Continuing operations
Profit/(loss) on sale of fixed assets and investments 4a 12 (2 ) (11 )
Loss on sale of subsidiaries and associates 4b (3 ) (4 ) (45 )
Discontinued operations
Loss on sale of fixed assets and investments 4a — — (2 )
Profit on sale of subsidiaries and associates 4b — 12 18
Profit on sale of a subsidiary by an associate 4c — — 3

Non operating items
9 6 (37 )

Profit before interest and taxation
240 232 106
Net finance costs 5 (69 ) (80 ) (131 )

Profit/(loss) before taxation
171 152 (25 )
Taxation 7 (62 ) (75 ) (64 )

Profit/(loss) after taxation
109 77 (89 )
Equity minority interests (21 ) (22 ) (22 )

Profit/(loss) for the financial year
88 55 (111 )
Dividends on equity shares
8 (201 ) (192 ) (187 )

Loss retained
(113 ) (137 ) (298 )

Basic earnings per share
9 11.1 p 6.9 p (13.9 )p
Diluted earnings per share
9 11.0 p 6.9 p (13.9 )p
Dividends per share
8 25.4 p 24.2 p 23.4 p
~~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 2004~~
~~(All figures in £ millions)~~

2003
Note 2004 restated

Fixed assets

Intangible assets 11 2,890 3,260
Tangible assets 12 473 468
Investments: joint ventures 13
Share of gross assets 9 7
Share of gross liabilities (2 ) (1 )

7 6
Investments: associates 14 41 58
Investments: other 15 17 21

3,428 3,813

Current assets

Stocks 16 676 683
Debtors 17 1,103 1,132
Deferred taxation 21 165 145
Investments 1 2
Cash at bank and in hand 18 613 561

2,558 2,523

Creditors — amounts falling due within one year

Short-term borrowing 19 (107 ) (575 )
Other creditors 20 (1,168 ) (1,129 )

(1,275 ) (1,704 )

Net current assets
1,283 819

Total assets less current liabilities
4,711 4,632
Creditors — amounts falling due after more than one year

Medium and long-term borrowing 19 (1,712 ) (1,347 )
Other creditors 20 (60 ) (45 )

(1,772 ) (1,392 )

Provisions for liabilities and charges
22 (123 ) (152 )

Net assets
2,816 3,088

Capital and reserves

Called up share capital 23 201 201
Share premium account 24 2,473 2,469
Profit and loss account 24 (71 ) 223

Equity shareholders’ funds 2,603 2,893
Equity minority interests 213 195

2,816 3,088

The 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 ====== ======
and 2002 comparatives have been restated for the adoption of UITF 38 (see note 24).
~~The company balance sheet is shown in note 32.~~
~~The financial statements were approved by the board of directors on 27 February ~~2004~~2005 and signed on its behalf by~~
Dennis Stevenson, Chairman
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) ==== ==== ====
2004
~~(All figures in £ millions)~~

2003 2002
Note 2004 restated restated

Net cash inflow from operating activities
27 530 359 529

Dividends from joint ventures and associates
10 9 6

Interest received 13 11 11
Interest paid (97 ) (86 ) (151 )
Debt issue costs (1 ) (1 ) —
Dividends paid to equity minority interests (2 ) (19 ) (1 )

Returns on investments and servicing of finance
(87 ) (95 ) (141 )

Taxation
(45 ) (44 ) (55 )

Purchase of tangible fixed assets (125 ) (105 ) (126 )
Sale of tangible fixed assets 4 8 7
Purchase of investments (1 ) (3 ) (3 )
Sale of investments 17 — 3

Capital expenditure and financial investment
(105 ) (100 ) (119 )

Purchase of subsidiaries 25 (35 ) (94 ) (87 )
Net cash acquired with subsidiaries — 34 1
Purchase of joint ventures and associates (10 ) (5 ) (40 )
Sale of subsidiaries 26 — (4 ) 3
Net overdrafts disposed with subsidiaries 1 1 (1 )
Sale of associates 24 57 920

Acquisitions and disposals
(20 ) (11 ) 796

Equity dividends paid
(195 ) (188 ) (181 )

Net cash inflow/(outflow) before management of liquid resources and financing
88 (70 ) 835
Liquid resources acquired 1 (85 ) (65 )
Collateral deposit reimbursed — — 22

Management of liquid resources
1 (85 ) (43 )

Issue of equity share capital 4 5 6
Purchase of own shares (10 ) (1 ) (18 )
Capital element of finance leases (2 ) (3 ) (5 )
Loan facility (repaid)/advanced (42 ) 1 (507 )
Bonds advanced 414 180 —
Bonds repaid (456 ) (159 ) (167 )
Collateral deposit (placed)/reimbursed (26 ) 54 17
Net movement in other borrowings 59 (13 ) (7 )

Financing
(59 ) 64 (681 )

Increase/(decrease) in cash in the year
27 30 (91 ) 111

~~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) ==== ==== ====
2004
~~(All figures in £ millions)~~

Note 2004 2003 2002

Profit/(loss) for the financial year 88 55 (111 )
Other net gains and losses recognised in reserves
Exchange differences (181 ) (254 ) (315 )
Taxation on exchange differences 5 — 5

Total recognised gains and losses relating to the year
(88 ) (199 ) (421 )

Prior year adjustment 24 37 — 209

Total recognised gains and losses
(51 ) (199 ) (212 )

Included within profit/(loss) for the financial year is a loss ~~for the year~~ of ~~L10m (2002:~~£7m (2003: loss of ~~L13m)~~£10m) relating to joint ventures and a profit of ~~L6m (2002: a loss~~£15m (2003: profit of ~~L39m)~~£13m) relating to associates. ~~The prior year adjustment in 2002 related to the adoption of FRS 19 "Deferred tax".~~
~~RECONCILIATION OF MOVEMENTS IN EQUITY ~~SHAREHOLDERS'~~SHAREHOLDERS’ FUNDS~~
~~YEAR ENDED 31 DECEMBER 2004~~
~~(All figures in £ millions)~~

2003 2002
Note 2004 restated restated

Profit for the financial year 88 55 (111 )
Dividends on equity shares (201 ) (192 ) (187 )

(113 ) (137 ) (298 )

Exchange differences net of taxation (176 ) (254 ) (310 )
Goodwill written back on sale of subsidiaries and associates — — 144
Shares issued 4 5 6
Purchase of own shares (10 ) (1 ) (18 )
Replacement options granted on acquisition of subsidiary — — 1
UITF 17 charge for the year 5 4 7

Net movement for the year (290 ) (383 ) (468 )
Equity shareholders’ funds at beginning of the year 2,893 3,276 3,797
Prior year adjustment — UITF 38 24 — — (53 )

Equity shareholders’ funds at end of the year
2,603 2,893 3,276

Restatement
      The Company has restated its UK GAAP shareholders’ funds for the financial years ended December 31, 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 ===== ===== =====
and 2002 for adoption of UITF Abstract 38 “Accounting for ESOP trusts’. This has reduced shareholders’ funds as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).
      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect a revised accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentive was recognized in the profit and loss account over the period during which the lease incentive was applicable until the lease returned to a market level. Additionally, future market-based rent increases were charged to the profit and loss account as they
~~F-6~~
became applicable under the terms of the lease. Both the lease incentives and market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the profit reported under US GAAP for the 2003 and 2002 financial years has been reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from amounts previously reported.
~~F-7~~
~~NOTES TO THE ACCOUNTS 1~~
1 ACCOUNTING POLICIES
      Accounting policies have been consistently applied except that UITF 38 ’Accounting for ESOP trusts’ and the ~~amendment to FRS 5 -- Application Note G "Revenue recognition" has been applied in respect~~revision 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~~UITF 17 ~~"Retirement benefits" which require additional disclosures in respect of retirement benefits~~‘Employee share schemes’ have been adopted ~~as set out~~in these statements. The adoption of these standards represents a change in accounting policy and the comparative figures have been restated accordingly. The effect of these changes in accounting policy is disclosed in note ~~10. A. BASIS OF ACCOUNTING --~~24.
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 --~~
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~~Group’s share of the results of joint ventures and associates, and the consolidated balance sheet includes the ~~Group's~~Group’s interest in joint ventures and associates at the book value of attributable net assets and attributable goodwill. ~~C. 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 --~~
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.~~title passes. 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,~~multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised ~~over~~as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract ~~term based~~requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on ~~the~~a percentage of ~~services provided during the period, compared to the total estimated services to be provided over the entire contract.~~completion basis. 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.
~~F-8~~
~~NOTES TO THE ACCOUNTS (Continued)~~
      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 --~~
e. Pension costs — The regular pension cost of the ~~Group's~~Group’s defined benefit pension schemes is charged to the profit and loss account in accordance with SSAP 24 ~~"Accounting~~‘Accounting for pension ~~costs"~~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~~Group’s defined contribution schemes is the amount of contributions payable for the year. ~~F. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS --~~
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 --~~
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 --~~
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 --~~charged to the profit and loss account on a straight-line basis over the duration of each lease term.
i. Fixed asset investments — Fixed asset investments are stated at cost less provisions for diminution in value. ~~J. SHARE SCHEMES --~~
j. Share schemes — Shares held by employee share ownership trusts are shown at cost ~~less any provision for permanent diminution~~and recorded as a deduction in ~~value.~~arriving at shareholders’ funds. 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~~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~~adjustment to the charge is made. ~~K. STOCKS --~~
k. Stocks — Stocks and work in progress are stated at the lower of cost and net realisable value. ~~L. PRE-PUBLICATION COSTS --~~
l. Pre-publication costs — Pre-publication costs represent direct costs incurred in the development of educational programmes and 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 --~~
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 --~~
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 --~~
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
~~F-9~~
~~NOTES TO THE ACCOUNTS (Continued)~~
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 --
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 --~~~~
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)~~$1.83 (2003: $1.63) and the year end rate was ~~$1.79 (2002: $1.61)~~$1.92 (2003: $1.79). ~~R. LIQUID RESOURCES --~~
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 --~~
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~~
~~F-10~~
~~NOTES TO THE ACCOUNTS ~~(CONTINUED) 2A~~ (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~~

2004 2003 2002

(All figures in £ millions)
Business sectors

Pearson Education 2,356 2,451 2,756
FT Group 587 588 578
The Penguin Group 786 840 838

Continuing operations 3,729 3,879 4,172
Discontinued operations 190 169 148

3,919 4,048 4,320

Geographical markets supplied

United Kingdom 545 474 411
Continental Europe 300 294 271
North America 2,505 2,742 3,139
Asia Pacific 261 255 249
Rest of world 118 114 102

Continuing operations 3,729 3,879 4,172
Discontinued operations 190 169 148

3,919 4,048 4,320

2004 2003 2002

Total Inter- Total Total Inter- Total Total Inter- Total
by source regional sales by source regional sales by source regional sales

(All figures in £ millions)
Geographical source of sales

United Kingdom 802 (57 ) 745 751 (60 ) 691 644 (25 ) 619
Continental Europe 174 (1 ) 173 166 — 166 156 (4 ) 152
North America 2,499 (2 ) 2,497 2,721 (2 ) 2,719 3,144 (36 ) 3,108 ��
Asia Pacific 225 (2 ) 223 230 (1 ) 229 226 (2 ) 224
Rest of world 93 (2 ) 91 74 — 74 69 — 69

Continuing operations 3,793 (64 ) 3,729 3,942 (63 ) 3,879 4,239 (67 ) 4,172
Discontinued operations 190 — 190 169 — 169 148 — 148

3,983 (64 ) 3,919 4,111 (63 ) 4,048 4,387 (67 ) 4,320

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~~2004 is an amount of ~~L127m~~£10m attributable to acquisitions made during the year. ~~F-10~~
F-11
NOTES TO THE ACCOUNTS ~~(CONTINUED) 2B~~(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~~

2004

Results from Integration Goodwill Goodwill Operating
operations costs amortisation impairment profit

(All figures in £ millions)
Business sectors

Pearson Education 293 — (174 ) — 119
FT Group 86 (20 ) 66
The Penguin Group 54 — (21 ) — 33

Continuing operations 433 — (215 ) — 218
Discontinued operations 22 — (9 ) — 13

455 — (224 ) — 231

Geographical markets supplied

United Kingdom (26 ) — (30 ) — (56 )
Continental Europe 21 — (2 ) — 19
North America 393 — (177 ) — 216
Asia Pacific 31 — (5 ) — 26
Rest of world 14 — (1 ) — 13

Continuing operations 433 — (215 ) — 218
Discontinued operations 22 — (9 ) — 13

455 — (224 ) — 231

2003

Results from Integration Goodwill Goodwill Operating
operations costs amortisation impairment profit

(All figures in £ millions)
Business sectors

Pearson Education 313 — (207 ) — 106
FT Group 58 — (30 ) — 28
The Penguin Group 91 — (21 ) — 70

Continuing operations 462 — (258 ) — 204
Discontinued operations 28 — (6 ) — 22

490 — (264 ) — 226

Geographical markets supplied

United Kingdom (46 ) — (31 ) — (77 )
Continental Europe 1 — (4 ) — (3 )
North America 466 — (218 ) — 248
Asia Pacific 33 — (5 ) — 28
Rest of world 8 — — — 8

Continuing operations 462 — (258 ) — 204
Discontinued operations 28 — (6 ) — 22

490 — (264 ) — 226

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................ 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~~(Continued)

2002

Results from Integration Goodwill Goodwill Operating
operations costs amortisation impairment profit

(All figures in £ millions)
Business sectors

Pearson Education 326 (7 ) (244 ) — 75
FT Group 51 — (49 ) (10 ) (8 )
The Penguin Group 87 (3 ) (18 ) — 66

Continuing operations 464 (10 ) (311 ) (10 ) 133
Discontinued operations 29 — (19 ) — 10

493 (10 ) (330 ) (10 ) 143

Geographical markets supplied

United Kingdom (72 ) (5 ) (9 ) — (86 )
Continental Europe 11 — (8 ) — 3
North America 495 (5 ) (288 ) — 202
Asia Pacific 31 — (6 ) — 25
Rest of world (1 ) — — (10 ) (11 )

Continuing operations 464 (10 ) (311 ) (10 ) 133
Discontinued operations 29 — (19 ) — 10

493 (10 ) (330 ) (10 ) 143

Note Discontinued operations relate to the disposal of the ~~Dorling Kindersley and NCS acquisitions. Integration costs, goodwill amortisation and goodwill impairment are included as "other items"~~Group’s interest in ~~the profit and loss account. Discontinued operations related to the withdrawal of the Group from the television business.~~Recoletos, see note 31. Included within operating profit for ~~2003~~2004 is an amount of ~~L12m~~£1m attributable to acquisitions made during the year. 2C
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~~

2004

Results from Goodwill Operating
operations amortisation profit/(loss)

(All figures in £ millions)
Business sectors

Pearson Education — — —
FT Group (8 ) — (8 )
The Penguin Group 1 — 1

Continuing operations (7 ) — (7 )

2003

Results from Goodwill Operating
operations amortisation profit/(loss)

(All figures in £ millions)
Business sectors

Pearson Education — — —
FT Group (11 ) — (11 )
The Penguin Group 1 — 1

Continuing operations (10 ) — (10 )

F-13
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(Continued)

2002

Results from Goodwill Operating
operations amortisation profit/(loss)

(All figures in £ millions)
Business sectors

Pearson Education (1 ) — (1 )
FT Group (13 ) — (13 )
The Penguin Group 1 — 1

Continuing operations (13 ) — (13 )

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~~

2004

Results from Goodwill Operating
operations amortisation profit

(All figures in £ millions)
Business sectors

Pearson Education 1 — 1
FT Group 14 — 14
The Penguin Group — — —

Continuing operations 15 — 15
Discontinued operations 2 — 2

17 — 17

2003

Results from Goodwill Operating
operations amortisation profit

(All figures in £ millions)
Business sectors

Pearson Education 1 — 1
FT Group 14 (7 ) 7
The Penguin Group — — —

Continuing operations 15 (7 ) 8
Discontinued operations 2 — 2

17 (7 ) 10

2002

Results from Goodwill Operating
operations amortisation profit

(All figures in £ millions)
Business sectors

Pearson Education 3 (1 ) 2
FT Group 7 (43 ) (36 )
The Penguin Group — — —

Continuing operations 10 (44 ) (34 )
Discontinued operations — (4 ) (4 )

10 (48 ) (38 )

F-14
NOTES TO THE ACCOUNTS ~~(CONTINUED) 2E~~(Continued)
2e     ANALYSIS OF CAPITAL EMPLOYED

2003
2004 restated

(All figures in
£ millions)
Business sectors

Pearson Education 3,059 3,457
FT Group 198 256
The Penguin Group 593 591

Continuing operations 3,850 4,304
Discontinued operations 130 152

3,980 4,456

Geographical location

United Kingdom 410 425
Continental Europe 58 62
North America 3,245 3,676
Asia Pacific 114 120
Rest of world 23 21

Continuing operations 3,850 4,304
Discontinued operations 130 152
��
3,980 4,456

2003
Note 2004 restated

(All figures in
£ millions)
Reconciliation of capital employed to net assets

Capital employed 3,980 4,456
Add: deferred taxation 21 165 145
Less: provisions for liabilities and charges 22 (123 ) (152 )
Less: net debt excluding finance leases 27 (1,206 ) (1,361 )

Net assets 2,816 3,088

F-15
NOTES TO THE ACCOUNTS (Continued)
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
3 ANALYSIS 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 ====== ====== CONSOLIDATED PROFIT AND LOSS ACCOUNT
~~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~~

2004 2003 2002

(All figures in £ millions)
Cost of sales
(1,866 ) (1,910 ) 2,064

Gross profit
2,053 2,138 2,256

Distribution costs (243 ) (239 ) (233 )
Administration and other expenses (1,635 ) (1,724 ) (1,888 )
Other operating income 46 51 59

Net operating expenses
(1,832 ) (1,912 ) (2,062 )

Analysed as
Net operating expenses — before other items (1,608 ) (1,655 ) (1,760 )
Net operating expenses — other items
— Integration costs — — (10 )
— Goodwill amortisation (224 ) (257 ) (282 )
— Goodwill impairment — — (10 )

Net operating expenses
(1,832 ) (1,912 ) (2,062 )

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 above are the following amounts in respect of discontinued operations: cost of sales £61m (2003: £53m), distribution costs £40m (2003: £33m) and administration and other expenses £66m (2003: £55m).

2004 2003 2002

(All figures in £ millions)
Other operating income

Income from other investments
Unlisted — 4 2
Other operating income (mainly royalties, rights and commission income) 46 47 57

46 51 59

Profit/(loss) before taxation is stated after charging

Amortisation of pre-publication costs 168 158 170
Depreciation 102 111 122
Operating lease rentals
— Plant and machinery 9 14 11
— Properties 97 113 101
— Other 13 9 13
Auditors’ remuneration
Statutory audit and audit-related regulatory reporting services 4 3 3
Non-audit services 2 2 3
Non-audit services were as follows

Tax compliance services 1 1 2
Tax advisory services 1 1 1
Note Included in statutory audit fees are amounts relating to the parent company of ~~L20,000 (2002: L20,000)~~£20,000 (2003: £20,000). Audit-related regulatory reporting fees relating to the parent company are ~~L200,000 (2002: L200,000).~~£225,000 (2003: £200,000) and £600,000 (2003: £nil) relating to overseas subsidiaries. Non-audit fees in the UK in ~~2003~~2004 are ~~L341,000 (2002: L231,000)~~£1m (2003:
F-16
NOTES TO THE ACCOUNTS (Continued)
£341,000) and are in respect of tax advisory, ~~and~~ tax compliance services and other advisory services. The remainder of the non-audit fees relate to overseas subsidiaries. ~~4A LOSS~~
4a     PROFIT/(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

2004 2003 2002

(All figures in £ millions)
Net loss on sale of property (4 ) (1 ) (3 )
Net gain/(loss) on sale of investments 16 (1 ) (8 )
Continuing operations 12 (2 ) (11 )
Discontinued operations — — (2 )

12 (2 ) (13 )

Taxation (2 ) — 6

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~~

2004 2003 2002

(All figures in £ millions)
Net loss on sale of subsidiaries and associates (3 ) (4 ) (45 )
Continuing operations (3 ) (4 ) (45 )
Discontinued operations — 12 18

(3 ) 8 (27 )

Taxation 1 (3 ) (6 )

4c     PROFIT ON SALE OF A SUBSIDIARY BY AN ASSOCIATE

2004 2003 2002

(All figures in £ millions)
Net profit on sale of a subsidiary by an associate — discontinued operations — — 3
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 --- ---- ----
5 NET ~~INTEREST PAYABLE........................................ (81) (94) (163) === ==== ====~~ FINANCE COSTS
~~F-16~~

Note 2004 2003 2002

(All figures in £ millions)
Net interest payable
— Group 6 (70 ) (81 ) (94 )
— Associates 1 1 —
Early repayment of debt and termination of swap contracts — — (37 )

Total net finance costs (69 ) (80 ) (131 )

F-17
NOTES TO THE ACCOUNTS ~~(CONTINUED) 7 TAXATION~~ (Continued)
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS) ~~ANALYSIS OF (CHARGE)/BENEFIT IN THE YEAR CURRENT~~
6 NET INTEREST PAYABLE — GROUP

2004 2003 2002

(All figures in £ millions)
Interest payable and similar charges

Bank loans, overdrafts, bonds and commercial paper

On borrowing repayable wholly within five years (58 ) (60 ) (54 )
On borrowing repayable wholly or partly after five years (32 ) (31 ) (51 )
Other borrowings

On borrowing repayable wholly within five years (1 ) (2 ) —

(91 ) (93 ) (105 )

Interest receivable and similar income

On deposits, liquid funds and other 21 12 11

Net interest payable
(70 ) (81 ) (94 )

7 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.

2004 2003 2002

(All figures in £ millions)
Analysis of (charge)/benefit in the year

Current taxation

UK corporation tax for the year 10 (9 ) 11
Adjustments in respect of prior years (2 ) 10 58

8 1 69
Overseas tax for the year (82 ) (59 ) (63 )
Adjustments in respect of prior years 27 3 —
Associates (3 ) (5 ) (4 )

(50 ) (60 ) 2

Deferred taxation

Origination and reversal of timing differences
UK (5 ) (4 ) (11 )
Overseas (30 ) (54 ) (56 )
Adjustments in respect of prior years 23 43 1

(12 ) (15 ) (66 )

Taxation
(62 ) (75 ) (64 )

F-18
NOTES TO THE ACCOUNTS (Continued)
      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~~

2004 2003 2002

(All figures in £ millions)
Profit before tax 171 152 (25 )

Expected charge at UK corporation tax rate of 30% (2003: 30%) (51 ) (46 ) 8
Effect of overseas tax rates 7 8 11
Effect of tax losses (9 ) (5 ) (7 )
Timing differences 35 64 55
Non-deductible goodwill amortisation (61 ) (90 ) (111 )
Adjustments in respect of prior years and other items 29 9 46

Current tax (charge)/benefit for the year
(50 ) (60 ) 2

2004 2003 2002

(All figures in percentages)
Tax rate reconciliation

UK tax rate 30.0 30.0 30.0
Effect of overseas tax rates 1.4 1.3 2.8
Other items (1.1 ) (0.1 ) —

Tax rate reflected in adjusted earnings
30.3 31.2 32.8

Note 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~~partial tax relief available on the goodwill amortisation charged in the accounts. The ~~current tax~~ charge will ~~continue to~~also 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~~2004 and ~~2002~~2003 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~~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 ---- --- ---- --- ---- ---
8 DIVIDENDS ~~FOR THE YEAR.................. 24.2 192 23.4 187 22.3 177 ==== === ==== === ==== ===~~ ON EQUITY SHARES
~~- --------------- NOTE~~

2004 2003 2002

Pence Pence Pence
per share £m per share £m per share £m

Interim paid 9.7 76 9.4 73 9.1 72
Final proposed 15.7 125 14.8 119 14.3 115

Dividends for the year
25.4 201 24.2 192 23.4 187

Note Dividends in respect of the ~~company's~~company’s shares held by employee share trusts (see note ~~15)~~24) 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
F-19
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(Continued)
9 EARNINGS/(LOSS) PER SHARE

2004 2003 2002

Earnings/ Earnings/ Earnings/
(loss) (loss) (loss)
per share per share per share
Note £m (p) £m (p) £m (p)

Profit/(loss) for the financial year 88 11.1 55 6.9 (111 ) (13.9 )
Diluted earnings/(loss) 88 11.0 55 6.9 (111 ) (13.9 )

Weighted average number of shares (millions)
— for basic earnings and adjusted earnings 795.6 794.4 796.3
Effect of dilutive share options 1.1 0.9 —
Weighted average number of shares (millions)

— for diluted earnings 796.7 795.3 796.3

10a     EMPLOYEE INFORMATION
      The details of the emoluments of the directors of Pearson plc are shown on pages 5546 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~~57.

2004 2003 2002

(All figures in £ millions)
Staff costs

Wages and salaries 1,023 1,027 1,106
Social security costs 105 99 106
Post-retirement costs 68 62 59

1,196 1,188 1,271

UK US Other Total

Average number employed 2004

Pearson Education 2,071 16,133 4,080 22,284
FT Group 1,709 1,352 2,594 5,655
The Penguin Group 1,067 2,026 992 4,085
Other 792 572 1 1,365

5,639 20,083 7,667 33,389

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

F-20
NOTES TO THE ACCOUNTS (Continued)

UK US Other Total

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

10b     PENSIONS
SSAP 24 ~~ACCOUNTING~~ accountingThe 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'~~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~~

2004 2003 2002

(All figures in £ millions)
UK Group scheme

Regular pension cost
— Defined benefit sections 10 10 11
— Defined contribution sections 8 7 7
Variation cost 9 6 —

27 23 18

Other schemes

Defined benefit schemes 6 7 6
Defined contribution schemes 29 27 30

35 34 36

62 57 54

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,~~the balance sheet, there is a pension provision of ~~L29m (2002: L36m)~~£19m (2003: £29m) as measured in accordance with SSAP ~~24.~~24 (see note 22).
F-21
NOTES TO THE ACCOUNTS (Continued)
      A full actuarial valuation of the UK Group scheme was performed as at 1 January ~~2001~~2004 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~~2004 was ~~L976m.~~£1,091m. The major assumptions used to determine the SSAP 24 charge are as follows:
UK GROUP SCHEME --------------- (ALL FIGURES IN PERCENTAGES) ~~~~Inflation................................................... 2.5~~ Group~~
scheme
(All figures in
percentages)
Inflation 2.75
Rate of increase in ~~salaries................................ 4.5~~ salaries 4.75
Rate of ~~inflation-linked~~ increase for pensions in payment and deferred ~~pensions..................................... 2.5~~ pensions 2.0 to 4.5
Return on ~~investments....................................... 7.0~~ investments 7.1
Level of ~~funding............................................ 96.0~~ funding 95
      The funding policy differs from the accounting policy to the extent that more conservative assumptions are used for funding purposes. ~~Furthermore, in 2003~~In particular, the ~~Group paid an additional one-off contribution~~deficit measured on the funding assumptions was £137m (compared to £56m on the SSAP 24 assumptions). Please refer to page F-23 for further details of ~~L5m into~~ the ~~scheme which was designed to ensure that~~funding of the ~~scheme was fully funded.~~scheme.
      The next full ~~triennial~~actuarial valuation of the UK Group scheme for funding purposes is due to be carried out as at 1 January ~~2004.~~2006. The date of the most recent valuation of the US plan was ~~31 December 2002.~~ 1 January 2004.
FRS 17 ~~DISCLOSURES~~ disclosuresThe disclosures required under the transitional arrangements of FRS 17 for the ~~Group's~~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.~~2004. 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

2004 2003 2002

UK Group Other UK Group Other UK Group Other
scheme schemes scheme schemes scheme schemes

(All figures in percentages)
Inflation 2.80 3.00 2.75 3.00 2.25 3.00
Rate of increase in salaries 4.80 4.50 4.75 4.50 4.25 4.50
Rate of increase for pensions in payment and deferred pensions 2.80–4.00 — 2.75–4.00 — 2.25–4.00 —
Rate used to discount scheme liabilities 5.40 5.85 5.50 6.10 5.70 6.75
F-22
NOTES TO THE ACCOUNTS (Continued)
      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~~

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 2004 31 Dec 2004 31 Dec 2003 31 Dec 2003 31 Dec 2002 31 Dec 2002

% £m % £m % £m
UK Group scheme

Equities 7.50 638 7.75 589 8.00 472
Bonds 4.75 276 5.00 262 4.75 284
Properties 6.25 113 6.50 107 6.50 112
Other 6.25 174 6.50 133 6.50 108

Total market value of assets 1,201 1,091 976
Present value of scheme liabilities (1,495 ) (1,316 ) (1,189 )
Deficit in the scheme (294 ) (225 ) (213 )
Related deferred tax asset 88 68 64

Net pension liability
(206 ) (157 ) (149 )

Other schemes

Equities 8.50 45 9.00 41 9.75 33
Bonds 5.50 26 6.00 25 6.00 23
Other 3.75 2 2.80 1 2.75 1

Total market value of assets 73 67 57
Present value of scheme liabilities (102 ) (104 ) (96 )
Deficit in the schemes (29 ) (37 ) (39 )
Related deferred tax asset 10 13 14

Net pension liability
(19 ) (24 ) (25 )

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.~~2004. Although the rise in stock markets in ~~2003~~2004 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~~liabilities. This increase has largely been caused by use of the ~~fall~~1 January 2004 formal funding valuation and the change in ~~bond yields~~both economic and ~~increase in the inflation assumption in~~mortality assumptions used for FRS 17 purposes since 31 December 2003. This has resulted in an increased deficit in the UK Group scheme under FRS 17. ~~F-21~~
F-23
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(Continued)

Defined
UK Group benefit Defined 2004
scheme other Sub-total contribution Total

(All figures in £ millions)
Operating charge

Current service cost (24 ) (1 ) (25 ) (29 ) (54 )
Past service cost — — — — —

Total operating charge
(24 ) (1 ) (25 ) (29 ) (54 )

Other finance income/(charge)

Expected return on pension scheme assets 73 5 78 — 78
Interest on pension scheme liabilities (70 ) (6 ) (76 ) — (76 )

Net finance credit/(charge) 3 (1 ) 2 — 2

Net profit and loss impact
(21 ) (2 ) (23 ) (29 ) (52 )

Statement of total recognised gains and losses

Actual return less expected return on pension scheme assets 60 2 62
Experience (losses)/gains arising on the scheme liabilities (62 ) 1 (61 )
Changes in assumptions underlying the present value of the scheme liabilities (76 ) (4 ) (80 )
Exchange differences — 2 2

Actuarial (loss)/gain
(78 ) 1 (77 )

Movement in deficit during the year

Deficit in scheme at beginning of the year (225 ) (37 ) (262 )
Current service cost (24 ) (1 ) (25 )
Past service cost — — —
Contributions 30 9 39
Other finance charge 3 (1 ) 2
Actuarial (loss)/gain (78 ) 1 (77 )

Deficit in scheme at end of the year
(294 ) (29 ) (323 )

Related deferred tax asset 88 10 98

Net pension deficit
(206 ) (19 ) (225 )

      Following the 1 January 2004 actuarial valuation for funding purposes, the Group has agreed to pay contributions of 14.8% of pensionable salaries, plus contributions in respect of the Money Purchase 2003 section introduced with effect from 1 January 2003, in respect of future service benefits. Further, the ~~company~~Group has agreed to pay contributions of £10m in respect of 2004, £15m in respect of 2005 and £21m in respect of each year from 2006 to 2013 to fund the past service deficit revealed by the funding valuation.
F-24
NOTES TO THE ACCOUNTS (Continued)

Defined
UK Group benefit Defined 2003
scheme other Sub-total contribution Total

(All figures in £ 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 finance 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 )

      The contribution rate for 2003 for the UK Group scheme ~~were~~was 17.1% of pensionable salaries, plus ~~L1m~~£1m in respect of the new Money Purchase section introduced with effect from 1 January 2003. In addition, a one-off contribution of ~~L5m~~£5m 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~~
F-25
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) ==== === ====
(Continued)

Defined
UK Group benefit Defined 2002
scheme other Sub-total contribution Total

(All figures in £ 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 finance 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 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 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~~

2004 2003 2002

History of experience gains and losses

Difference between the actual and expected return on scheme assets £62m £88m £(176)m
As a percentage of year end assets 5% 8% (17)%
Experience gains and (losses) on scheme liabilities £(61)m £(9)m £16m
As a percentage of year end liabilities (4)% (1)% 1%
Total amount recognised in statement of total recognised gains and losses £(77)m £(19)m £(159)m
As a percentage of year end liabilities (5)% (1)% (12)%
F-26
NOTES TO THE ACCOUNTS ~~(CONTINUED)~~(Continued)
      If the above amounts had been recognised in the financial statements, the ~~Group's~~Group’s net assets and profit and loss reserve at 31 December ~~2003~~2004 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~~

2004 2003

(All figures in
£ millions)
Net assets excluding pension liability (see note below) 2,835 3,117
FRS 17 pension liability (225 ) (181 )

Net assets including FRS 17 pension liability
2,610 2,936

Profit and loss reserve excluding pension reserve (see note below) (52 ) 252
FRS 17 pension reserve (225 ) (181 )

Profit and loss reserve including FRS 17 pension reserves
(277 ) 71

Note The net assets and profit and loss reserve exclude the pension liability of ~~L29m (2002: L36m)~~£19m (2003: £29m) included within provisions (see note 22). ~~10C OTHER POST-RETIREMENT BENEFITS~~
10c OTHER POST-RETIREMENT BENEFITS
UITF 6 ~~ACCOUNTING~~ accountingThe Group provides certain healthcare and life assurance benefits principally for retired US employees and their ~~dependants.~~dependents. 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~~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 valuation with a measurement date of 31 December ~~2002,~~2003, are as follows:

2004 2003 2002

(All figures in £ millions)
Other post-retirement benefits 6 5 5
2003 2002 2001 ------ ------ ------ (ALL FIGURES IN L MILLIONS) Other post-retirement benefits.............................. 5 5 4 (ALL FIGURES IN PERCENTAGES) Inflation...................................................
(All figures in
percentages)
Inflation 3.0
Initial rate of increase in healthcare ~~rates................~~ rates 12.0
Ultimate rate of increase in healthcare rates ~~(2007)........~~ (2008) 5.0
Rate used to discount scheme ~~liabilities.................... 6.8~~ liabilities 6.1
      Included in ~~note 22,~~the balance sheet, there is a post-retirement medical benefits provision of ~~L51m (2002: L56m)~~£51m (2003: £51m). In accordance with UITF 6, the cost of post-retirement benefits, and related provisions, are based on the equivalent US GAAP standard, FAS ~~106.~~ 106 (see note 22).
FRS 17 ~~DISCLOSURES~~ disclosuresThe 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~~2004 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~~

2004 2003 2002

(All figures in percentages)
Inflation 3.00 3.00 3.00
Initial rate of increase in healthcare rates 12.00 12.00 12.00
Ultimate rate of increase in healthcare rates (2009; 2008; 2007) 5.00 5.00 5.00
Rate used to discount scheme liabilities 5.85 6.10 6.75
F-27
NOTES TO THE ACCOUNTS ~~(CONTINUED)~~ (Continued)

2004 2003 2002

(All figures in £ millions)
The value of the unfunded liability is as follows:
Present value of unfunded liabilities (58 ) (61 ) (63 )
Related deferred tax asset 20 21 22

Net post-retirement healthcare liability
(38 ) (40 ) (41 )

Operating charge

Current service cost (1 ) (1 ) (1 )
Past service cost — — —

Total operating charge
(1 ) (1 ) (1 )

Other finance charge

Interest on pension scheme liabilities (3 ) (4 ) (4 )
Net finance charge (3 ) (4 ) (4 )

Net profit and loss impact
(4 ) (5 ) (5 )

Statement of total recognised gains and losses

Experience gains arising on the scheme liabilities 5 3 3
Changes in assumptions underlying the present value of the scheme liabilities (5 ) (6 ) (7 )
Exchange differences 4 6 5

Actuarial gain
4 3 1

Movement in deficit during the year

Deficit in scheme at beginning of the year (61 ) (63 ) (63 )
Current service cost (1 ) (1 ) (1 )
Contributions 3 4 4
Other finance charge (3 ) (4 ) (4 )
Actuarial gain 4 3 1

Deficit in scheme at end of the year
(58 ) (61 ) (63 )

Related deferred tax asset 20 21 22

Net post-retirement deficit
(38 ) (40 ) (41 )

The ~~value of~~experience gains and losses for 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~~ schemes are shown below:

2004 2003 2002

History of experience gains and losses

Experience gains on scheme liabilities £5 m £3 m £3 m
As a percentage of year end liabilities 9 % 5 % 4 %
Total amount recognised in statement of total recognised gains and losses £4 m £3 m £1 m
As a percentage of year end liabilities 7 % 5 % 2 %
F-28
NOTES TO THE ACCOUNTS ~~(CONTINUED)~~(Continued)
      If the above amounts had been recognised in the financial statements, the ~~Group's~~Group’s net assets and profit and loss reserves at 31 December ~~2003~~2004 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~~

2004 2003

(All figures in
£ millions)
Net assets excluding post-retirement healthcare liability (see note below) 2,867 3,139
FRS 17 post-retirement healthcare liability (38 ) (40 )

Net assets including FRS 17 post-retirement healthcare liability
2,829 3,099

Profit and loss reserve excluding post-retirement healthcare reserve (see note below) (20 ) 274
FRS 17 post-retirement healthcare reserve (38 ) (40 )

Profit and loss reserve including FRS 17 post-retirement healthcare reserve
(58 ) 234

Note The net assets and profit and loss reserve exclude the post-retirement healthcare liability of ~~L51m (2002: L56m)~~£51m (2003: £51m) included within provisions (see note 22). ~~11 INTANGIBLE FIXED ASSETS~~
GOODWILL -------------- (ALL FIGURES IN L MILLIONS) ~~COST AT~~
11 INTANGIBLE FIXED ASSETS
Goodwill
(All figures in
£ millions)
Cost
At 31 ~~DECEMBER 2001......................................... 4,866~~ December 2002
4,487
Exchange differences........................................ (383) Additions................................................... 63 Disposals................................................... (59) ----- ATdifferences (321 )
Additions 157
Disposals (99 )
At 31 ~~DECEMBER 2002......................................... 4,487~~ December 2003
4,224
Exchange differences........................................ (321) Additions................................................... 157 Disposals................................................... (99) ----- ATdifferences (245 )
Additions 33
Disposals —
At 31 ~~DECEMBER 2003......................................... 4,224 ===== AMORTISATION AT~~December 2004
4,012
Amortisation
At 31 ~~DECEMBER 2001......................................... (673)~~ December 2002
(877 )
Exchange ~~differences........................................ 70~~ differences 75
Provided in the year........................................ (282) Provision for impairment.................................... (10) Disposals................................................... 18 ----- ATyear (257 )
Disposals 95
At 31 ~~DECEMBER 2002......................................... (877)~~ December 2003
(964 )
Exchange ~~differences........................................ 75~~ differences 66
Provided in the year........................................ (257) Disposals................................................... 95 ----- AT 31 DECEMBER 2003......................................... (964) ===== NET CARRYING AMOUNT year (224 )
Disposals —
At 31 December ~~2002......................................... 3,610 ----- AT~~2004
(1,122 )
Net carrying amount
At 31 ~~DECEMBER 2003.........................................~~ December 2003 3,260 ~~=====~~
At 31 December 2004
2,890
~~F-26~~
F-29
NOTES TO THE ACCOUNTS ~~(CONTINUED) 12 TANGIBLE FIXED ASSETS~~ (Continued)
~~FREEHOLD AND PLANT~~
12 TANGIBLE FIXED 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 --~~

Assets in
Freehold and Plant and course of
leasehold property equipment construction Total

(All figures in £ millions)
Cost

At 31 December 2002
319 750 20 1,089
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
301 753 22 1,076
Exchange differences (9 ) (27 ) — (36 )
Reclassifications — 14 (14 ) —
Owned by subsidiaries acquired 1 4 — 5
Owned by subsidiaries disposed (4 ) — — (4 )
Additions 14 103 10 127
Disposals (13 ) (44 ) — (57 )

At 31 December 2004
290 803 18 1,111

Depreciation

At 31 December 2002
(104 ) (482 ) — (586 )
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
(102 ) (506 ) — (608 )
Exchange differences 4 19 — 23
Provided in the year (16 ) (86 ) — (102 )
Owned by subsidiaries acquired — (4 ) — (4 )
Owned by subsidiaries disposed 4 — — 4
Disposals 6 43 — 49

At 31 December 2004
(104 ) (534 ) — (638 )

Net book value

At 31 December 2003 199 247 22 468
At 31 December 2004
186 269 18 473
Freehold and leasehold property — Net book value includes freehold of ~~L120m (2002: L130m)~~£109m (2003: £120m) and short leases of ~~L79m (2002: L85m)~~£77m (2003: £79m). ~~CAPITAL COMMITMENTS --~~
Capital commitments — The Group had capital commitments for fixed assets, including finance leases, already under contract amounting to ~~L1m~~£6m at 31 December ~~2003 (2002: L12m)~~2004 (2003: £1m). ~~OTHER~~
F-30
NOTES --TO THE ACCOUNTS (Continued)
Other notes — The net book value of Group tangible fixed assets includes ~~L5m (2002: L7m)~~£3m (2003: £5m) in respect of assets held under finance leases. Depreciation on these assets charged in ~~2003~~2004 was ~~L2m (2002: L2m)~~£2m (2003: £2m). ~~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~~
13 JOINT VENTURES
~~- --------------- NOTE~~

2004 2003

Valuation Book value Valuation Book value

(All figures in £ millions)
Unlisted joint ventures 7 7 6 6

Note The valuations of unlisted joint ventures are ~~directors'~~directors’ valuations as at 31 December ~~2003.~~2004. If realised at these values there would be an estimated liability for taxation of ~~Lnil (2002: Lnil)~~£nil (2003: £nil). The Group had no capital commitments to subscribe for further capital ~~and~~or 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~~

Share Total
of equity Reserves net assets

(All figures in £ millions)
Summary of movements

At 31 December 2003
75 (69 ) 6
Exchange differences 1 — 1
Additions 10 (2 ) 8
Dividends (including tax credits) from joint ventures — (1 ) (1 )
Retained loss for the year — (7 ) (7 )

At 31 December 2004
86 (79 ) 7

2004 2003 2002

Operating Total Operating Total Operating Total
loss net assets loss net assets loss net assets

(All figures in £ millions)
Business sectors
Pearson Education — — — — (1 ) —
FT Group (8 ) 2 (11 ) 2 (13 ) 3
The Penguin Group 1 5 1 4 1 4

(7 ) 7 (10 ) 6 (13 ) 7

Geographical markets supplied and location of net assets

United Kingdom 1 4 1 4 1 4
Continental Europe (8 ) 3 (11 ) 2 (13 ) 3
North America — — — — (1 ) —

(7 ) 7 (10 ) 6 (13 ) 7

2004 2003 2002

(All figures in £ millions)
Reconciliation to retained loss

Operating loss of joint ventures (7 ) (10 ) (13 )
Taxation — — —

Retained loss for the year
(7 ) (10 ) (13 )

F-31
NOTES TO THE ACCOUNTS ~~(CONTINUED) 14 ASSOCIATES~~ (Continued)
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 === === === ===
14 ASSOCIATES
~~- --------------- NOTE~~

2004 2003

Valuation Book value Valuation Book value

(All figures in £ millions)
Listed associates 53 9 27 9
Unlisted associates 175 32 192 49

228 41 219 58

Note Principal associates are listed in ~~Item 4 -- Information on the Company.~~note 34. The valuations of unlisted associates are ~~directors'~~directors’ valuations as at 31 December ~~2003.~~2004. If realised at these values there would be an estimated liability for taxation of ~~Lnil (2002: Lnil)~~£nil (2003: £nil). The Group had no capital commitments to subscribe for further capital ~~and~~or 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~~

Share Total
of equity Loans Reserves Total Goodwill net assets

(All figures in £ millions)
Summary of movements

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
Exchange differences (1 ) — 1 — — —
Additions 1 — — 1 — 1
Disposals (24 ) — — (24 ) — (24 )
Retained profit for the year — — 6 6 — 6

At 31 December 2004
25 — 16 41 — 41

F-32
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) === === ===
(Continued)

2004 2003 2002

Operating Total Operating Total Operating Total
profit net assets profit net assets loss net assets

(All figures in £ millions)
Business sectors

Pearson Education 1 5 1 4 2 8
FT Group 14 33 7 30 (37 ) 98

Continuing operations 15 38 8 34 (35 ) 106
Discontinued operations 2 3 2 24 (3 ) —

17 41 10 58 (38 ) 106

Geographical markets supplied and location of net assets/(liabilities)

United Kingdom 9 19 10 20 11 9
Continental Europe 1 13 2 39 (1 ) 92
North America 4 (1 ) (3 ) (7 ) (45 ) (5 )
Rest of world 1 7 1 6 — 10

Continuing operations 15 38 10 58 (35 ) 106
Discontinued operations 2 3 — — (3 ) —

17 41 10 58 (38 ) 106

2004 2003 2002

(All figures in £ millions)
Reconciliation to retained profit

Operating profit of associates (before goodwill amortisation) 17 17 10
Interest 1 1 —
Profit on sale of subsidiaries — — 3
Taxation (3 ) (5 ) (4 )
Dividends (including tax credits) from unlisted associates (9 ) (8 ) (7 )

Retained profit for the year
6 5 2

      The aggregate of the ~~Group's~~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~~

2004 2003 2002

(All figures in £ millions)
Sales
290 234 141
Fixed assets 22 24 28
Current assets 102 116 130
Liabilities due within one year (75 ) (70 ) (76 )
Liabilities due after one year or more (8 ) (12 ) (8 )

Net assets
41 58 74

F-33
NOTES TO THE ACCOUNTS ~~(CONTINUED) 15 OTHER FIXED ASSET INVESTMENTS~~ (Continued)
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 == == == ==
15 OTHER FIXED ASSET INVESTMENTS
~~- --------------- NOTE~~

2003
2004 restated

Valuation Book value Valuation Book value

(All figures in £ millions)
Unlisted other fixed asset investments 17 17 21 21
Note The valuations of unlisted investments are ~~directors'~~directors’ valuations as at 31 December ~~2003.~~2004. If realised at valuation there would be an estimated liability for taxation of ~~Lnil (2002: Lnil)~~£nil (2003: £nil). Other fixed asset investments have been restated for the adoption of UITF 38 (see note 24).
OWN SHARES HELD OTHER TOTAL ---------- ----- ----- (ALL FIGURES IN L MILLIONS) ~~COST~~
Total
(All figures in
£ millions)
Cost
At 31 December ~~2001......................................... 91 107 198~~ 2002 restated 60
Exchange differences........................................ -- (4) (4) Additions................................................... 17 4 21 Disposals................................................... -- (10) (10) --- --- ---- differences (3 )
Additions 3
Disposals (1 )
At 31 December ~~2002......................................... 108 97 205 --- --- ----~~ 2003 restated 59
Exchange differences........................................ -- (5) (5) Additions................................................... -- 4 4 Disposals................................................... (2) -- (2) --- --- ---- AT 31 DECEMBER 2003......................................... 106 96 202 === === ==== PROVISION differences (2 )
Additions 1
Disposals (25 )
At 31 December ~~2001......................................... (59) (55) (114)~~ 2004
33
Provision
At 31 December 2002 restated (38 )
Provided during the ~~year.................................... (7) -- (7) --- --- ----~~ year —
At 31 December ~~2002......................................... (66) (55) (121) --- --- ---- Provided during~~2003 restated (38 )
Exchange differences 1
Provision written back in the year.................................... (3) -- (3) Disposals................................................... 2 -- 2 --- --- ---- AT 31 DECEMBER 2003......................................... (67) (55) (122) === === ==== NET BOOK VALUE year 4
Disposals 17
At 31 December ~~2002......................................... 42 42 84 --- --- ----~~2004
(16 )
Net book value
At 31 December 2003 restated 21
At 31 December 2004
17
16 STOCKS

2004 2003

(All figures in £
millions)
Raw materials 27 24
Work in progress 36 30
Finished goods 261 270
Pre-publication costs 352 359

676 683

F-34
NOTES TO THE ACCOUNTS (Continued)
Note The replacement cost of stocks is not materially different from book value.
17 DEBTORS

2004 2003

(All figures in
£ millions)
Amounts falling due within one year

Trade debtors 785 822
Associates 1 1
Joint ventures 1 —
Royalty advances 116 110
Other debtors 53 61
Prepayments and accrued income 45 38

1,001 1,032

Amounts falling due after more than one year

Royalty advances 70 83
Other debtors 31 16
Prepayments and accrued income 1 1

102 100

1,103 1,132

18 CASH AT BANK AND IN HAND

2004 2003

Group Company Group Company

(All figures in £ millions)
Cash, bank current accounts and overnight deposits 371 — 309 —
Certificates of deposit and commercial paper 5 �� — 8 —
Term bank deposits 237 87 244 75

613 87 561 75

19 FINANCIAL INSTRUMENTS
Treasury policyThe 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,
F-35
NOTES TO THE ACCOUNTS (Continued)
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 riskThe 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 2004 that ratio was 61%. A 1% change in the Group’s variable rate US dollar, euro and sterling interest rates would have a £5m effect on profit before tax.
Liquidity and refinancing riskThe 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 2004 the average maturity of gross borrowings was six years and non-banks provided £1,650m (91%) of them (up from 4.9 years and 89% 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. 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 strives to maintain a rating of at least BBB+/ Baa1 over the long term. The Group will also continue to use internally a range of ratios to monitor and manage its finances. These include interest cover, net debt to operating profit, net debt to enterprise value and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2004 these amounted to £641m and their weighted average maturity was 4.5 years.
Counterparty riskThe Group’s risk of loss on deposits or derivative contracts with individual banks is managed in part through the use of counterparty limits. These limits, which take published credit limits (among other things) into account, are approved by the Chief Financial Officer. In addition, for certain longer-dated, higher-value derivative contracts, specifically, a currency swap that transforms a major part of the 6.125% eurobonds due 2007 into a US dollar liability, the Group has entered into mark-to-market agreements whose effect is to reduce significantly the counterparty risk of the relevant transactions.
Currency riskAlthough 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 affected 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 transnational exposure with cash flow instruments. However, the Group does seek to create a “natural hedge” through 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 88%, euro 7% and sterling 5%.
      Short-term debtors and creditors have been excluded from all the following disclosures, other than currency risk disclosures as set out in table e.
F-36
NOTES TO THE ACCOUNTS (Continued)
a.     Maturity of borrowings and other financial liabilities
      The maturity profile of the Group’s borrowings and other financial liabilities is shown below:

2004 2003

Group Company Group Company

(All figures in £ millions)
Maturity of borrowings

Short-term

Bank loans and overdrafts 107 139 119 262
9.5% Sterling Bonds 2004 — — 108 —
4.625% Euro Bonds 2004 — — 348 348

Total due within one year, or on demand
107 139 575 610

Medium and long-term

Loans or instalments thereof repayable:
From one to two years 130 — 85 —
From two to five years 733 541 582 443
After five years not by instalments 849 640 680 680

Total due after more than one year
1,712 1,181 1,347 1,123

Total borrowings
1,819 1,320 1,922 1,733

Note At 31 December 2004 £61m (2003: £85m) of debt, including commercial paper, currently classified from two to five 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.

2004 2003

Group Group other Group Group other
finance financial Group finance financial Group
leases liabilities total leases liabilities total

(All figures in £ millions)
Maturity of other financial liabilities

Amounts falling due:
In one year or less or on demand 2 4 6 3 5 8
In more than one year but not more than two years 1 19 20 1 14 15
In more than two years but not more than five years 1 9 10 1 7 8
In more than five years — 25 25 — 21 21

4 57 61 5 47 52

F-37
NOTES TO THE ACCOUNTS (Continued)
b. Borrowings by instrument

2004 2003

Group Company Group Company

(All figures in £ millions)
Unsecured

9.5% Sterling Bonds 2004 — — 108 —
4.625% Euro Bonds 2004 — — 348 348
7.375% US Dollar notes 2006 130 — 139 —
6.125% Euro Bonds 2007 390 390 343 343
10.5% Sterling Bonds 2008 100 100 100 100
4.7% US Dollar Bonds 2009 181 — — —
7% Global Dollar Bonds 2011 260 260 278 278
7% Sterling Bonds 2014 226 226 235 235
5.7% US Dollar Bonds 2014 207 — — —
4.625% US Dollar notes 2018 156 156 167 167
Bank loans and overdrafts and commercial paper 169 188 204 262

Total borrowings
1,819 1,320 1,922 1,733

c. Undrawn committed borrowing facilities

2004 2003

(All figures in
£ millions)
Expiring within one year — —
Expiring between one and two years — 950
Expiring in more than two years 641 —

641 950

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.
d. Currency and interest rate risk profile

2004

Fixed rate borrowings

Weighted
Weighted average
Total Total average period for
variable fixed interest which rate is
Borrowings rate rate rate fixed —
£m £m £m % years

Currency and interest rate risk profile of borrowings

US dollar 1,332 830 502 5.8 2.4
Sterling 201 91 110 8.9 6.4
Euro 284 160 124 5.6 1.5
Other currencies 2 2 — — —

1,819 1,083 736

F-38
NOTES TO THE ACCOUNTS (Continued)

2003

Fixed rate borrowings

Weighted
Weighted average
Total Total average period for
variable fixed interest which rate is
Borrowings rate rate rate fixed —
£m £m £m % years

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

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.

2004

Other Total Total
financial fixed no interest
liabilities rate paid

(All figures in £ millions)
Currency and interest rate risk profile of other financial liabilities

US dollar 40 10 30
Sterling 8 3 5
Euro 11 — 11
Other currencies 2 1 1

61 14 47

Note The US dollar fixed rate liability is fixed for 7 years at a rate of 6.3%. The sterling fixed rate liability is fixed for 2 years at a rate of 6.9%. The other currencies fixed rate liability is fixed for 3 years at a rate of 5.0%.

2003

Other Total Total
financial fixed no interest
liabilities rate paid

(All figures in £ 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-39
NOTES TO THE ACCOUNTS (Continued)

2004

Other
US dollar Sterling Euro currencies Total

(All figures in £ millions)
Currency and interest rate risk profile of financial assets

Cash at bank and in hand 170 52 72 77 371
Short-term deposits 7 89 125 21 242
Other financial assets 33 12 3 1 49

210 153 200 99 662

Fixed rate 5 3 — 1 9
Floating rate 189 140 195 95 619
No interest received 16 10 5 3 34

210 153 200 99 662

Note The US dollar fixed rate asset is fixed for 11 years at a rate of 8.2%. The sterling fixed rate asset is fixed for 5 years at a rate of 7.0%. The other currencies fixed rate asset is fixed for 7 years at a rate of 2.0%.

2003

Other
US dollar Sterling Euro currencies Total

(All figures in £ 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

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.

2004
Net foreign monetary assets/(liabilities)

Other
US dollar Sterling Euro currencies Total

(All figures in £ millions)
Functional currency of entity

US dollar — 1 — 5 6
Sterling (6 ) — 9 3 6
Euro — — — — —
Other currencies 20 (1 ) — — 19

14 — 9 8 31

F-40
NOTES TO THE ACCOUNTS (Continued)

2003
Net foreign monetary assets/(liabilities)

Other
US dollar Sterling Euro currencies Total

(All figures in £ 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

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:

2004 2003

Book Fair Book Fair
value value value value

(All figures in £ millions)
Primary financial instruments held or issued to finance the Group’s operations

Other financial assets 49 49 59 59
Other financial liabilities (61 ) (61 ) (52 ) (52 )
Cash at bank and in hand 371 371 309 309
Short-term deposits 242 242 252 252
Short-term borrowings (107 ) (107 ) (575 ) (619 )
Medium and long-term borrowings (1,712 ) (1,817 ) (1,347 ) (1,553 )

Derivative financial instruments held to manage the interest rate and currency profile

Interest rate swaps — 23 — (4 )
Currency swaps — 11 — 26

Note Other financial assets, other financial liabilities, cash at bank and in hand, short-term deposits and short-term borrowings: the fair value approximates to the carrying value due to the short maturity periods of these financial instruments. Medium and long-term borrowings: the fair value is based on market values or, where these are not available, on the quoted market prices of comparable debt issued by other companies. Interest rate swaps: the fair value of interest rate swaps is based on market values. At 31 December 2004 the notional principal value of these swaps was £2,824m (2003: £2,394m). Currency swaps: the fair value of these contracts is based on market values. At 31 December 2004 the Group had £368m (2003: £1,096m) of such contracts outstanding.
F-41
NOTES TO THE ACCOUNTS (Continued)
g. Hedges
      The Group’s policy on hedges is explained on page F-35. 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
Unrecognised Unrecognised total net
gains losses gains/(losses)

(All figures in £ millions)
Gains and losses on hedges at 31 December 2003 82 (60 ) 22
Gains and losses arising in previous years that were recognised in 2004 (19 ) — (19 )

Gains and losses arising before 31 December 2003 that were not recognised in 2004
63 (60 ) 3
Gains and losses arising in 2004 that were not recognised in 2004 10 21 31

Unrecognised gains and losses on hedges at 31 December 2004
73 (39 ) 34
Of which:
Gains and losses expected to be recognised in 2005 1 (2 ) (1 )

Gains and losses expected to be recognised in 2006 or later 72 (37 ) 35

20 OTHER CREDITORS

2004 2003

(All figures in
£ millions)
Amounts falling due within one year

Trade creditors 349 407
Taxation 91 55
Social security and other taxes 14 4
Other creditors 75 85
Accruals and deferred income 512 456
Obligations under finance leases 2 3
Dividends 125 119

1,168 1,129

Amounts falling due after more than one year

Other creditors 37 34
Accruals and deferred income 21 9
Obligations under finance leases 2 2

60 45

F-42
NOTES TO THE ACCOUNTS (Continued)
21 DEFERRED TAXATION
(All figures in
£ millions)
Summary of movements
At 31 ~~DECEMBER 2003......................................... 39~~ December 2003 145
Exchange differences (9 )
Transfers 41 ~~80 === === ====~~
Net release in the year (12 )
At 31 December 2004
165
~~- --------------- NOTE~~

2004 2003

(All figures in
£ millions)
Deferred taxation derives from

Capital allowances (31 ) (21 )
Tax losses carried forward 150 168
Taxation on unremitted overseas earnings (2 ) (4 )
Other timing differences 48 2

165 145

Deferred taxation not provided

Relating to gains subject to roll-over relief — 1

Note The Group has calculated deferred tax not provided on rolled over gains in 2004, 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-43
NOTES TO THE ACCOUNTS (Continued)
22 PROVISIONS FOR LIABILITIES AND CHARGES

Post- Deferred Reorganis-
retirement consideration Integration ations Leases Other Total

(All figures in £ millions)
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
Exchange differences (7 ) (2 ) (1 ) (1 ) (1 ) — (12 )
Arising on acquisitions 1 (3 ) — — — — (2 )
Released — (2 ) — (1 ) — (1 ) (4 )
Provided 68 — — 5 — 6 79
Utilised (72 ) (1 ) (3 ) (8 ) (3 ) (3 ) (90 )

At 31 December 2004
70 21 5 7 10 10 123

Note
a   Post-retirement provisions are in respect of pensions, £19m (2003: £29m) and post-retirement medical benefits, £51m (2003: £51m).
b   Integration. During the year, £3m 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.
c   Reorganisations. £5m has been provided during the year and £8m utilised mainly in respect of redundancies.
d   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-44
NOTES TO THE ACCOUNTS (Continued)
23 SHARE CAPITAL

Number
of shares
(000’s) £m

Ordinary shares of 25p each
Authorised

At 31 December 2003
1,178,000 295

At 31 December 2004
1,182,000 296

Called up, allotted and fully paid

At 31 December 2002
801,662 200
Issued under share option and employee share schemes 726 1

At 31 December 2003
802,388 201
Issued under share option and employee share schemes 862 —

At 31 December 2004
803,250 201

Note The consideration received in respect of shares issued during the year was £4m (2003: £5m).

Number Original
When of shares subscription
granted (000’s) Price (p) exercise period

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

F-45
NOTES TO THE ACCOUNTS (Continued)

Number Original
When of shares subscription
granted (000’s) Price (p) exercise period

Options outstanding at 31 December 2004

Worldwide Save for Shares plans 1997 5 530 2004 — 05
1998 46 687 2005 — 06
1999 118 913 — 926 2004 — 07
2000 52 1,277 — 1,481 2005 — 08
2001 303 957 — 1,096 2004 — 09
2002 474 696 2005 — 10
2003 1,978 425 — 426 2006 — 11
2004 878 495 — 518 2007 — 12

3,854

Discretionary share option plans 1995 116 487 — 545 1998 — 05
1996 195 584 — 654 1999 — 06
1997 943 677 — 758 2000 — 07
1998 1,483 847 — 1,090 2001 — 08
1999 2,950 1,081 — 1,922 2002 — 09
2000 5,432 64 — 3,224 2000 — 10
2001 11,206 822 — 1,421 2002 — 11

22,325

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-46
NOTES TO THE ACCOUNTS (Continued)
24 RESERVES

Share Profit
premium and loss
account account

(All figures in
£ millions)
Summary of movements

At 31 December 2002 restated 2,465 611
Exchange differences net of taxation — (254 )
Premium on issue of equity shares 4 —
Loss retained for the year — (137 )
Purchase of own shares — (1 )
UITF 17 charge for the year — 4

At 31 December 2003 restated
2,469 223

Analysed as

Joint ventures and associates (60 )
Group excluding joint ventures and associates 283

Summary of movements

At 31 December 2003 restated 2,469 223
Exchange differences net of taxation — (176 )
Premium on issue of equity shares 4 —
Loss retained for the year — (113 )
Purchase of own shares — (10 )
UITF 17 charge for the year — 5

At 31 December 2004
2,473 (71 )

Analysed as

Joint ventures and associates (63 )
Group excluding joint ventures and associates (8 )

Note Cumulative goodwill relating to acquisitions made prior to 1998, which was deducted from reserves, amounts to £915m (2003: £961m). Included in exchange differences are exchange gains of £nil (2003: £74m) arising on borrowings denominated in, or swapped into, foreign currencies designated as hedges of net investments overseas.
Prior year adjustment
      UITF Abstract 38 ‘Accounting for ESOP trusts’ and the revision of UITF Abstract 17 ‘Employee share schemes’ were issued on 15 December 2003 and these revisions have been applied for the first time in 2004. Under UITF 38 own shares held in treasury or through an ESOP trust are recorded at cost and shown as a deduction in arriving at shareholders’ funds. Previously these shares were recorded at cost less provision for impairment and shown as a fixed asset investment with impairment charges being taken to the profit and loss account. Under the revised UITF 17, employee share scheme charges to the profit and loss account are now always calculated as the intrinsic value of the award and spread over the performance period. The intrinsic value is the difference between the fair value of shares at the date of grant and the amount paid by the employee to exercise the rights to those shares irrespective of the cost of shares purchased to fund the award.
F-47
NOTES TO THE ACCOUNTS (Continued)
      The reclassification of own shares from fixed asset investments to equity has reduced net assets by £59m at 31 December 2003 (1 January 2003: £62m). The reversal of prior year impairments taken on the cost of shares held in trust (£37m) has been shown as a prior year adjustment in the statement of total recognised gains and losses. The amendment to UITF 17 in respect of the calculation of share scheme charges has had no material effect on the profit and loss account.
      Included within own shares are shares held by the Pearson Employee Share Trust and Pearson plc Employee Share Ownership ~~Trusts~~Trusts. Together they hold ~~7.5m (2002: 7.9m)~~6.9 million (2003: 7.5 million) Pearson plc ordinary shares which had a market value of ~~L46m~~£43m at 31 December ~~2003 (2002: L45m) and a nominal value of L2m at 31 December 2003 (2002: L2m)~~2004 (2003: £46m). 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)~~£2m (2003: £2m).
      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~~
F-48
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: (Continued)
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 ===== ===== ===== =====
25 ACQUISITIONS
- --------------- 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~~
a. Acquisition of net (liabilities)/assets acquired............. (32) 25 Fair value adjustments...................................... (14) (14) --- --- FAIR VALUE TO THE GROUP..................................... (46) 11 === === subsidiaries
~~- --------------- NOTE All the~~

2004 2003

(All figures in
£ millions)
Tangible fixed assets 1 10
Stocks 2 —
Debtors 3 32
Creditors (2 ) (95 )
Provisions 1 (4 )
Deferred taxation — (15 )
Net cash and short-term deposits acquired — 34

5 (38 )
Equity minority interests (7 ) (8 )

Net liabilities acquired at fair value (2 ) (46 )

Fair value of consideration

Cash (33 ) (87 )
Deferred cash consideration — (24 )
Costs provided for (1 ) —
Net prior year adjustments 3 —

Total consideration (31 ) (111 )

Goodwill arising
33 157

Acquisition fair values

Book value of net liabilities acquired (3 ) (32 )
Fair value adjustments 1 (14 )

Fair value to the Group
(2 ) (46 )

Note The fair value adjustments above relate to acquisitions made in ~~2003.~~both 2003 and 2004. They include ~~a write-off of certain fixed assets~~adjustments to provisions and ~~recognition of~~accruals and an adjustment to a pension scheme liability. ~~These~~The fair value adjustments relating to 2004 acquisitions are provisional and will be finalised in the ~~2004~~2005 financial statements. ~~B. CASH FLOW FROM ACQUISITIONS~~
2003 2002 2001 ------- ------- ------- (ALL FIGURES IN L MILLIONS)
b. Cash ~~-- current year acquisitions........................... 87 74 52 Deferred payments for prior year~~flow from acquisitions and other items..................................................... 7 13 76 -- -- --- NET CASH OUTFLOW............................................ 94 87 128 == == ===
~~F-45~~

2004 2003 2002

(All figures in £ millions)
Cash — current year acquisitions 33 87 74
Deferred payments for prior year acquisitions and other items 2 7 13

Net cash outflow
35 94 87

F-49
NOTES TO THE ACCOUNTS ~~(CONTINUED) 26. DISPOSALS A. DISPOSAL OF SUBSIDIARIES~~ (Continued)
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
26 DISPOSALS
a. Disposal of subsidiaries

2004 2003 2002

(All figures in £ millions)
Intangible fixed assets — (4 ) (41 )
Tangible fixed assets — (3 ) —
Stocks — (2 ) (3 )
Debtors (4 ) (9 ) (2 )
Creditors — 10 (3 )
Provisions — — 1
Net overdraft/(cash) 1 1 (1 )
Equity minority interest — — 3

Net assets disposed of (3 ) (7 ) (46 )
Proceeds received 2 1 11
Deferred consideration — 2 —
Costs (2 ) (1 ) (7 )
Net prior year adjustments — 1 (3 )

Loss on sale
(3 ) (4 ) (45 )

b. Cash flow from reserves......................... -- -- (37) --- --- --- NET LOSS ON SALE............................................ (4) (45) (63) === === === disposals
~~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~~

2004 2003 2002

(All figures in £ millions)
Cash — current year disposals 2 1 11
Costs paid (2 ) (2 ) (3 )
Deferred receipts and payments from prior year disposals and other amounts — (3 ) (5 )

Net cash (outflow)/inflow
— (4 ) 3

F-50
NOTES TO THE ACCOUNTS ~~(CONTINUED)~~ (Continued)
~~DEBT DUE DEBT DUE SHORT-TERM WITHIN AFTER FINANCE~~
27 NOTES TO CONSOLIDATED 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) ==== ==== === === ==== ====== === ====== FLOW STATEMENT
~~- --------------- NOTE~~

2004 2003 restated 2002 restated

Continuing Discontinued Total Continuing Discontinued Total Continuing Discontinued Total

(All figures in £ millions)
a. Reconciliation of operating profit to net cash inflow from operating activities

Total operating profit 218 13 231 204 22 226 130 13 143
Share of operating profit of joint ventures and associates (8 ) (2 ) (10 ) 2 (2 ) — 50 1 51
Depreciation 95 7 102 104 7 111 114 8 122
Goodwill amortisation and impairment 215 9 224 251 6 257 278 14 292
(Increase)/decrease in stocks (26 ) (1 ) (27 ) (8 ) — (8 ) 41 2 43
Increase in debtors (10 ) (5 ) (15 ) (93 ) (3 ) (96 ) (111 ) — (111 )
Increase/(decrease) in creditors 47 3 50 (71 ) 3 (68 ) 57 7 64
Decrease in operating provisions (15 ) — (15 ) (20 ) — (20 ) (50 ) — (50 )
Other and non-cash items (10 ) — (10 ) (44 ) 1 (43 ) (29 ) 4 (25 )

Net cash inflow from operating activities
506 24 530 325 34 359 480 49 529

Debt due Debt due
Short-term within after Finance
Cash Overdrafts Sub-total deposits one year one year leases Total

(All figures in £ millions)
b. Analysis of net debt

At 31 December 2003
309 (23 ) 286 252 (552 ) (1,347 ) (5 ) (1,366 )
Exchange differences (5 ) 2 (3 ) (9 ) 37 50 — 75
Other non-cash items — — — — — — (1 ) (1 )
Net cash flow 67 (37 ) 30 (1 ) 466 (415 ) 2 82

At 31 December 2004
371 (58 ) 313 242 (49 ) (1,712 ) (4 ) (1,210 )

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 )

Note Finance leases are included within other creditors in the balance sheet (see note 20).
F-51
NOTES TO THE ACCOUNTS (Continued)

2004 2003 2002

(All figures in £ millions)
c. Reconciliation of net cash flow to movement in net debt

Increase/(decrease) in cash in the year 30 (91 ) 111
(Increase)/decrease in net debt from management of liquid resources (1 ) 85 43
Decrease/(increase) in net debt from other borrowings 51 (63 ) 664
Decrease in finance leases 2 3 5
Acquired with subsidiary — — 24
Other non-cash items (1 ) (2 ) (1 )
Exchange differences 75 117 132

Movement in net debt in the year 156 49 978
Net debt at beginning of the year (1,366 ) (1,415 ) (2,393 )

Net debt at end of the year
(1,210 ) (1,366 ) (1,415 )

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
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~~
29 COMMITMENTS UNDER LEASES
      ~~At 31 December ~~2003~~2004 the Group had commitments under leases, other than finance leases, to make payments in ~~2004~~2005 as follows:~~

Land and
buildings Other

(All figures in
£ millions)
For leases expiring

In 2005 7 4
Between 2006 and 2009 22 15
Thereafter 67 —

96 19

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
~~30 RELATED PARTIES JOINT VENTURES AND ASSOCIATES --~~
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~~ 2004.
31 POST BALANCE SHEET EVENTS
      In December 2004, Pearson announced its intention to dispose of its 79% interest in Recoletos Grupo de Comunicaciòn, S.A. to Retos Cartera, a consortium of investors, as part of a tender offer for all of Recoletos. The transaction was approved by the Spanish regulatory authorities in February 2005 and will close in the early part of 2005. In January 2005 Pearson sold its 22% stake in MarketWatch to Dow Jones & Co for $101m.
F-52
NOTES TO THE ACCOUNTS ~~(CONTINUED) 32~~ (Continued)
32 COMPANY BALANCE SHEET AS AT 31 DECEMBER 2004

2003
Note 2004 restated

(All figures in
£ millions)
Fixed assets

Investments: subsidiaries 33 7,134 6,343

7,134 6,343

Current assets

Debtors:
Amounts due from subsidiaries — due within one year 674 1,394
Amounts due from subsidiaries — due after more than one year 288 944
Taxation 66 3
Other debtors — —
Cash at bank and in hand 18 87 75

1,115 2,416

Creditors — amounts falling due within one year

Short-term borrowing 19 (139 ) (610 )
Amounts due to subsidiaries (1,815 ) (2,860 )
Other creditors (2 ) (1 )
Accruals and deferred income (11 ) (16 )
Dividends 8 (125 ) (119 )

(2,092 ) (3,606 )

Net current liabilities
(977 ) (1,190 )

Total assets less current liabilities
6,157 5,153

Creditors — amounts falling due after more than one year

Medium and long-term borrowing 19 (1,181 ) (1,123 )
Amounts due to subsidiaries (440 ) (234 )
Provisions for liabilities and charges (4 ) (2 )

(1,625 ) (1,359 )

Net assets
4,532 3,794

Capital and reserves

Called up share capital 23 201 201
Share premium account 33 2,473 2,469
Special reserve 33 397 397
Other reserves 33 26 17
Profit and loss account 33 1,435 710

Equity shareholders’ funds
4,532 3,794

The 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 ====== ======
comparatives have been restated for the adoption of UITF38 (see note 24).
The financial statements were approved by the board of directors on 27 February ~~2004~~2005 and signed on its behalf by ~~Dennis Stevenson, Rona Fairhead, Chairman Chief Financial Officer~~
~~F-49~~
~~Dennis Stevenson, Chairman                                         Rona Fairhead, Chief Financial Officer~~
~~F-53~~
~~NOTES TO THE ACCOUNTS ~~(CONTINUED)~~ (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~~
(All figures in
£ millions)
Investment in subsidiaries
At 31 ~~DECEMBER 2001......................................... 5,384~~ December 2002
6,422
External ~~acquisition........................................ 2 Subscription for additional share capital in subsidiaries... 1,085~~ acquisition 15
Disposal to ~~subsidiary...................................... (16)~~ subsidiary (22 )
Provision for diminution in ~~value........................... (32) Revaluations................................................ (1) ----- AT~~value (33 )
Revaluations (39 )
At 31 DECEMBER 2002......................................... 6,422 External acquisition........................................ 15 Disposal to subsidiary...................................... (22) December 2003
6,343
Subscription for share capital in subsidiary 915
Provision for diminution in ~~value........................... (33) Revaluations................................................ (39) ----- AT~~value (100 )
Revaluations (24 )
At 31 ~~DECEMBER 2003......................................... 6,343 =====~~ December 2004
7,134
~~- --------------- NOTE~~
Note Shares are stated at cost less provisions for diminution in value or ~~directors'~~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~~

Share Profit
premium Special Other and loss
account reserve reserves account Total

(All figures in £ millions)
Reserves

Summary of movements

At 31 December 2002
2,465 397 11 935 3,808
Exchange differences — — — (23 ) (23 )
Premium on issue of equity shares 4 — — — 4
Net amount received in respect of ESOP shares — — 6 — 6
Loss for the financial year — — — (10 ) (10 )
Dividends on equity shares — — — (192 ) (192 )

At 31 December 2003
2,469 397 17 710 3,593
Exchange differences — — — (20 ) (20 )
Premium on issue of equity shares 4 — — — 4
Net amount received in respect of ESOP shares — — 9 — 9
Profit for the financial year — — — 946 946
Dividends on equity shares — — — (201 ) (201 )

At 31 December 2004
2,473 397 26 1,435 4,331

Note The special reserve represents the cumulative effect of cancellation of the ~~company's~~company’s share premium account. As permitted by section 230(4) of the Companies Act 1985, only the ~~Group's~~Group’s profit and loss account has been presented. ~~34.~~
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"~~GAAP”), which differ in certain significant
~~F-54~~
~~NOTES TO THE ACCOUNTS (Continued)~~
respects from generally accepted accounting principles in the United States of America ("(“US ~~GAAP"~~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'~~shareholders’ funds that would have been required in applying the significant differences between UK and US GAAP. ~~F-51~~
~~Reconciliation of consolidated profit/(loss) for the financial year~~

Year ended December 31

Restated

Note 2004 2003 2002

£m £m £m
Profit/(loss) for the financial year under UK GAAP
88 55 (111 )
US GAAP adjustments:
Goodwill amortization and impairment (i ) 215 251 270
Intangible amortization (i ) (81 ) (103 ) (119 )
Discontinued operations (ii ) 9 1 17
Disposal adjustments (iii ) 3 (6 ) (3 )
Pensions and other post-retirement benefits (iv ) (18 ) (3 ) 7
Deferred taxation (v ) (2 ) (27 ) 1
Leases (vi ) (16 ) (16 ) (9 )
Options (vii ) (32 ) (30 ) (46 )
Derivatives (viii ) (23 ) 35 187
Capitalized costs (ix ) — — 1
Acquisition adjustments (x ) — — (2 )
Partnerships and associates (xi ) 1 5 42
Interest in own shares (xiii ) — — —
Minority interests (xiv ) (3 ) (4 ) (7 )
Other (5 ) — —
Taxation effect of US GAAP adjustments (v ) 46 15 (18 )

Total US GAAP adjustments 94 118 321

Profit for the financial year under US GAAP
182 173 210

Cumulative effect of change in accounting principle (less (benefit from) applicable taxes £(9)m) (iv ) — — (21 )
Profit for the financial year under US GAAP after cumulative effect of change in accounting principle
182 173 189

Profit from continuing operations (less charge for applicable taxes 2004: £11m, 2003: £71m, 2002: £67m) 166 160 216
Profit/(loss) from discontinued operations (less charge for applicable taxes 2004: £6m, 2003: £22, 2002: £12m) 16 16 (5 )
Loss on disposal of discontinued operations (less charge for/(benefit from) applicable taxes 2004: £nil, 2003: £2m, 2002 £(4)m) — (3 ) (1 )

Profit for the financial year under US GAAP
182 173 210

Cumulative effect of change in accounting principle (less (benefit from) applicable taxes £(9)m) (iv ) — — (21 )

Profit for the financial year under US GAAP after cumulative effect of change in accounting principle
182 173 189

~~F-55~~
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~~ (Continued)

Year ended December 31

Restated

Note 2004 2003 2002

Presentation of earnings per equity share under US GAAP
(xv )
Earnings per equity share (p ) (p ) (p )
Basic:
Continuing operations 20.9 20.1 27.1
Discontinued operations 2.0 1.7 (0.8 )
Cumulative effect of change in accounting principle — — (2.6 )

Total 22.9 21.8 23.7

Diluted:
Continuing operations 20.8 20.1 27.1
Discontinued operations 2.0 1.7 (0.8 )
Cumulative effect of change in accounting principle — — (2.6 )

Total 22.8 21.8 23.7

Average shares outstanding (millions) 795.6 794.4 796.3
Dilutive effect of stock options (millions) 1.1 0.9 0.4

Average number of shares outstanding assuming dilution (millions) 796.7 795.3 796.7

~~F-56~~
~~NOTES TO THE ACCOUNTS ~~(CONTINUED)~~ (Continued)~~
~~Reconciliation of consolidated shareholders’ funds~~

Year ended
December 31

Restated

Note 2004 2003

£m £m
Shareholders’ funds under UK GAAP
2,603 2,893
US GAAP adjustments:
Goodwill (i ) 492 300
Intangibles (i ) 315 401
Discontinued operations (ii ) 67 58
Disposal adjustments (iii ) — (4 )
Pensions and other post-retirement benefits (iv ) (276 ) (304 )
Deferred taxation (v ) (6 ) 29
Leases (vi ) (47 ) (31 )
Options (vii ) — 2
Derivatives (viii ) 11 21
Capitalized costs (ix ) — —
Acquisition adjustments (x ) 19 24
Partnerships and associates (xi ) 11 (5 )
Ordinary dividends (xii ) 125 119
Interest in own shares (xiii ) — —
Minority interests (xiv ) (20 ) (18 )
Other (5 ) —
Taxation effect of US GAAP adjustments (v ) (71 ) (152 )

Total US GAAP adjustments 615 440

Shareholders’ funds under US GAAP
3,218 3,333

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 ===== ===== ======
Restatements
~~In 2001 the Group recorded a loss~~
      The Company has restated its UK GAAP shareholders’ funds for the financial ~~year.~~years ended December 31, 2003 and 2002 for the adoption of UITF Abstract 38 “Accounting for ESOP trusts”. This has reduced shareholders’ funds under UK GAAP as at December 31, 2003 and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17. Financial Statements”).
      The Company has restated its US GAAP profit and loss account and shareholders’ funds for the financial years ended December 31, 2003 and 2002 to reflect the correct accounting treatment in respect of incentives and fixed rental escalations under one of its leases. Previously the incentives were recognized in the profit and loss account over the period during which the lease incentives were applicable until the lease returned to a market level. Additionally, fixed future market-based rent increases were charged to the profit and loss account as they became applicable under the terms of the lease. As required by US GAAP, both the lease incentives and fixed market-based rent increases are now being charged to the profit and loss account over the entire term of the lease. Consequently, the ~~effect of share options is anti-dilutive~~profit reported under US GAAP for the 2003 and 2002 financial years has been ~~excluded~~reduced by £14 million and £12 million, respectively, on a pre-tax basis and £10 million and £9 million, respectively, on a post-tax basis and the shareholders’ funds reported as at December 31, 2003 and 2002 has been reduced by £19 million and £9 million, respectively, from ~~the calculation of diluted loss per share. Anti-dilutive options in 2001 were 7.8 million. F-53~~ amounts previously reported.
F-57
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 ===== =====
(Continued)
      A summary of the principal differences and additional disclosures applicable to the Group are set out below: ~~(I) GOODWILL AND INTANGIBLES~~
     (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~~“Goodwill and Intangible ~~Assets"~~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"~~(“SFAS”) 142, ~~"Goodwill~~“Goodwill and Other Intangible ~~Assets"~~ 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",~~was effective for the Group 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 2004, 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~~141 “Business Combinations” 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~~
     (ii) Discontinued operations
      Following a strategic review of the business, the Group approved and announced, in December 2004, its intention to dispose of its 79% interest in Recoletos Grupo de Comunicacion, S.A. to Retos Cartera, a consortium of investors, as part of a tender offer for all the share capital of Recoletos. The transaction was approved by the Spanish regulatory authorities in February 2005 and completed in April 2005 with the Group receiving net cash proceeds of £372 million. In accordance with the provisions of SFAS 144“Accounting for the Impairment or Disposal of Long-Lived Assets”the results of Recoletos have been reclassified as a discontinued operation.
      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"~~(“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.
F-58
NOTES TO THE ACCOUNTS (Continued)
      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~~
      The operating profits, assets and liabilities in respect 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 ofdiscontinued 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 presentedunder US GAAP are set out 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~~

2004 2003 2002

£m £m £m
Total operating profit in respect of discontinued operations 21 27 22
Assets in respect of discontinued operations 413 402
Liabilities in respect of discontinued operations (148 ) (147 )
     (iii) Disposal adjustments
      In 2004, 2003 ~~2002~~ and ~~2001~~2002 gains and losses were recognized under UK GAAP on the disposal of a number of the ~~Group's~~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
      Under US GAAP, profits and losses from the ~~extent that~~sale of fixed assets or investments are included within operating profit. Under UK GAAP, the corresponding profits and losses are disclosed as non-operating (see note 4a of “Item 17. Financial Statements”). Under US GAAP, the profit on sale of fixed assets and investments was £14 million in 2004 (a loss of £7 million in 2003 and a loss of £15 million in 2002).
      Under UK GAAP, the full amount of any goodwill previously written off ~~under UK GAAP was brought~~ to ~~account~~reserves is accounted for as part of the calculation of profit or loss on disposal of an entity. This results in ~~the disposal calculation and,~~lower profits (or higher losses) on disposals of entities than under US GAAP, ~~a portion of that~~where these 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.balances have been partially amortized. 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~~GAAP.
     (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"~~(“SSAP”) 24 ~~"Accounting~~“Accounting for Pension ~~Costs"~~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~~“Employers Accounting for ~~Pensions"~~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 with the offset as a reduction to
F-59
NOTES TO THE ACCOUNTS (Continued)
equity. Under UK GAAP, there is no requirement to recognize a minimum pension liability in respect of the unfunded accumulated benefit obligation.
      Under SFAS 87, the Group has recognised an asset in respect of pensions and other post retirement benefits, the majority of which is attributable to prior acquisitions. The difference between this asset and the plans’ funded status (the difference between plan assets and liabilities) is held as unrecognised and spread over the employees’ remaining service lifetimes. However, the unrecognised amount attributable to actuarial gains and losses falling within a 10% corridor (i.e. 10% of the greater of the plan assets or plan liabilities) is deferred and not spread.
      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~~£30 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.
     (v) Deferred ~~tax assets were only recognized to the extent that their recoverability was assured beyond reasonable doubt.~~taxation
      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 more likely than not to be 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~~more likely than not to crystallize ~~within the foreseeable future.~~in future periods. 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 2004, 2003 ~~2002~~ and ~~2001~~2002 reflect the impact of recording the full provision and deferred tax assets, net of valuation ~~allowance.~~allowance, and are summarized below:

Stockholders Stockholders
Net income equity Net income equity
Restated

2004 2004 2003 2003

£m £m £m £m
Tax effect of GAAP adjustments on:

Goodwill and intangible amortization (23 ) (108 ) 29 (128 )
Derivatives 38 (3 ) (21 ) (41 )
Options, pensions, disposals and other adjustments 31 40 7 17

Total taxation effect of US GAAP adjustments
46 (71 ) 15 (152 )

      Income tax adjustments on the GAAP differences on goodwill and intangible amortization are calculated by reference to each specific acquisition. These adjustments arise on tax deductible goodwill and intangibles due to the different amortization periods adopted under the different GAAPs and due to the recognition of temporary differences between the tax base cost of intangibles and their book value at acquisition under US GAAP that are not recognized under UK GAAP. The net effect of the adjustments is to recognize a greater deferred tax liability under US GAAP.
F-60
NOTES TO THE ACCOUNTS (Continued)
      Adjustments to the deferred tax on derivatives are provided on the gross adjustment to the value of the derivatives at the balance sheet date with the movement on the tax adjustment shown as a reconciling item in the profit and loss account. Where related exchange gains and losses recognized in reserves for UK GAAP are taken to the profit and loss account under US GAAP then the related tax adjustment is also taken to the profit and loss account.
      The recognized deferred tax asset is based upon the expected future utilization of tax loss carryforwards and the reversal of other temporary differences. For financial reporting purposes, the Group has recognized a valuation allowance for those benefits for which realization does not meet the more likely than not criteria.
      The valuation allowance has been recognized in respect of the tax loss carryforwards. The Group continually reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.
      The deferred tax 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
     (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,~~As a result, the Group has certain leases for which the classification is operating under UK GAAP and finance (capital) under US GAAP. ~~Adjustments~~
      Differences can also arise ~~due to~~in respect of the timing of recognition of lease ~~related costs being different~~incentives and future fixed market-based rent escalations. Under UK GAAP lease incentives are recognized in the profit and loss account over the period until the lease rentals revert to a market level, and future market-based rental increases are recognized as they become applicable under UKthe terms of the lease. Under US GAAP, both lease incentives and ~~US GAAP. (VII) OPTIONS~~fixed market-based rent increases are recognized on a straight-line basis over the entire fixed term of the lease.
     (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~~“Accounting For Stock-Based ~~Compensation"~~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~~£37m in 2004, £33m in 2003 ~~L53m~~and £53m in 2002. The fair value of Company options and the weighted average assumptions used in the
F-61
NOTES TO THE ACCOUNTS (Continued)
Black Scholes model for determining the fair values of options issued under the Company option schemes for each period ending December 31, 2004, 2003 and 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.as follows:

Weighted Weighted Weighted
Number average Number average Number average
granted fair value granted fair value granted fair value
2004 2004 2003 2003 2002 2002

£
(’000) £ (’000) £ (’000)
Fair value of company options 1,116 2.53 2,885 1.86 1,557 3.60
Fair value of shares granted under restricted share schemes:
Annual Bonus Share Matching Plan 53 5.42 108 5.41 50 9.03
Long Term Incentive Plan 2,413 4.54 1,711 5.21 3,194 5.67

2004 2003 2002

Assumption for company options:

Risk free interest rate 4.78 % 3.90 % 5.19 %
Expected life (years) 3.34 3.55 4.05
Expected dividend yield 3.72 % 4.45 % 2.61 %
Expected volatility 37.32 % 47.96 % 49.18 %
      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'~~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'~~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~~
     (viii) Derivatives
      Under UK GAAP, the ~~Group's~~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~~Movements in the fair value of the ~~derivatives that the Group has designated and that~~effective portion of derivative instruments which qualify as ~~effective~~either fair value hedges ~~are recorded~~or net investment hedges have been offset in ~~either~~earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or ~~earnings.~~asset. Any movements on the ineffective portion of derivatives that are classified as hedges isare immediately recognized in earnings.
      In 2003 ~~as in~~and 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, for those years, 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~~Group’s treasury policy, these are not trading instruments and are transacted solely to match underlying financial exposures. In 2004 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAP for certain of its derivative contracts. The movements in the fair value of the effective portion of qualifying fair value hedges and net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset.
      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
F-62
NOTES TO THE ACCOUNTS (Continued)
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~~
     (ix) Capitalized Costs
      In earlier periods, 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
     (x) 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~~“Recognition of Liabilities in Connection with a Business Purchase ~~Accounting"~~Combination”. 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 withSFAS 141 ~~"Business~~“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~~
     (xi) 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~~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"~~(“APB”) No. 18, ~~"The~~“The Equity Method of Accounting for Investments in Common ~~Stock"~~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
     (xii) Ordinary dividends
      Under UK GAAP, ordinary dividends proposed are provided for in the year in respect of which they are recommended by the board of directors although approval of the final dividend will not take place until the Annual General Meeting subsequent to the year-end. Under US GAAP, such dividends are provided for in the year in which they are declared and approved by the board of directors. ~~F-59~~
     (xiii) Interest in own shares
      Under UK GAAP, following the adoption of UITF Abstract 38 ‘Accounting for ESOP trusts’, and also under US GAAP, own shares held in treasury or through an ESOP trust are recorded at cost and shown as a deduction from shareholders’ funds. As a result, there is no longer any GAAP difference in respect of interests in own shares.
F-63
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(Continued)
     (xiv) Minority interests
      Minority interests represent the minority share of US GAAP adjustments. ~~(XVII) PRESENTATION OF EARNINGS PER EQUITY SHARE~~
     (xv) 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~~
     (xvi) Other disclosures required by 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~~
     Cash flow information
      Under UK GAAP, the Consolidated Cash Flow Statements are presented in accordance with FRS 1, as revised,Cash Flow ~~Statements.~~Statements. The statements prepared under FRS 1 present substantially the same information as that required under US GAAP as interpreted by SFAS 95 ~~"Statement~~“Statement of Cash Flows."”
      The definition of ~~"cash flow"~~“cash flow” differs between UK and US GAAP. Cash flow under UK GAAP represents increases or decreases in ~~"cash"~~“cash”, which comprises cash in hand and repayable on demand and overdrafts. Under US GAAP, cash flow represents increases or decreases in ~~"cash~~“cash and cash ~~equivalents"~~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~~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~~

2004 2003 2002

£m £m £m
Net cash provided by operating activities 402 239 334
Net cash (used in)/provided by investing activities (115 ) (102 ) 689
Net cash used in financing activities (226 ) (164 ) (819 )
Foreign exchange differences (6 ) 14 (14 )

Net (decrease)/increase in cash and cash equivalents 55 (13 ) 190
Cash and cash equivalents under US GAAP at the beginning of the year 558 571 381

Cash and cash equivalents under US GAAP at the end of the year
613 558 571

F-64
NOTES TO THE ACCOUNTS (Continued)
     Discontinued operations
      The Group analyses turnover and operating profit between continuing and discontinued operations. Under US GAAP, for transactions occurring in 2004, 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 Recognition
      Revenue from the sale of books is recognized when ~~the goods are shipped (which is also when~~ title ~~passes),~~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,~~multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognized as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are ~~delivered.~~treated as long-term contracts with revenues recognized on a percentage of completion basis. 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~~
      Circulation and advertising revenue is recognized when the ~~advertisement appears in the publication. Online advertising~~newspaper or other publication is published. Subscription 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 revenueon a straight-line basis over the ~~subscription term.~~life of the subscription.
      The Group recognizes software revenue in accordance with the provisions of the Statement of Position 97-2, ~~"Software~~“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~~
F-65
NOTES TO THE ACCOUNTS (Continued)
     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.~~2004. 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~~FAS 13“Accounting For Leases”:

Capital Capital Operating Operating
leases — land leases — plant leases — land leases — plant
& buildings & machinery/other & buildings & machinery/other

£m £m £m £m
Fiscal year ending December 31,
2005 — (2 ) (96 ) (19 )
2006 — (1 ) (89 ) (12 )
2007 — (1 ) (84 ) (5 )
2008 — — (81 ) (2 )
2009 — — (78 ) (1 )
Thereafter — — (584 ) —

Total minimum lease payments
— (4 ) (1,012 ) (39 )

     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~~Group’s share of the net earnings of these companies is included in the consolidated ~~net income.~~profit and loss. 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~~
      The Group consolidates variable interest entities where we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are deemed the primary beneficiary are included in the profit and loss account from the date such determination is made.
     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~~
     Companies Act 1985
      The consolidated financial statements do not constitute ~~"statutory accounts"~~“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~~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~~
F-66
NOTES TO THE ACCOUNTS (Continued)
     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 JanuaryDecember 2003, the FASB issued FIN ~~46 "Consolidation~~46R “Consolidation of Variable Interest Entities --— an interpretation of ARB No. ~~51"~~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 4646R 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~~entity’s activities or entitled to receive a majority of the ~~entity's~~entity’s residual returns, or both. ~~A revision (FIN 46R) was issued in December 2003 which deferred the~~The effective date for public companies tois 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'~~“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~~a material impact on the financial position, cash flows or results of the Group under US GAAP as at December 31, 2004.
      In May 2004, the FASB issued FSP No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides authoritative guidance on accounting for the federal subsidy specified in the Medicare Act. The Medicare Act provides for a federal subsidy equal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning in 2006. The adoption of FSP 106-2 did not have a material impact on the ~~transitional arrangements. Currently~~financial position, cash flows or results of 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~~under US GAAP as at December 31, 2004.
      In November ~~2003,~~2004, the ~~EITF reached a final consensus on Issue~~FASB issued SFAS No. ~~00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This EITF provides guidance on when and how to separate elements~~151, “Inventory Costs-An Amendment of ~~an arrangement that may involve~~ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the ~~delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The~~ guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the ~~consensus~~accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for ~~revenue arrangements entered into~~fiscal years beginning after June 15,2005. The Group is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material impact.
      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non monetary Assets-An Amendment of APB Opinion No. 29, Accounting for Non monetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non- monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, ~~2003 and~~2005. The Group is currently evaluating the effect that the adoption of SFAS 153 will ~~apply to the Group for any arrangements entered into after January 1, 2004. Currently, this is~~have but does not ~~expected~~expect it to have a material ~~effect on~~impact.
      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial ~~position and results~~statements based on their fair values beginning with the first interim or annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previously permitted
F-67
NOTES TO THE ACCOUNTS (Continued)
under SFAS 123 no longer will be an alternative to financial statement recognition. The Group is currently evaluating the impact of adoption of SFAS 123R will have, but because it already applies the requirements SFAS 123 it does not expect adoption of the ~~Group under US GAAP. F-63~~ new standard to have a material impact.
F-68
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~~
Pearson plc
/s/ Rona Fairhead
Rona Fairhead
Chief Financial Officer
Date: ~~May 7, 2004~~ June 27, 2005
F-69


(Mark One)
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the fiscal year ended December 31, 2004
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the transition period from to


Title of Class		Name of Each Exchange 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


		Page

	Introduction		4
	Forward-Looking ~~Statements...................... iii~~ Statements		4

PART I ~~ITEM~~
Item 1. ~~IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.................................................. 1 ITEM~~	Identity of Directors, Senior Management and Advisers		6
Item 2. ~~OFFER STATISTICS AND EXPECTED TIMETABLE.......... 1 ITEM~~	Offer Statistics and Expected Timetable		6
Item 3. ~~KEY INFORMATION.................................. 1~~	Key Information		6
	Selected Consolidated Financial ~~Data............ 1~~ Data		6
	Dividend ~~Information............................ 3~~ Information		8
	Exchange Rate ~~Information....................... 4~~ Information		9
	Risk ~~Factors.................................... 4 ITEM~~Factors		9
Item 4. ~~INFORMATION ON THE COMPANY....................... 6 Pearson......................................... 6~~	Information on the Company		12
	Pearson		12
	Overview of Operating ~~Divisions................. 6~~ Divisions		12
	Our ~~Strategy.................................... 6~~ Strategy		13
	Operating ~~Divisions............................. 7~~ Divisions		13
	Pearson ~~Education.......................... 7~~ Education		13
	The FT ~~Group............................... 8~~ Group		15
	The Penguin ~~Group.......................... 10 Competition..................................... 11~~ Group		16
	Competition		17
	Intellectual ~~Property........................... 11~~ Property		17
	Raw ~~Materials................................... 11~~ Materials		17
	Government ~~Regulation........................... 11~~ Regulation		18
	Licenses, Patents and ~~Contracts................. 12~~ Contracts		18
	Recent ~~Developments............................. 12~~ Developments		18
	Organizational ~~Structure........................ 12~~ Structure		19
	Property, Plant and ~~Equipment................... 12 ITEM~~Equipment		19
Item 5. ~~OPERATING AND FINANCIAL REVIEW AND PROSPECTS..... 13~~	Operating and Financial Review and Prospects		20
	General ~~Overview................................ 14~~ Overview		20
	Results of ~~Operations........................... 19~~ Operations		26
	Liquidity and Capital ~~Resources................. 32~~ Resources		40
	Accounting ~~Principles........................... 34 ITEM~~Principles		42
Item 6. ~~DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....... 36~~	Directors, Senior Management and Employees		46
	Directors and Senior ~~Management................. 36~~ Management		46
	Compensation of Senior ~~Management............... 38~~ Management		47
	Share Options of Senior ~~Management.............. 43~~ Management		53
	Share Ownership of Senior ~~Management............ 46~~ Management		55
	Employee Share Ownership ~~Plans.................. 46~~ Plans		56
	Board ~~Practices................................. 47 Employees....................................... 47 ITEM~~Practices		56
	Employees		57
Item 7. ~~MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................................. 48 ITEM~~	Major Shareholders and Related Party Transactions		57
Item 8. ~~FINANCIAL INFORMATION............................ 48~~	Financial Information		58
	Legal ~~Proceedings............................... 48 ITEM~~Proceedings		58
Item 9. ~~THE OFFER AND LISTING............................ 49 ITEM~~	The Offer and Listing		58
Item 10. ~~ADDITIONAL INFORMATION........................... 49 ITEM~~	Additional Information		59
Item 11. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 57 Introduction.................................... 57~~	Quantitative and Qualitative Disclosures About Market Risk		68
	Introduction		68
	Interest ~~Rates.................................. 58~~ Rates		68
	Currency Exchange ~~Rates......................... 58~~


		Page


PART II ~~ITEM~~
Item 13. ~~DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................. 60 ITEM~~	Defaults, Dividend Arrearages and Delinquencies		70
Item 14. ~~MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS............................... 60 ITEM~~	Material Modifications to the Rights of Security Holders and Use of Proceeds		70
Item 15. ~~CONTROLS AND PROCEDURES.......................... 60 ITEM~~	Controls and Procedures		70
Item 16A. ~~AUDIT COMMITTEE FINANCIAL EXPERT.................. 60 ITEM~~	Audit Committee Financial Expert		70
Item 16B. ~~CODE OF ETHICS.................................... 60 ITEM~~	Code of Ethics		70
Item 16C. ~~PRINCIPAL ACCOUNTANT FEES AND SERVICES............ 60 ITEM~~	Principal Accountant Fees and Services		71
Item 16D. ~~EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES................................................ 61 ITEM~~	Exemptions from the Listing Standards for Audit Committees		71
Item 16E. ~~PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES...................................... 61~~	Purchases of Equity Securities by the Issuer and Affiliated Purchases		71

PART III ~~ITEM~~
Item 17. ~~FINANCIAL STATEMENTS............................. 62 ITEM~~	Financial Statements		71
Item 18. ~~FINANCIAL STATEMENTS............................. 62 ITEM~~	Financial Statements		72
Item 19. ~~EXHIBITS......................................... 62~~	Exhibits		72
EX-2.2
EX-4.1
Ex-4.2
EX-8.1
EX-10
EX-12.1
EX-12.2
EX-13.1
EX-13.2


United Kingdom/Republic of ~~Ireland..........................~~ Ireland			31%
Continental Europe, Africa and Middle ~~East..................~~ East			32% ~~Americas....................................................~~
Americas			30% ~~Asia........................................................~~
Asia			7%


*	Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC.


Ordinary Shares, 25p par ~~value.............................. 802,388,000~~ value			803,250,000

	68
	Forward Foreign Exchange ~~Contracts.............. 58 ITEM~~Contracts	69
Item 12. ~~DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES................................................ 59~~	Description of Securities Other Than Equity Securities	70


	•	references to “sterling”, “pounds”, “pence” or “£” are to the lawful currency of the United Kingdom,

	•	references to “euro” or “€” 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.


	•	operations and prospects,

	•	growth strategy,

	•	funding needs and financing resources,

	•	expected financial position,

	•	market risk,

	•	currency risk,

	•	US federal and state spending patterns,

	•	debt levels, and

	•	general market and economic conditions.


ITEM 1.	*IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS*


	Year Ended December 31

	2004			2004			2003			2002			2001			2000

							Restated			Restated			Restated			Restated
	$			£			£			£			£			£
	(In millions, except for per share amounts)
UK GAAP Information:
Consolidated Profit and Loss Account Data
Statutory Measures
Total sales		7,524			3,919			4,048			4,320			4,225			3,874
Total operating profit/(loss)		444			231			226			143			(47	)		209
Profit/(loss) after taxation		209			109			77			(89	)		(403	)		173
Profit/(loss) for the financial year		169			88			55			(111	)		(423	)		174
Basic earnings/(loss) per equity share(4)	$	0.21			11.1	p		6.9	p		(13.9	)p		(53.2	)p		23.9	p
Diluted earnings/(loss) per equity share(5)	$	0.21			11.0	p		6.9	p		(13.9	)p		(53.2	)p		23.4	p
Dividends per ordinary share	$	0.49			25.4	p		24.2	p		23.4	p		22.3	p		21.4	p
Consolidated Balance Sheet Data
Total assets (Fixed assets plus Current assets)		11,493			5,986			6,336			6,790			8,209			8,924
Shareholders funds		4,998			2,603			2,893			3,276			3,712			4,100
Long-term obligations(6)		(3,291	)		(1,714	)		(1,349	)		(1,737	)		(2,616	)		(2,715	)
Capital stock(1)		386			201			201			200			200			199
Number of equity shares outstanding (millions of ordinary shares)		803			803			802			802			801			798


(1)	Capital stock and 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 Numbernumber of equity shares outstanding ~~(millions~~are the same under both UK and US GAAP.

(2)	Total operating profit under US GAAP includes a profit of ~~ordinary shares)........ 802 802 802 801 798 613~~


Fiscal Year	Interim		Final		Total		Interim		Final		Total

	(Pence per ordinary share)						(Cents per ordinary share)
2004		9.7		15.7		25.4		18.6		30.2		48.8
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


Month	High		Low

May 2005	$	1.90	$	1.82
April 2005	$	1.92	$	1.87
March 2005	$	1.93	$	1.87
February 2005	$	1.92	$	1.87
January 2005	$	1.91	$	1.86
December 2004	$	1.95	$	1.91


ITEM 3.	*KEY INFORMATION*


	*Pearson Education*


	School


Year Ended December 31	Average Rate

2004	$	1.84
2003	$	1.63
2002	$	1.51
2001	$	1.45
2000	$	1.52


	Our US educational textbook and testing businesses may be adversely affected by changes in state educational funding that result from the condition of the local state or US economy, changes in legislation, both at the federal and state level, and/or changes in the state procurement process.


	*Our newspaper business may be adversely affected by a weak global advertising environment and other economic and market factors.*


	*Our intellectual property and proprietary rights may not be adequately protected under current laws in some jurisdictions and that may adversely affect our results and our ability to grow.*


	*The contracting risks associated with our Professional division within Pearson Education are complex and, if unmanaged, could adversely affect our financial results and growth prospects.*


	*A control breakdown in our school testing businesses could result in financial loss and reputational damage.*


	*Changes in the Penguin business may restrict our ability to grow and return this business to historical profit levels.*


	*We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.*


	•	Students seeking cheaper sources of content, e.g. on-line, used books or imported textbooks. To counter this trend we introduced our own on-line format (called SafariX) and are providing students with a greater choice and customization of our products.

	•	Competition from major publishers and other educational material and service providers in our US educational textbook and testing business.

	•	Author advances in Penguin. We compete with other publishing businesses for the rights to author manuscripts, and a competitive situation arises where author advances can be bid up to a level at which we cannot generate a sufficient return on our investment.


	*We operate in markets which are dependent on Information Technology systems and technological change.*


	*Our reported earnings may be adversely affected by changes in our pension costs and funding requirements due to poor investment returns and/or changes in pension regulations.*


	*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.*


	•	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.

	•	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 personalize 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 theFinancial 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.


		Percentage
		Interest/Voting
Name	Country of Incorporation/Residence	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~~ Group
The Financial Times ~~Limited..................~~ Limited	England and Wales		100%
Financial Times Business Ltd. ~~...............~~	England and Wales		100%
Interactive Data ~~Corporation.................~~ Corporation	United States (Delaware)		61%
Recoletos Grupo de Comunicacion ~~SA...........~~ SA	Spain		79%
Les Echos ~~SA.................................~~ SA	France		100% ~~THE PENGUIN GROUP~~
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%


General Use of Property	Location	Area in Square Feet

Warehouse	Pittstown, Pennsylvania, USA		510,000 ~~Warehouse.................................... LaPorte, Indianapolis, USA(1) 437,000 Warehouse....................................~~
Warehouse	Kirkwood, New York, USA		409,000 ~~Offices......................................~~
Offices	Iowa City, Iowa, USA		310,000 ~~Offices......................................~~
Offices	Old Tappan, New Jersey, USA ~~211,900~~		210,100
Warehouse/~~office.............................~~ office	Cedar Rapids, Iowa, USA		205,000 ~~Offices......................................~~
Offices	Reading, Massachusetts, USA(1)		158,527 ~~Offices......................................~~
Offices	London, UK		152,986
Printing/~~Processing..........................~~ Processing	Owatonna, Minnesota, USA		128,000
Printing/~~Processing..........................~~ Processing	Columbia, Pennsylvania, USA		121,400 ~~Offices......................................~~
Offices	Eagan, Minnesota, USA		109,500 ~~Offices......................................~~
Offices	Mesa, Arizona, USA		96,000


	*Year ended December 31, 2004 compared to year ended December 31, 2003*


	Year Ended
	December 31

	2004			2003

	£m			£m
Cost of sales		(1,866	)		(1,910	)

Distribution costs		(243	)		(239	)
Administration and other expenses		(1,635	)		(1,724	)
Other operating income		46			51

Net operating expenses		(1,832	)		(1,912	)


	*Year ended December 31, 2003 compared to year ended December 31, 2002*