: directors ' report :

The directors are pleased to present their report to shareholders, together with the financial statements for the year ended 31 December 1999 on pages 58 to 61 and 63 to 94. Details of the businesses, the development of the Group and its subsidiaries and likely future developments are given on pages 11 to 35 of this annual report. Sales and profits of the different sectors and geographical markets are given on page 65.

Results and dividend The profit for the financial year ended 31 December 1999 was £294m (1998: £437m). The profit retained for the year was £156m (1998: £311m) and has been transferred to reserves. A final dividend of 13.9p per share is recommended for the year ended 31 December 1999. This, together with the interim dividend already paid, makes a total for the year of 22.5p (1998: 21p). The final dividend will be paid on 2 June 2000 to shareholders on the register at the close of business on 17 March 2000, the record date.

Dividend reinvestment plan (DRIP) The plan provides the benefit of giving shareholders the right to buy the company’s shares on the London stock market with the cash dividend. If you would like further information about the DRIP, please contact the company’s registrar, whose address and telephone number are set out on page 96.

Significant acquisitions and disposals Details of these transactions can be found in notes 25 and 26 to the accounts on pages 86 to 89.

Transactions with related parties Details of transactions with related parties, which are reportable under FRS8, are given in note 30 to the accounts on page 91.

Capital expenditure The analysis of capital expenditure and details of capital commitments are shown in note 12 to the accounts on page 73.

Post balance sheet events Details of these events can be found in note 31 to the accounts on page 91.

Directors The present members of the board, together with their biographical details, are shown on page 41. Greg Dyke resigned from the board on 17 September 1999. Michel David-Weill and David Verey resigned as directors on 3 March 2000. Details of directors’ remuneration and interests in ordinary shares and options of the company are contained in the personnel committee report on pages 49 to 56. Three directors, Marjorie Scardino, Gill Lewis and Reuben Mark, will retire by rotation at the forthcoming Annual General Meeting (AGM) on 12 May 2000. All three, being eligible, will offer themselves for re-election. Terry Burns, who was appointed to the board on 6 May 1999, retires from office in accordance with the company’s articles of association and, being eligible, will offer himself for reappointment. Details of directors’ service contracts can be found on page 51. No director was materially interested in any contract of significance to the company’s business.

Corporate governance The board supports the principles of good governance and code of best practice expressed in the Combined Code (the Code) published in June 1998. The directors’ report, including the personnel committee report which has been considered and adopted by the board, describes how the company has applied such principles and, apart from the two following exceptions, has complied with the provisions set out in section 1 of the Code. Given the small size of the board and the calibre and experience of the non-executive directors, the board does not believe the identification of a senior independent director is appropriate. Also, the board does not have a nomination committee for directors as it considers that the most formal and transparent procedure for the appointment of a new director is for this to be a matter for the whole board.

The board The board currently comprises four executive directors, including the chairman, who is part-time, and four non-executive directors. All of the non-executive directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement.

The board schedules six meetings each year and arranges to meet at other times as appropriate. There is a formal schedule of matters specifically reserved to the board for decision and approval, and the board is supplied in a timely manner with the necessary information to discharge its duties. A procedure exists for directors to seek independent professional advice in the furtherance of their duties, and all directors have access to the advice and services of the company secretary.

Board committees The board of directors has established the following committees all of which have written terms of reference setting out their authority and duties:

i. Audit committee This committee is chaired by Vernon Sankey and its other members are Terry Burns and Reuben Mark. All are non-executive directors. The committee provides the board with the means to appraise Pearson’s financial management and reporting, and to assess the integrity of the Group’s accounting procedures and financial controls. The Group’s internal and external auditors have direct access to the 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 Pearson.

ii. Personnel committee This committee is chaired by Gill Lewis and its other members are Terry Burns and Reuben Mark. All are non-executive directors. The committee meets regularly to decide the remuneration and benefits packages of the executive directors and the chief executives of the main operating companies, as well as recommending the chairman’s remuneration to the board for its decision. It also reviews the Group’s management development and succession plans. The committee reports to the full board and its report, which has been considered and adopted by the board, is set out on pages 49 to 56.

iii. Treasury committee This committee comprises Dennis Stevenson, John Makinson and Vernon Sankey. The committee sets the policies for the company’s treasury department and reviews its procedures on a regular basis.

Internal control Following the publication of guidance from the Turnbull Committee, the directors reviewed the company’s internal control processes in the light of provision D2.1 of the Combined Code. This resulted in a single new control process that is now embedded into the company’s integrated system of internal control, together with a more formal reporting process to the board. The directors now require the operating companies to undertake annual reviews to identify new or potentially under-managed risks. The results from these reviews are monitored within the existing monthly reporting and annual budgeting processes. Annually, the Group control department provides a report to executive management and to the board. These processes, adopted during the year, will allow Pearson to report on internal controls in next year’s annual report. However, in accordance with the transitional arrangements permitted by the London Stock Exchange, the board reports below on internal financial controls only.

The board of directors has overall responsibility for the Group’s system of internal financial control, which it exercises through an organisational structure with clearly defined levels of responsibility and authority and appropriate reporting procedures. This structure includes the audit committee which, with the finance director, has reviewed the effectiveness of the internal financial control environment of the Group. The audit committee meets regularly and considers, inter alia, reports from internal and external auditors covering such matters.

The directors consider that the Group’s system of internal financial control is appropriately designed to provide reasonable but not absolute assurance against material misstatement or loss. The main elements of this internal financial control are as follows:

i. Operating company controls The identification and mitigation of major business risks is the responsibility of operating management. Each operating company maintains controls and procedures appropriate to its own business environment while conforming to Group standards and guidelines. These include procedures to identify and then mitigate all types of risks.

ii. Self assessment Each year, chief executives of the main operating companies are required to certify that they had in place, throughout the year, a comprehensive system of controls and that they have conducted a review of the effectiveness of those internal controls. The Group control department reviews the chief executives’ submissions and reports its conclusion to the audit committee.

iii. Financial reporting There is a comprehensive budgeting system with an annual budget approved by the board of directors. Monthly financial information, including balance sheets, cash flow statements, trading results and indebtedness, are reported against the corresponding figures for the budget and the previous year, with corrective action being taken by the directors as appropriate.

iv. Treasury management The treasury department operates within policies approved by the board, and its procedures are reviewed regularly by the treasury committee. Major transactions are authorised outside the department at the requisite level and there is an appropriate segregation of duties. Frequent reports are made to the finance director and regular reports are prepared for the treasury committee.

v. Group control The Group control department has the central responsibility for risk control and internal audit which it exercises through teams located both in the UK and the US. The department reviews risks, processes and procedures in all main operating companies, agrees with operating companies their plans to eliminate or mitigate risks where possible, and to improve controls and processes. It monitors operating companies’ progress and reports regularly to executive management and the audit committee and annually to the board.

vi. Insurance Insurance cover is provided either through Pearson’s captive insurance subsidiary or externally, depending on the scale of the risk in question and the availability of cover in the external market.

Going concern Having reviewed the Group’s liquid resources and borrowing facilities, and the 2000 and 2001 cash flow forecasts contained in the Group budget for 2000, the directors believe that the Group and the company have adequate resources to continue as a going concern for the foreseeable future. For this reason, the financial statements have, as usual, been prepared on a going concern basis.

Year 2000 Pearson operating companies have completed their Year 2000 programmes according to plan and all businesses have been operating normally from the beginning of the year. The company recognises that it is too early to declare that the Year 2000 issue is completely resolved. All operating companies will remain vigilant and will continue to monitor carefully their systems for any Year 2000 problems throughout this year.

Across the Pearson Group the direct overall cost to resolve the Year 2000 problem was £19m, of which £6m was spent in 1999. These figures include all remedial work, upgrades, hardware replacement and additional external resources. The figures do not, however, include the cost of internal resources, nor the introduction of new IT systems where there are significant functional enhancements, over and above simply resolving the Year 2000 issue.

Shareholder communication Management continues to develop, increase and improve communication with share-holders, large and small, institutional and private. This year’s AGM will again include information about the Group’s businesses, as well as the 1999 results and general AGM business. The company’s website (www.pearson.com) includes a section focusing specifically on Investor Relations and we post all company announcements on the website as soon as they are made. In addition, Pearson has developed a comprehensive institutional investor communications programme, as well as communicating with employees.

Employment The average number of Group employees in 1999 was 23,872, of whom some 5,456 were employed in the UK. The employment policies of the Group embody the principles of equal opportunity and are designed to meet the needs of operating companies and comply with local regulations in their areas of operation. The sole criterion for selection, training, development and promotion is the individual’s suitability for the position of employment offered and his or her aptitudes and abilities. The company takes seriously its statutory obligations relating to disabled persons and seeks not to discriminate against current or prospective employees with disabilities because of a reason relating to their disability. Consideration is given to making reasonable adjustments to premises, or employment arrangements, if these substantially disadvantage a disabled employee, or prospective employee, compared to an able-bodied person.

i. Training and development The Group is committed to improving the performance of all employees through development and training. In 1999 Pearson implemented a management development curriculum that identified training needs across the businesses and developed a series of specially designed group programmes for senior management and high potential people across the Group. These activities include regular updates on core business skills for management at all levels, the establishment of a Pearson intensive top management programme to run regularly at leading business schools across the world and a forum for identifying and training the brightest and best of the Group’s talent. The operating companies have also initiated their own programmes to support these initiatives. Employees are also encouraged to develop their careers by taking up opportunities in other parts of the Group.

ii. Employee participation Share ownership is at the heart of Pearson’s remuneration philosophy and the directors believe that the key to our success lies in a motivated workforce holding a stake in the company. Pearson operates both worldwide profit sharing and save for shares plans. For 1999, eligible employees, who make up the vast majority of all employees, will receive a cash bonus and an award of Pearson shares