: financial review :

simon & schuster : Simon & Schuster was acquired at the end of 1998.The acquisition has had an impact on the 1999 accounts in a number of areas which are described below.

exceptional items In 1998 an exceptional charge of £72m was made against operating profit to reflect part of the cost of integrating Simon & Schuster with Pearson’s existing education business. An additional charge of £64m was made to align accounting policies and write down certain assets relating to our former education business. Additional integration costs of £110m have been incurred in 1999, bringing total integration costs for the two years as a whole to £246m. Further charges are expected in 2000, but these are not expected to be significant by comparison.

goodwill Goodwill represents the difference between the purchase price paid and the fair value of the net tangible assets acquired. On the acquisition of Simon & Schuster the company recorded goodwill of £2,325m. This is being amortised over a period of 20 years and resulted in an amortisation charge of £116m in 1999, by far the most significant item in Pearson’s total goodwill amortisation charge of £131m.

business & professional and reference assets At the time of the acquisition of Simon & Schuster, Pearson indicated that it intended to dispose of a number of the non-core businesses which were purchased as part of the overall acquisition. During 1999 these businesses were sold for proceeds of £209m, significantly higher than the anticipated £171m, despite the decision to retain the Prentice Hall Direct business which we had initially planned to sell.

final fair value adjustments Provisional fair value adjustments were made in 1998 which have now been finalised in 1999. Following these final adjustments, the fair value of net assets acquired have been slightly increased in 1999 (see note 25 to the accounts).

non-operating items : Although there were fewer disposals during 1999 than in 1998, non-operating items remained significant principally due to the disposal of the Group’s indirect interest in BSkyB which resulted in a non-operating profit of £348m before tax estimated at £91m.

interest : Net interest rose significantly to £147m, principally because of a £1,726m increase in average net debt. This reflected the impact for a full year, as opposed to just over one month in 1998, of the borrowings taken on to finance the Simon & Schuster transaction. The enlargement of Pearson Education also increased the debt needed to fund the Group’s working capital requirements in the middle part of the year. However, this was partially offset by the proceeds received from asset disposals, also in the middle part of the year. The Group’s net interest rate payable averaged approximately 6.4%. This was lower than in the previous year (mainly due to a change in the ratio of cash to gross debt) even though interest rates increased during the year. A weighted three month LIBOR rate, reflecting the Group’s borrowings in US dollars, euros, and sterling, rose by 80 basis points, or 0.8%, principally in September and October, due to the markets’ concerns over Year 2000 issues. The effect of these rises on the Group was also mitigated by its existing portfolio of interest rate swaps, which converted over half of its variable rate commercial paper and bank debt to a fixed rate basis.

taxation : The tax charge of £180m represents an effective rate of 37.5% on profit before taxation of £480m. This compares with an effective rate of 29.9% in 1998. The main reason for the increase in the effective rate is the very significant increase in the charge for goodwill amortisation, from £12m in 1998 to £131m in 1999, this in turn reflecting the fact that the Simon & Schuster education businesses were in the Group for a full year in 1999. No tax relief is available on this amortisation, and, as in 1998, only limited tax relief has been recognised on the Simon & Schuster integration costs.

In addition, the overall tax rate on non-operating items was higher in 1999 than it was in 1998. By far the largest gain in 1999 arose on the disposal of the indirect interest in BSkyB discussed above; there was a benefit from the indexed tax base cost being higher than the book value but this was offset by some smaller disposals where the opposite was the case.

The tax rate on adjusted earnings fell from 28% to 25%, whereas the effective UK statutory rate fell from 31% to 30.25%. As in 1998, the availability of tax losses in the US meant that no significant tax provision was required on the Group’s profits there, and once again this factor alone largely accounted for the difference between the UK statutory rate and the effective rate on adjusted profits. The difference between the two rates increased this year because profits arising in the US which could be offset by the losses were higher, again reflecting the fact that the Simon & Schuster education businesses were in the Group for a full year. The benefit of the US losses was slightly offset by higher tax rates in countries other than the UK and the US and by the effect of disallowed expenses.

The tax rate reflected in the calculation of adjusted earnings should remain at around 25% in the current year in the absence of any significant change in the tax regime in the UK or US. It is expected, however, that this year the UK Accounting Standards Board will issue a new standard on the treatment of deferred taxation which could result in a higher charge to current income for most UK public companies, including Pearson.

minorities : Minority interests amounted to £6m in 1999 principally reflecting the 20% stake held in Recolétos throughout the year by a third party. This stake was purchased by the Group at the end of 1999.