Pearson is a growing company. In four years, we have more than doubled our annual revenues from £1.8 billion to nearly £4 billion and tripled our operating profit from £216 million to £686 million. At the same time, we have built a simpler, more integrated media company and made each of our businesses a leader in its market. Today, in every part of the company, we continue to make the moves that will accelerate our long-term growth. PEARSON PLC ANNUAL REPORT Pearson is a growing company. In four years, we have more than doubled our annual revenues from £1.8 billion to nearly £4 billion and tripled our operating profit from £216 million to £686 million. At the same time, we have built a simpler, more integrated media company and made each of our businesses a leader in its market. Today, in every part of the company, we continue to make the moves that will accelerate our long-term growth. PEARSON PLC ANNUAL REPORT preface 1 Financial highlights 2 Chairman’s letter strategy 5 Chief executive’s review goals 11 The Pearson goals 12 Corporate measures 15 Operating measures 16 Internet enterprises performance 17 The results 18 Pearson Education 22 The Penguin Group 26 The Financial Times Group 30 Recoletos 31 Financial review governance 39 Board of directors 40 Directors’ report 47 Personnel committee report financials 55 Index 56 Profit and loss 58 Balance sheet 59 Cash flow notes 61 Auditor’s report 62 Notes to the accounts ne 98 Five year summary nli d o d 100 an an s Shareholder information al br er ion es ap at im sp ern l T w int cia ne t in an ial r ves Fin nc ou e in he ina n f s w of t d f ha p • A ce an e t rou uen ess or mes G infl sin f m cial Ti and f bu s o Finan each rk o ion the r two cis sion, r ne y de expan . Ou ail e. grow he d wid es to ms t orld continu infor s w ices stor e serv inve d onlin and an ople ss pe busine million ing quir d ac s an its uthor ced lling a infor best se as re d ation of uin h alle new gener Peng nriv Penguin • By discovering a rence, an u ted refe ishes nce in illustra publ fere ley, the leader ers. It nd re Dorling Kinders publish n’s a t-known hildre world’s bes ics, c position as one of the d class ellers an ion, bests range of fiction and non-fict 110 ountries. works, read by people in c Pear son Educatio sting and n • With the acquisition of NCS, one of the world’s leading te ed ucational so ost popular lutions companies, and the launch of Learning Network, the m co nsumer educ ing learning ation source on the internet, we have created the world’s lead com pany. Our te ogrammes xt books, online learning tools and testing and assessment pr help to educate m ore than 100 million people around the world every year. preface 1 Financial highlights 2 Chairman’s letter strategy 5 Chief executive’s review goals 11 The Pearson goals 12 Corporate measures 15 Operating measures 16 Internet enterprises performance 17 The results 18 Pearson Education 22 The Penguin Group 26 The Financial Times Group 30 Recoletos 31 Financial review governance 39 Board of directors 40 Directors’ report 47 Personnel committee report financials 55 Index 56 Profit and loss 58 Balance sheet 59 Cash flow notes 61 Auditor’s report 62 Notes to the accounts ne 98 Five year summary nli d o d 100 an an s Shareholder information al br er ion es ap at im sp ern l T w int cia ne t in an ial r ves Fin nc ou e in he ina n f s w of t d f ha p • A ce an e t rou uen ess or mes G infl sin f m cial Ti and f bu s o Finan each rk o ion the r two cis sion, r ne y de expan . Ou ail e. grow he d wid es to ms t orld continu infor s w ices stor e serv inve d onlin and an ople ss pe busine million ing quir d ac s an its uthor ced lling a infor best se as re d ation of uin h alle new gener Peng nriv Penguin • By discovering a rence, an u ted refe ishes nce in illustra publ fere ley, the leader ers. It nd re Dorling Kinders publish n’s a t-known hildre world’s bes ics, c position as one of the d class ellers an ion, bests range of fiction and non-fict 110 ountries. works, read by people in c Pear son Educatio sting and n • With the acquisition of NCS, one of the world’s leading te ed ucational so ost popular lutions companies, and the launch of Learning Network, the m co nsumer educ ing learning ation source on the internet, we have created the world’s lead com pany. Our te ogrammes xt books, online learning tools and testing and assessment pr help to educate m ore than 100 million people around the world every year. FINANCIAL HIGHLIGHTS ADJUSTED EARNINGS per share 2000 31.9p* 54.6p† 1999 43.3p* 47.6p† 1998 37.5p 1997 31.2p 1996 27.3p *after internet enterprises † before internet enterprises EBITDA 2000 £780m 1999 £670m 1998 £455m 1997 £393m 1996 £352m earnings before interest, tax, depreciation and amortisation (before internet enterprises) DIVIDEND per share 2000 21.4p 1999 20.1p 1998 18.8p 1997 17.4p 1996 16.1p 2000 1999 SALES £3,874m £3,332m $5,850m $5,031m OPERATING PROFIT before internet enterprises £686m £588m $1,036m $888m NET INVESTMENT in internet enterprises £(196)m £(39)m $(296)m $(59)m PRE-TAX PROFIT after internet enterprises £333m £402m $503m $607m ADJUSTED EARNINGS per share, before internet enterprises 54.6p 47.6p 82.4¢ 71.9¢ ADJUSTED EARNINGS per share, after internet enterprises 31.9p 43.3p 48.2¢ 65.4¢ DIVIDEND per share 21.4p 20.1p 32.3¢ 30.4¢ value of the dollar translated at $1.51:£1 sterling note • All charts are stated before goodwill, integration costs and non-operating items. Prior year earnings and dividend per share have been restated to reflect the rights issue. 1 CHAIRMAN’S LETTER To: Fellow shareholders From: Dennis Stevenson It has taken three years of hard work to turn Pearson from an attractive collection of diverse businesses into one company with a coherent strategy single-mindedly pursued by every part of Pearson. If you want to read not just about Pearson’s future strategy but also an unusually down-to-earth and insightful view of the changing commercial environment, you should turn to Marjorie’s report on page 5. I sum up that strategy in two simple statements: • we want to make outstanding returns for our shareholders by creating, owning, applying and exploiting intellectual property; • we want to do this in a way that is brave, imaginative and decent. Last year we made a number of moves – the acquisitions of National Computer Systems (NCS) and Dorling Kindersley, the sale of Lazard, a major investment in our internet enterprises – that we knew, taken together, would suppress our earnings in 2000. We did so because we believe they put us in better shape to deliver longer-term growth across all our businesses. And we did so safe in the knowledge that we would continue to deliver on our key financial goals – sales, margins and cash – at the operating level. As Marjorie makes clear, this focus on performance is at the heart of all we do. It matters not to us whether the activity could be described as ‘old’ or ‘new’ economy; what is important is what works in helping to deliver our strategy. Nothing is certain in this life but I am as confident as I can be that: • we have a simple strategy that we all understand and believe in; • we will steadily increase value for Pearson’s shareholders. My confidence stems from the conviction that our colleagues – and the way they feel about being part of Pearson – are the key to creating more value. Yes, compet- chairman • itive material rewards are crucial to motivating the people who work in our businesses. That is why, at this year’s annual general meeting, we will be asking lord stevenson lord for your approval of a new long-term incentive plan. The plan is designed to ensure 2 that our global business – anchored as it is, more than ever, in the United States of America – is able to compete worldwide for the very best talent. But material rewards are only part of the answer. We are fortunate to be part of a company where many of our colleagues choose to make their careers with Pearson when (even following the implementation of our new long-term incentive plan) they could earn greater rewards elsewhere. One of the reasons they stay is because of the second part of our strategy – in every part of Pearson, in everything we do, we aspire to be brave, imaginative and decent (and we expect everyone who works with us to share those aspirations). In the past year we have also been pleased to see a steady increase in the number of highly talented people – at all levels – who seek to join us.