Letter from the Chairman of Pearson

PART 1 - LETTER FROM THE CHAIRMAN OF PEARSON

PEARSON PLC

3 BURLINGTON GARDENS

LONDON W1X 1LE

To holders of Pearson Shares

Dear Shareholder,

3 for 11 Rights Issue to raise ,1.7 billion in connection with the Proposed Acquisition of NCS
Introduction

As you know, the board of Pearson announced on 31 July 2000 that we had reached agreement with the board of NCS to make a cash offer for NCS, valuing it at approximately ,1.7 billion.

NCS is one of the leading commercial testing and educational services companies in the United States. It operates in some of the fastest growing sectors of the US education market and has delivered annual average compound revenue and earnings growth of 20 per cent. and 24 per cent. respectively since 1995. The acquisition of NCS will transform Pearson Education, creating a world leading integrated education company which combines strong market positions in educational content, online learning, assessment and enterprise applications for US schools and professional accreditation. The acquisition of NCS is expected to create significant value for Pearson Shareholders and enhance adjusted earnings per share in 2001.

We intend to finance the acquisition of NCS through a Rights Issue to existing Pearson Shareholders to raise up to ,1.7 billion (after expenses).

Qualifying Shareholders (other than certain Overseas Shareholders) will be offered new Pearson Shares under the Rights Issue at a price of ,10 per share on the basis of 3 new Pearson Shares for every 11 existing Pearson Shares. The Issue Price of ,10 per new Pearson Share represents a substantial discount (approximately 50 per cent.) to the closing middle market price of ,20.10 per Pearson Share on 28 July 2000, the last business day before the announcement of the Rights Issue.     

The purpose of this document is to tell you more about the proposed acquisition of NCS and to describe the Rights Issue. In Part 2 of this document, beginning on page 8 below, we have tried to anticipate some of the questions you may have relating to the Rights Issue and have provided answers. If you are in any doubt as to whether or not to take up the rights or to sell them in the market, you should seek your own independent financial advice. We have arranged for a shareholders' helpline to be available to answer questions you may have on the Rights Issue process, but for regulatory reasons the helpline cannot provide financial advice. Details are set out in Part 2.

We have attempted to keep the Rights Issue open for sufficient duration to let all of our shareholders participate, notwithstanding holidays. The Rights Issue had to be launched during August due to the timing of the NCS acquisition.

Information on NCS

NCS provides software, services, systems, applications and internet‑based technologies for the collection, management and interpretation of data in education. Since 1995, NCS's revenues have grown at a compound annual rate of 20 per cent. and earnings at a compound rate of 24 per cent. For the year ended 29 January 2000 (calculated under US GAAP), NCS had consolidated revenues of $630 million (,391 million), operating profit of $70 million (,43 million), net earnings of $43 million (,27 million) and shareholders' funds of $276 million (,171 million). It has an equity market capitalisation of $1.9 billion (,1.3 billion) (based on NCS's closing share price of $58.13 on 28 July 2000).      

NCS is the largest commercial processor of student assessment tests for kindergarten to 12th grade (K -12) education in the US, scoring some 40 million tests a year across the US. It is involved at all stages of the process, from test design to delivery, processing and reporting results. NCS is also the largest single provider of student curriculum, instructional and financial management software to schools. These tools help teachers and administrators to keep attendance records, grades, test scores and manage state curriculum requirements. NCS has software in some 40,000 of the 110,000 schools in the US and has been adding thousands of new schools a year to its client base. It is responsible for large amounts of school data, including managing the schedules of over 16 million students.

NCS is making extensive use of electronic and internet‑based technologies to extend its market penetration and offer innovative products and services to its customers in the education field. For example, NCS's ParentCONNECTxp software product connects parents and teachers, enabling parents to become more involved in their child's academic and classroom performance.

NCS also develops, markets and manages complex data collection, processing and reporting services and products targeted for certain key applications in the large scale data management market.

NCS was founded in 1962, has its headquarters in Eden Prairie, Minnesota and employs nearly 5,000 people.

Financial information on NCS

The following information is an extract from the selected financial information on NCS (prepared under US GAAP) set out in Part 5 of this document. We advise you to read the whole of this document and not just rely on the key or summarised information below.     

Financial highlights
  2000 1999 1998
January 29, January 31,
NCS 3 Year Financial Data Year Ended
(US $'000)

Revenues

629,545

505,372

406,015

EBITDA

104,756

88,075

73,160

EBIT

69,588

55,271

43,044

Tax

25,500

21,600

16,800

Net Income

42,930

32,511

25,175

Reasons for and Benefits of the Acquisition

We believe that the combination of Pearson Education and NCS will create a world leading integrated education company, which will be able to capitalise on the trends that are driving growth in education markets: the demand for a more highly skilled and better educated workforce; the opportunities for customised and interactive learning created by the internet; the move to greater accountability in education through testing and assessment; and an increasing focus by government and education authorities on improving the quality of education. The new company will, for the first time, link the worlds of curriculum, assessment and data management. As a result, the combined business will be well placed to create new market opportunities through developing customised learning in which testing and curriculum work together. The key benefits of the Acquisition are:

Integrating educational programmes

The combination of curricular content, testing, and educational applications creates opportunities to provide schools, universities and colleges and professional and training organisations with a comprehensive range of education solutions, encompassing curricular and training programmes, assessment and testing and educational services (including student curriculum, instructional and financial management software).

Customising learning

Combining NCS's assessment tools with Pearson's curricular content will help create customised learning programmes individually tailored for each student, which we believe will be a competitive advantage of the combined business.

Extending customer reach

The scale and reach of Pearson's sales forces will be used to market NCS's instruction management software, assessment tools and school administrative software to kindergarten to 12th grade school districts to supplement NCS's own direct sales force.

Accelerating the development of new online products  Integrating Pearson's Computer Curriculum Corporation and NCS's NovaNet online businesses will create a leading electronic end to end learning solutions company.

Developing a new market, with parents as customers

NCS's ParentCONNECTxp and related products will enable Pearson to reach parents, creating new opportunities for its educational publishing business. It will also dramatically extend the scale and reach of Pearson's Learning Network, enabling it to reach directly a much bigger audience of parents and students. This will both accelerate its time to market and reduce marketing and related costs.

Moving into new professional markets

Pearson's strong positions in both professional publishing and corporate training will enable NCS to capitalise on its testing and assessment skills to meet the growing demand for accreditation in a wide range of professions and disciplines.

Broadening international reach

With major educational publishing operations in some 30 countries around the world and a number of strategic alliances, Pearson will enable NCS to accelerate the growth of its international assessment, testing and enterprise solutions operations.

Achieving cost savings of $50 million per year

Although this deal is driven primarily by new opportunities, Pearson expects to be able to generate annual cost savings amounting to $50 million by the end of 2002, including through economies of scale and avoiding the duplication of investments in similar areas of education.

Management

Once we complete the deal, NCS will become part of Pearson Education, with Peter Jovanovich continuing as CEO of the enlarged business. Russ Gullotti, Chairman, president and CEO of NCS announced earlier this year that, due to health reasons, he planned to step down from his position by June 2001. Mr Gullotti will play a key role in the integration of the two companies. A new CEO of NCS, reporting to Peter Jovanovich, will be appointed in due course.

Current trading and prospects
Pearson

We announced Pearson's half‑year results for the six month period to 30 June 2000 on 31 July 2000. You can find these in full in Part 4 of this document. In these six months, sales were up 18 per cent. and operating profits from continuing operations (before goodwill, exceptional items and internet enterprises) up 32 per cent. on sales and operating profit for the corresponding period for the six months ended 30 June 1999, to ,1,545 million and ,148 million, respectively.

Pearson's business operations have made a strong start to the second half of the year and are trading in line with its expectations. Pearson will continue to step up its investment in developing the internet enterprises that will secure its longer term growth.

NCS

On 18 May 2000, NCS announced its results for the quarter to 29 April 2000. Revenues increased by 39 per cent. to $174.4 million, and net income by 32 per cent. to $8.8 million from the corresponding quarter of 1999. NCS reported strong underlying growth in both its education and data management businesses. These results were enhanced by its role as a contractor in processing the returns from the 2000 US census.

Use of Proceeds from the Rights Issue

We will use the net funds raised from the Rights Issue, expected to be some ,1.7 billion after expenses, to pay for the acquisition of NCS. To ensure that funds are available to complete the Acquisition, Goldman Sachs International and Cazenove have agreed to acquire up to 150 million of the new Pearson Shares not taken up in the Rights Issue on the basis summarised in paragraph 9(u) of Part 9 of this document. This arrangement has been entered into to ensure that funds are available for the purpose of paying the consideration for the Acquisition and does not guarantee any return to shareholders in respect of their nil paid rights in the Rights Issue. In view of the size of the discount, the commission expected to be payable by the Company (0.6% of the value of the underwritten portion) is significantly less than would typically be paid on a traditionally underwritten rights issue in the UK. In the unlikely event that the remaining new Pearson Shares are not taken up, Pearson expects to satisfy the balance of the consideration through existing bank facilities. The Rights Issue is not conditional on either the Acquisition or the Underwriting Agreement becoming unconditional.

The Directors believe that the Acquisition has a high probability of becoming unconditional. In the very unlikely event that the Acquisition is not completed, Pearson will consider the return of a substantial proportion of the funds raised from the Rights Issue in an appropriate manner.

Principal Terms of the Rights Issue

170,528,278 new Pearson Shares are being offered in aggregate in connection with the Rights Issue, with a view to raising approximately ,1.7 billion, after expenses. The Issue Price of ,10 per new Pearson Share represents a substantial discount (approximately 50 per cent.) to the middle market closing price of ,20.10 per Pearson Share on 28 July 2000, which was the last business day prior to the announcement of the Rights Issue.

Qualifying Shareholders (other than certain Overseas Shareholders, as explained further in Part 2 of this document) are being offered new Pearson Shares at a price of ,10 per new Pearson Share on the following basis:

3 new Pearson Shares for every 11 existing Pearson Shares

and so in proportion for any other number of Pearson Shares held at the close of business on 28 July 2000. Fractions of new Pearson Shares will not be allotted to Qualifying Shareholders, but will be aggregated and sold in the market for the benefit of the Qualifying Shareholders entitled to those fractions.      

The Rights Issue is conditional upon Admission becoming effective by 8.00 a.m. on 10 August 2000 or such later time and/or date as the Company may determine. As explained above, the Rights Issue is not conditional on the Underwriting Agreement becoming unconditional. In addition, the obligations of each of Goldman Sachs International and Cazenove under the Underwriting Agreement to subscribe or procure subscribers for the new Pearson Shares which are not taken up in the Rights Issue remain conditional on, amongst other things, the Acquisition not being terminated by Pearson prior to the time and date on which those obligations must be performed (see further paragraph 9(u) of Part 9 of this document).

We expect the listing of the new Pearson Shares to become effective and dealings in them to commence, nil paid, on 10 August 2000.

The latest time and date for acceptance and payment in full in respect of the Rights Issue is 3.00 p.m. on 1 September 2000.

Full take‑up of entitlements under the Rights Issue would result in the issue of 170,528,278 new Pearson Shares (representing approximately 21 per cent. of the issued ordinary share capital of Pearson, as enlarged by the Rights Issue). The new Pearson Shares will be issued credited as fully paid and will rank pari passu in all respects with the existing issued Pearson Shares, except that they will not rank for the interim dividend of 9.2 pence per Pearson Share in respect of the year ending 31 December 2000. We currently intend to reduce future dividend payments per share pro rata to take account of the effect of the Rights Issue.

Based on the closing price of a Pearson Share on 28 July 2000 (the last business day before announcement of the Rights Issue) of ,20.10 and the proposed Issue Price of ,10.00 for each new Pearson Share, and having adjusted for the proposed interim dividend of 9.2 pence per Pearson Share, the theoretical ex‑rights price of the Pearson Shares is ,17.86. For an explanation of this calculation see paragraph 13 of Part 9 of this document.

NCS Tender Offer

We will acquire NCS through the Tender Offer, which is conditional, amongst other things, upon the tender of at least a majority of the outstanding shares of NCS and certain regulatory approvals. We expect these conditions to be satisfied by 7 September 2000. The Tender Offer, which is described in more detail in Part 7 of this document, is expected to start on 7 August 2000 and to close some time in September. Further details of the Merger Agreement relating to the Acquisition are set out in Part 7 of this document. The Acquisition is not conditional on the Rights Issue or the Underwriting Agreement becoming unconditional.

Under the terms of the Merger Agreement between Pearson and NCS, Pearson is entitled to a break up fee of $98 million if the Acquisition does not complete in certain circumstances.

Participants in the Pearson Share Plans

The attention of participants under the Pearson Share Plans is drawn to the information which appears in the paragraph entitled "Pearson Share Plans" in paragraph 11 of Part 3 of this document.

Overseas Shareholders

The attention of shareholders who have registered addresses outside the UK, or who are citizens or residents of countries other than the UK, is drawn to the information which appears in the paragraph entitled "Overseas shareholders" in paragraph 13 of Part 3 of this document.

To comply with US securities laws, the US Rights Issue is being made to US Shareholders pursuant to an effective registration statement filed with the SEC and US Shareholders are advised to read that document.

Taxation

Information about UK taxation and the Rights Issue is set out in paragraph 8 of Part 9 of this document. If you are in any doubt as to your tax position, or you are subject to tax in a jurisdiction other than the UK, you should consult your own independent professional adviser without delay.

Action to be Taken

Qualifying Shareholders (other than certain Overseas Shareholders) will find enclosed a Provisional Allotment Letter setting out their entitlements to new Pearson Shares and containing instructions on how to take up those entitlements under the Rights Issue.

Neither the Rights Issue nor the Acquisition (due to its size) requires the approval of Pearson Shareholders.

To take up their entitlements to new Pearson Shares in whole or in part, Qualifying Shareholders must lodge their Provisional Allotment Letters in accordance with the instructions on them, together with a remittance for the full amount payable, by post or by hand to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA or by hand only (during normal business hours) to Lloyds TSB Registrars, Antholin House, 71 Queen Street, London EC4N 1SL by 3.00 p.m. on 1 September 2000.

You will find more details concerning the Rights Issue and the procedure for acceptance and payment set out in Part 3 of this document. The procedure for acceptance and payment of the US Rights Issue will be set out in separate documents sent to US Shareholders.

Further information

Your attention is drawn to the further information set out in Parts 2 to 9 of this document, including the Investment Considerations set out in Part 8.

Directors' intentions and recommendation

Pearson's Directors, who have received financial advice from Goldman Sachs International, believe that the Acquisition and the Rights Issue are in the best interests of the Company and its Shareholders as a whole. The Directors, who hold in aggregate approximately 0.029 per cent. of Pearson's current issued share capital, intend to take up their rights in full.

In providing advice to the Directors, Goldman Sachs International has placed reliance on the Directors' commercial assessment of the Acquisition and the Rights Issue.

Yours sincerely

Chairman