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Pearson Plc To Acquire National Computer Systems,Inc.

July 31, 2000
London, England


Cash tender offer of $73 per share for the entire issued share capital of NCS, (NASDAQ: NLCS) recommended by the NCS Board. This values the company at $2.5 billion (£1.7 billion) and represents a premium of 26% to the NCS closing price on Friday 28 July, 2000.

  • Acquisition to be financed through a 3 for 11 rights issue of 170 million new Pearson shares at £10 per share to raise 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% and 24% respectively since 1995.
  • Acquisition of NCS will transform Pearson Education, creating a world leading integrated education company, combining strong market positions in educational content, online learning, assessment and enterprise applications for US schools and professional accreditation.
  • The combined business will be well placed to create new market opportunities through developing customised learning in which testing and curriculum work together.
  • The new business will connect schools and homes, enabling parents to play a more active role in the education of their children. It will enhance the products and services it can offer to parents as customers and accelerate the development of Pearson's online Learning Network.
  • Integration of the businesses is expected to deliver $50 million of annual cost savings by the end of 2002.
  • Acquisition of NCS is expected to create significant value for Pearson shareholders and enhance adjusted earnings per share in 2001.

Marjorie Scardino, chief executive of Pearson, said:

"NCS is a superb company in its own right with a record of delivering consistently high levels of innovation and growth. Together, we can transform our business into one that can reach further and grow faster. We will be strong in content, technology and testing, the three factors that are driving the education revolution around the world." "Together, we can create the 'intelligent classroom', where teaching is customised so that each child learns in his own way, at his own speed, with constant assessment, feedback and help. Together we can take the next great leap in education - adding applications and testing to curriculum and changing the way we teach and learn." "We have financed the recent development of Pearson through a programme of disposals and the assumption of additional debt. The rights issue we are announcing today will enable us to complete the acquisition of NCS and strengthen our balance sheet for the future."

Russ Gullotti, chairman, president and chief executive officer of NCS, added:

"NCS and Pearson make an outstanding strategic fit. Both companies have a strong presence in the education market, and the core products and skills of the two businesses are remarkably complementary, but without direct overlap. The acquisition of NCS by Pearson allows for the kind of presence needed for both of us to continue our strong growth and maintain our market leadership positions."

Enquiries:
44 (0)20 7411 2310 Marjorie Scardino, chief executive John Makinson, finance director John Fallon, communications director

Pearson is being advised by Goldman Sachs in relation to the acquisition of NCS. Goldman Sachs and Cazenove & Co. are acting as joint underwriters and brokers to the rights issue.

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% and earnings at a compound rate of 24%. For the year ended 29 January 2000, as calculated under US GAAP, NCS had consolidated revenues of $630 million (£391 million), operating profit of $70 million (£43 million), 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 to manage state curriculum requirements. It 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. In large scale data management, NCS 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, is headquartered in Eden Prairie, Minnesota and employs nearly 5,000 people.

Information on Pearson Education
Pearson Education is one of the world's largest providers of curriculum materials in print, electronic and online formats. Pearson Education was formed in November 1998 through the acquisition of the Simon & Schuster education business and its subsequent merger with Addison Wesley Longman (AWL). In 1999, its first full year of operation, pro forma revenues of Pearson Education increased by 10% to $2.7 billion (£1.7 billion), with operating profits of $411 million (£257 million) for that year. In the six months ended 30 June 2000, Pearson Education increased underlying revenues by 17% to £647 million and reduced seasonal first half losses by 32% to £26 million. In early September, Pearson will launch its online Learning Network, which will comprise four vertically integrated networks serving the K-12, Higher Education, Professional Development and Lifelong Learning markets.

Strategic rationale for the acquisition
The combination of Pearson Education and NCS will create a world leading integrated education company. Pearson believes that the combined company will be able to capitalise on the trends that are driving growth in education markets. These trends are 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 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 K-12 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 combination is driven primarily by new opportunities, Pearson will be able to generate savings in a number of areas by the end of 2002, including economies of scale and avoiding the duplication of investments in similar areas of education.

Management
On completion of the transaction, 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.

Financing of the Acquisition
Pearson will finance the tender offer for NCS by means of a rights issue at £10 per share to raise some £1.7 billion before expenses. £1.5 billion of the rights issue is to be underwritten by Goldman Sachs International and Cazenove & Co. in order to ensure that funds are available at completion of the acquisition. In the unlikely event that the remaining £200 million is not taken up, Pearson will satisfy the remaining consideration for NCS through existing bank facilities. The overall cost of the underwriting is expected to be 0.5% of the underwritten portion of the rights issue. Up to 170,500,067 new Pearson shares in aggregate will be offered on the basis of 3 new Pearson shares for each 11 existing Pearson shares to Pearson shareholders (other than certain overseas shareholders) on the register at the close of business on the record date (28 July 2000). Based on the middle market closing price of 2010 pence per share on 28 July 2000 and the proposed issue price of £10 per share of the new Pearson shares and having adjusted for the proposed interim dividend of 9.2 pence per share, the theoretical ex-rights price of the Pearson shares is 1786 pence. The rights issue is conditional upon admission of the new Pearson shares to the official list of the UK Listing Authority and to trading on the London Stock Exchange becoming effective. The rights issue is not conditional upon either the acquisition of NCS or the underwriting agreement between Goldman Sachs International, Cazenove & Co. and Pearson becoming unconditional. The Directors of Pearson believe that the acquisition of NCS has a high probability of becoming unconditional. In the 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 and tax efficient manner. Full take-up of entitlements under the rights issue would result in the issue of 170,500,067 new Pearson shares, representing approximately 21% 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. It is anticipated that the documents in relation to the rights issue will be posted to Pearson shareholders in the week beginning Monday, 7 August 2000. Assuming posting on 7 August, 2000, listing of the new Pearson shares will become effective and dealings in them will commence, nil paid, on 8 August 2000.

NCS tender offer
The acquisition of NCS will be effected by a tender offer which is conditional, inter alia, upon the tender of at least a majority of the outstanding shares of NCS and certain regulatory approvals. The tender offer is expected to commence on 7 August 2000 and close some time in September. 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.

Interim results
The interim results of Pearson were released today in a separate announcement.

General
Goldman Sachs International, which is regulated in the United Kingdom by the Securities and Futures Authority Limited, has approved the contents of this announcement solely for the purposes of Section 57 of the Financial Services Act 1986. Goldman Sachs International is acting for Pearson and no-one else in connection with the proposed acquisition of NCS and the rights issue and will not be responsible to anyone other than Pearson for providing the protections afforded to customers of Goldman Sachs International or for providing advice in relation to the proposed acquisition of NCS and the rights issue. Cazenove & Co., who are regulated in the United Kingdom by the Securities and Futures Authority Limited, are acting for Pearson and no-one else in connection with the rights issue and will not be responsible to anyone other than Pearson for providing the protections afforded to customers of Cazenove & Co. or for providing advice in relation to the rights issue. The conversion of US Dollars to Sterling has been made at an exchange rate of $:£ of 1.61, except for conversion of market capitalisations which have been made at an exchange rate of 1.50. This announcement is not an offer of securities for sale in the United States. Such securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering of such securities to be made in the United States would be made by means of a prospectus that would be obtained from Pearson and that would contain detailed information about Pearson. Certain statements made in this announcement are forward looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results and performance to differ materially from any expected future results or performance, express or implied, by the forward looking statements. Pearson assumes no responsibility to update any of the forward looking statements contained herein.

Portico Capital Securities LLC served as financial advisor to National Computer Systems, Inc. with respect to this transaction.