UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2000 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
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TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value | The NASDAQ Stock Market
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, $0.01 par value, held by
non-affiliates as of August 9, 2000, was approximately $877,907,000. As of such
date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There
is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant's voting stock
as of August 9, 2000 was as follows: 16,238,581 shares of Common Stock and
828,100 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders to be held
September 19, 2000.
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PART I
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ITEM 1 BUSINESS
OVERVIEW
Scholastic Corporation (together with its subsidiaries, "Scholastic" or the
"Company") is a global children's publishing and media company. The Company
believes that it is the world's largest publisher and distributor of children's
books. Scholastic creates quality educational and entertaining materials and
products for use in school and at home, including children's books, textbooks,
magazines, technology-based products, teacher materials, television programming,
videos and toys. The Company's website, Scholastic.com, is a leading site for
teachers and classrooms and an award-winning destination for children. During
its eighty-year history, Scholastic has emphasized quality products and
dedication to learning.
On June 22, 2000, Scholastic acquired Grolier Incorporated ("Grolier") for $400
million in cash. Grolier is the leading operator of United States direct-to-home
book clubs for children, primarily serving children age five and under, and is
the leading print and on-line publisher of children's non-fiction and reference
products (including the Children's Press and Franklin Watts imprints in the
United States and major encyclopedias) sold primarily to United States school
libraries. Grolier also has significant international operations in the United
Kingdom, Canada and Southeast Asia, complementing Scholastic's wholly-owned
businesses in the United Kingdom, Canada, Australia, New Zealand, Mexico, India,
Ireland and Argentina.
Scholastic Corporation was incorporated under the laws of Delaware in 1986 and,
through predecessor entities, has been in business since 1920. Grolier, through
its predecessor entities, has been in business since 1895.
OPERATING SEGMENTS
The Company's businesses are categorized into four operating segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING and ADVERTISING (which collectively represent the Company's domestic
operations); and INTERNATIONAL.
During the three-year period ended May 31, 2000, Scholastic's revenues have
grown at an average annual compounded rate of 14.5%.
The following table sets forth revenues by operating segment for the three
fiscal years ended May 31:
(Amounts in millions)
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2000 1999 1998
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CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION $ 872.4 $ 667.2 $ 562.9
EDUCATIONAL PUBLISHING 219.8 203.8 210.6
MEDIA, LICENSING
AND ADVERTISING 104.3 103.5 99.9
INTERNATIONAL 206.0 191.0 196.4
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TOTAL $1,402.5 $1,165.5 $1,069.8
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Certain amounts have been reclassified in accordance with EITFIssue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs."
Based on Grolier's historical financial results, the combination of Grolier's
revenues with Scholastic's would not significantly change the Company's sales
mix by operating segment.
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
(62.2% of fiscal 2000 revenues)
GENERAL
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in and from the United States
through school-based book clubs, continuity programs, school-based book fairs
and the trade channel. Commencing with the first quarter of fiscal 2001, this
segment will also include Grolier's direct-to-home book clubs in the United
States and the United States trade imprint Orchard Books.
The Company believes it is the largest publisher and distributor of children's
books and the largest operator of school-based book clubs and school-based book
fairs in the United States. The Company is also a leading publisher of
children's books distributed through the trade channel. Grolier is the leading
distributor in the United States of children's books through the direct-to-home
channel, primarily for children age five and younger also publishes children's
books under the Orchard Books imprint and for distribution in the trade channel.
The Company offers a broad range of quality children's literature. Many of the
books offered by the Company have received awards for excellence in children's
literature, including the
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Caldecott and the Newbery awards. In fiscal 2000, Scholastic distributed in
excess of 250 million children's books in the United States. In addition, the
Company's books are exported to countries throughout the world.
The Company obtains titles for sale in its distribution channels from three
principal sources. First, the Company publishes paperback and/or hardcover
editions of books written by outside authors under exclusive publication
agreements with the Company or written by the Company's editorial staff.
Scholastic generally owns the rights to sell these titles in all channels of
distribution, including school and trade. Scholastic's second source of titles
is reprints of books originally published by other publishers for which the
Company acquires rights under license agreements to sell exclusively in the
school market. The third source of titles is the Company's purchase of finished
books from other publishers to be sold in the school market. At May 31, 2000,
the Company's backlist (a list of titles published as new titles in prior years)
included more than 5,000 titles. Grolier acquires books for direct-to-home
distribution through licenses with other publishers and media companies and
through original publication agreements directly with authors.
SCHOOL BOOK CLUBS
Scholastic founded its first school book club in 1948. The Company operates ten
school-based book clubs: FIREFLY(R), serving pre-kindergarten ("pre-K") and
kindergarten students; SEESAW(R), serving kindergarten and first grade students;
two CARNIVAL(R) clubs, one serving students in kindergarten through second
grade, and the other serving third through sixth grade students; LUCKY BOOK
CLUB(R), serving second and third grade students; ARROW BOOK CLUB(R), serving
fourth through sixth grade students; TAB BOOK CLUB(R), serving sixth, seventh
and eighth grade students; and three TRUMPET(R) clubs, serving pre-K through
sixth grade students. In addition to its regular periodic offerings, the Company
creates special theme-based offers targeted to the different grade levels during
the year, such as holiday offers, science offers, curriculum offers and Spanish
language offers.
The Company estimates that over 80% of all elementary school teachers in the
United States participate in school book clubs, with approximately 80% of these
teachers using Scholastic book clubs at least once during the year. The Company
believes that teachers participate in school book clubs because it is their
opinion that quality books at affordable prices will be of interest to students
and improve students' reading skills. The Company also believes that teachers
participate because the school book clubs offer easy access to a broad range of
books.
The Company mails promotional pieces containing order forms to teachers in the
vast majority of the pre-K through eighth grade classrooms in the United States.
Participation in any offer does not create an obligation to participate in any
subsequent offer, nor does it preclude participation in a competitor's book
club. Teachers who wish to participate in a school book club distribute the
order forms to their students, who may choose from generally 70 or more
selections at substantial reductions from list prices. The teacher consolidates
the students' orders and forwards them to the Company. Orders are then shipped
to the teacher for distribution to the students. Teachers who participate in the
book clubs receive bonus points for use by their school, which may be redeemed
for the purchase of additional books and other items for their classrooms.
In its school book club business, the Company competes on the basis of book
selection, price, promotion and customer service. The Company believes that its
broad selection of titles, many of which are distributed in this channel
exclusively by Scholastic, combined with low costs and its large number of
promotion mailings, enable the Company to compete effectively.
CONTINUITY PROGRAMS
The Company operates book club continuity programs, in which children and their
families generally place a single order and receive more than one shipment of
books. Scholastic's continuity programs include ANIMORPHS(R) ALLIANCE, THE
BABY-SITTERS COLLECTOR CLUB, CLIFFORD'S CLUBHOUSE, JUST 4 GIRLS, SCHOLASTIC AT
HOME PHONICS READING PROGRAM, THE MAGIC SCHOOL BUS(R), ARTHUR'S ADVENTURE and
STAR WARS(R) MISSIONS. Scholastic will be introducing new continuity prograMS,
including I SPY(TM) and an updated CLIFFORD THE BIG RED DOG(TM) program based on
Scholastic's new animated television series, CLIFFORD THE BIG RED DOG(TM),
debuting in fall 2000. Scholastic's continuity programs are promoted primarily
through Scholastic's school book clubs.
Grolier's direct-to-home book clubs in the United States, primarily serving
children age five and under, generated approximately $270 million in revenues
during Grolier's last fiscal year ended December 31, 1999. Grolier's
direct-to-home book clubs include licensed programs such as DISNEY BOOK
CLUB(TM), BARBIE(TM) and DR. SEUSS BEGINNING READERS PROGRAM(TM) and proprietary
Grolier originated programs. Grolier programs are promoted primarily through
direct maiL, telemarketing, the internet and advertisements.
SCHOOL BOOK FAIRS
The Company entered the school-based book fair business in 1981. Since that
time, the Company's school book fair business has grown through geographic
expansion, selected acquisitions, increased penetration of its existing markets,
increased frequency of multiple fairs for the same school and growth in revenue
on a per fair basis.
Book fairs are generally week-long events conducted on school premises and
sponsored by school librarians and/or parent-teacher organizations. School book
fair events expose children to hundreds of new books and allow them to purchase
books and other select products of their choice. Although the Company provides
the school with the books and book display cases, the
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school itself conducts the book fair. The Company believes that the primary
motivation of the schools in sponsoring fairs is to make quality books available
to their students at reasonable prices in order to help them become more
interested in reading. In addition, the school retains a portion of the book
fair revenues, which can then be used to purchase books, supplies and equipment
for the school.
The Company operates school book fairs in all 50 states under the name
SCHOLASTIC BOOK FAIRS(R). The Company also markets fairs branded as SCHOLASTIC
SHOWCASE BOOK FAIRS(TM), SCHOLASTIC EXPLORASTORY BOOKFAIRS(TM), READ STREET BOOK
FAIRS(R) and DISCOVERY FAIRS(TM), which feature non-fiction, science,
technology, arts, crafts and interactive products. In addition, tHE Company
offers premium fairs under the names SCHOLASTIC LITERACY FESTIVAL(TM) and
SCHOLASTIC BOOKS ON TOUR(R), which featuRE an expanded list of titles supported
by merchandise displays and costumed book characters.
The Company's books and display cases are delivered to schools from the
Company's warehouses by a fleet of leased vehicles. The Company's sales and
customer service functions are performed from regional sales offices, supported
by field representatives. The Company believes that its competitive advantages
in the book fair business include the strength of the relationship between its
sales representatives and schools, broad geographic coverage, a high level of
customer service and its breadth of product selection. Over 90% of the schools
that sponsored a Scholastic book fair in fiscal 1999 sponsored a Scholastic book
fair again in fiscal 2000.
TRADE
The Company is one of the leading sellers of children's books through trade
booksellers in the United States. The Company maintains over 3,000 titles for
trade distribution, including original publications such as HARRY POTTER(TM), I
SPY(TM), ANIMORPHS(R), DEAR AMERICA(R), THE BABY-SITTERS CLUB(R), THE MAGIC
SCHOOL BUS(R), CAPTAIN UNDERPANTS(TM), MISS SPIDER(R) and CLIFFORD THE BIG RED
DOG(R) and licensed properties such as POKEMON(R), TELETUBBIES(TM), FRANKLIN(R)
and STAR WARS(R). The Company has A trade sales organization which focuses on
selling the broad range of Scholastic books to book store accounts.
The Company's fiscal 2000 sales in the trade market were led by the HARRY POTTER
books. Other Scholastic bestsellers during fiscal 2000 included books from the
DEAR AMERICA, I SPY, ANIMORPHS, CAPTAIN UNDERPANTS and POKEMON series.
The Company licenses foreign-language rights to selected Scholastic titles to
other publishing companies around the world in over 25 languages.
EDUCATIONAL PUBLISHING
(15.7% of fiscal 2000 revenues)
GENERAL
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of kindergarten ("K") through 12th grade textbooks, supplemental
materials, classroom magazines, teaching resources and instructional technology
in and from the United States to schools and libraries.
Scholastic has been providing quality innovative educational materials to
schools and libraries since it began publishing classroom magazines in the
1920's. The Company added supplementary books and texts to its product line in
the 1940's, professional books for teachers in the 1980's and early childhood
products and core curriculum materials in the 1990's. In 1996, the Company
strengthened its Spanish language offerings through the acquisition of Lectorum
Publications, Inc., the largest Spanish language book distributor to schools and
libraries in the United States. In addition, educational materials are sold
outside the United States to United States government schools abroad and
international schools. Commencing with the first quarter of fiscal 2001, this
segment will include Grolier Publishing, which includes print and on-line
children's non-fiction and reference products (including the Children's Press
and Franklin Watts imprints in the United States and major encyclopedias), sold
primarily to United States school libraries.
The Company markets and sells its EDUCATIONAL PUBLISHING products through a
combination of field representatives, direct mail (including catalogs) and
telemarketing (both outsourced and in-house).
CLASSROOM MAGAZINES
Scholastic is a leading publisher of classroom magazines.
These magazines are used as supplementary educational materials by teachers in
grades K to 12. The Company's classroom magazines carry the Scholastic name,
which reinforces the Company's educational reputation with students, teachers
and school administrators. The Company's reputation for publishing quality
magazines, maintaining an extensive magazine mailing list and having a large
customer base of teachers helps generate customers for its school book clubs and
other Scholastic products as well as its magazines. At the same time, the
Company uses its school book club mailings to help secure additional circulation
for its classroom magazines.
The Company's 33 classroom magazines are designed to encourage students to read
and to supplement the school's formal learning program by bringing subjects of
current interest into the classroom. The subjects covered include English,
reading, literature, math, science, current events, social studies and foreign
languages. The most well known of the Company's
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domestic magazines are SCHOLASTIC NEWS(R) and JUNIOR SCHOLASTIC(R).
Scholastic's classroom magazine circulation in the United States in fiscal 2000
was approximately 8 million. Approximately two-thirds of the circulation was in
grades K to 6, with the balance in grades 7 to 12. In fiscal 2000, teachers in
over 60% of the elementary schools and in over 70% of the secondary schools in
the United States used the Company's classroom magazines. The various classroom
magazines are distributed either on a weekly, bi-weekly or monthly basis during
the school year.
The majority of the magazines purchased are paid for with school funds and the
balance is paid for by teachers or students. Circulation revenue accounted for
substantially all of the Company's classroom magazine revenues in fiscal 2000.
CORE, SUPPLEMENTAL, EARLY CHILDHOOD AND TEACHING RESOURCE PUBLISHING
The Company's core and supplemental publishing operations develop and distribute
instructional materials (both core and supplemental curriculum programs)
directly to schools in the United States, purchased through school budgets.
The Company's strategy is to publish and distribute a full array of products in
reading and language arts, concentrating on grades pre-K to 8, to meet the
spectrum of schools' needs in these disciplines. The Company's offerings range
from core curriculum products, including SCHOLASTIC LITERACY PLACE(R), a grade K
to 6 core curriculum reading program with technology features, and its companion
Spanish-language program SCHOLASTIC SOLARES(R), to supplemental materials,
including print products (broad selections of paperback books and specialized
products such as phonics readers). The Company's technology-based products
assist in teaching reading (WIGGLEWORKS(R)), measure student progress
(SCHOLASTIC READING INVENTORY(TM)) and encourage reading through a
school-managed incentive program (SCHOLASTIC READING COUNTS!(TM)). READ 180(TM),
the Company'S cutting-edge reading intervention program for 4th through 8th
grade students reading at least two years below grade level, is helping raise
students' test scores and is used in a majority of the largest urban school
districts.
Scholastic will introduce two new programs in fiscal 2001: READ XL(TM) , a
reading improvement program for students in grades 6 to 8, providing
high-interest language arts curricula to students reading one to three years
below grade level, and BUILDING LANGUAGE FOR LITERACY(TM), a program of books
and audio tapes to guide children through the critical pre-K to K stages of
literacy development.
The teaching resources group publishes professional books designed for and
generally purchased by teachers and distributes individual paperbacks and
collections to schools. The Company also distributes a successful line of
supplemental phonics products.
GROLIER PUBLISHING
Grolier Publishing products include print and on-line versions of ENCYCLOPEDIA
AMERICANA(R), THE NEW BOOK OF KNOWLEDGE(R), CUMBRE, a Spanish language
encyclopedia, as well as quality non-fiction books published in the United
States under the imprints Children's Press and Franklin Watts. Grolier
Publishing had revenues of approximately $80 million in its last fiscal year
ended December 31, 1999.
MEDIA, LICENSING AND ADVERTISING
(7.4% of fiscal 2000 revenues)
GENERAL
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution of programming and consumer products (including children's
television programming, videos, CD-ROM's, feature films and non-book products)
and internet services, as well as advertising and promotional activities.
PRODUCTION AND DISTRIBUTION
The Company's wholly-owned subsidiary, Scholastic Entertainment Inc. ("SEI"),
extends the Company's franchises by creating programming and managing global
brands based on Scholastic's strong publishing properties. SEI's multimedia
programming also generates extensive awareness for brand building and consumer
products activities worldwide. SEI develops and produces children's television
programming, videos, CD-ROM's, feature films and non-book products.
SEI has built a television media library of over 160 half-hours including:
SCHOLASTIC'S THE MAGIC SCHOOL BUS(R), Goosebumps(R), ANIMORPHS(R) and DEAR
AMERICA(R). These television series initially aired on PBS, Fox Kid's Network,
Nickelodeon and HBO, respectively, and have been licensed for broadcast in more
than 50 countries.
SEI will launch two new animated original television series in fiscal 2001.
CLIFFORD THE BIG RED DOG(TM), is a television series based on the Company's
best-selling children's books by Norman Bridwell, first published in 1963, and
will be shown on PBS Kids with 40 episodes in the initial season. SEI will also
launch 26 episodes of HORRIBLE HISTORIES(TM), an animated adaptation of
Scholastic UK's best-selling book series, which will be shown on ITV Network in
the United Kingdom.
BRAND MARKETING AND CONSUMER PRODUCTS
SEI creates and develops branding campaigns for properties. The fiscal 2001
launch of the CLIFFORD THE BIG RED DOG(TM) television series will foster a
comprehensive licensing program for pre-
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school and early grade children to support the CLIFFORD brand. The campaign
includes new CLIFFORD books, videos, CD-ROM's and consumer products. In
connection with its branding campaigns, SEI has received numerous marketing and
licensing awards and has partnered with industry leaders in consumer promotions.
In addition, SEI creates, manufactures and distributes high-quality consumer
products primarily based on Scholastic's literary properties, such as a line of
upscale plush toys and wooden puzzles based on CLIFFORD THE BIG RED DOG(TM),
SCHOLASTIC'S THE MAGIC SCHOOL BUS(R), THE REAL MOTHER GOOSE(TM) and
STELLALUNA(TM). The products are available through independent toy/gift stores,
specialty chains, department stores, mail order catalogs and bookstores, as well
as through Scholastic's school book clubs, school book fairs and continuity
programs. Scholastic also produces and markets videos to the school market
through Weston Woods, a producer of videos based on high quality children's
books.
SOFTWARE
Scholastic sells original and licensed consumer software for grades K to 8
through school-based software clubs, school book clubs and school book fairs.
The Company acquires software for distribution in all of these channels through
a combination of licensing, purchases of product from software publishers and
internal development. In fiscal 1998, the Company also commenced trade sales of
its internally developed CD-ROM titles, including the award-winning I SPY(TM)
CD-ROM, through a third party distribution arrangement. Scholastic's school
software clubs are modeled and marketed on the same basis as the Company's
school book clubs.
SCHOLASTIC.COM
The Company's website, Scholastic.com, is a leading site for teachers and
classrooms and an award-winning destination for children. Scholastic pioneered
on-line curriculum education in 1993 with the launch of SCHOLASTIC NETWORK, a
subscription-based Internet service for teachers of grades K to 8. In fiscal
2000, the Company launched the new Scholastic.com, integrating the resources of
the SCHOLASTIC NETWORK to provide, free of charge, multimedia teaching units,
thousands of classroom- tested, ready-to-use lesson plans, as well as teaching
tools and on-line activities. For children, Scholastic.com offers learning sites
with favorite characters, such as ANIMORPHS(TM), CLIFFORD THE BIG RED DOG(TM), I
SPY(TM) and HARRY POTTEr(TM). DURING fiscal 2000, Scholastic.com won the Webby
award for "Best Kid's Web Site."
The re-launched Scholastic.com offers content designed for each of its primary
audiences - teachers, children and parents. In fiscal 2001, Scholastic plans to
add to the site e-commerce functionality, improved home-to-school communication
tools and resources for parents to help their children learn.
The purchase of Grolier further strengthens Scholastic's home and school
Internet strategy, providing parents of pre-school children with on-line
opportunities to purchase books and multimedia products.
ADVERTISING
Certain of the Company's magazine properties generate advertising revenues as
their primary source of revenue, including INSTRUCTOR, SCHOLASTIC EARLY
CHILDHOOD TODAY(TM) and COACH AND ATHLETIC DIRECTOR(TM), which are directed at
teachers and education professionals and are distributed during the academic
year. Total circulation for these magazines was approximately 309,000 in fiscal
2000. Subscriptions for these magazines are solicited by direct mail and are
cross-marketed to teachers through Scholastic's book clubs. SCHOLASTIC PARENT
AND CHILD(R) magazine, which is directed at parents and distributed through
schools and day care programs, had a paid circulation of approximately 1.3
million in fiscal 2000. These magazines carry outside advertising, advertising
for Scholastic's other products and advertising for clients that sponsor
customized programs. In February 2000, the Company added to this magazine group
with the purchase of SOCCER JR.(R), a soccer magazine designed for children ages
8 to 14, and two related special adult editions, SOCCER FOR PARENTS and COACHES
EDITION.
Also included in this group are: Scholastic Marketing Partners, which develops
sponsored educational materials, creating supplementary classroom programs in
partnership with corporations, government agencies and nonprofit organizations;
and Quality Education Data, which maintains and markets databases focused on
schools and education.
INTERNATIONAL
(14.7% of fiscal 2000 revenues)
GENERAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's operations in the United
Kingdom, Canada, Australia and New Zealand, and its newer businesses in Mexico,
India, Ireland and Argentina. Commencing with the first quarter of fiscal 2001,
this segment will also include Grolier's direct-to-home operations in the United
Kingdom, Canada and Australia and the publication and distribution of Grolier's
reference products and services outside the United States, principally in
Southeast Asia.
Scholastic's operations in the United Kingdom, Canada, Australia and New Zealand
generally mirror Scholastic's United States business model. Each of these
international operations have original trade and educational publishing
programs, distribute children's books, software and other materials through
school-based book clubs, school-based book fairs and through trade channels,
distribute magazines and offer on-line services. Each of these operations has
established export and foreign
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rights licensing programs and is a licensor of book tie-ins for major media
properties, such as STAR WARS, POKEMON and TELETUBBIES. Original books published
by each of these operations have received awards of excellence in children's
literature both domestically and internationally.
AUSTRALIA
Scholastic Australia, founded in 1968, is the leading publisher and distributor
of children's educational materials in Australia and has the largest school book
club and book fair operation in the country, reaching 90% of the primary
schools. Scholastic Australia's imprints include: Scholastic Press, Omnibus
Books and Margaret Hamilton Books.
CANADA
Scholastic Canada, founded in 1957, is a leading publisher and distributor of
English and French language books, the largest school book club and school book
fair operator in Canada and one of the leading suppliers of original or licensed
children's books to the Canadian trade market. Since 1965, Scholastic Canada has
produced quality Canadian-authored books and educational materials in English.
Scholastic Canada also publishes in French to support its French Canadian
operations.
NEW ZEALAND
Scholastic New Zealand, founded in 1964, is the largest children's book
publisher and the leading book distributor to schools in New Zealand. Through
its school book clubs and school book fairs, Scholastic New Zealand reaches 90%
of the country's schools.
UNITED KINGDOM
Scholastic UK, founded in 1964, is a leading children's publisher in the United
Kingdom. Scholastic UK's trade books appear frequently on children's bestseller
lists in the United Kingdom. Scholastic UK is the largest school book club and
school book fair operator in the United Kingdom. Scholastic UK's best selling
original book series, HORRIBLE HISTORIES(TM), is being adapted for television by
SEI. Scholastic UK also publishes five monthly magazines for teachers and
supplemental educational materials, including professional books.
RECENT EXPANSION
In recent years, the Company has launched operations in Mexico (1994), India
(1997), Ireland (1998) and Argentina (1999). These businesses principally
distribute through school book fairs and/or school book clubs books and
educational materials published by Scholastic's other operations as well as from
other publish ers. In fiscal 1999, Scholastic India began its own Hindi and
English language original publishing program. Grolier's revenues for
international operations were $100 million in Grolier's last fiscal year ended
December 31, 1999.
MANUFACTURING AND DISTRIBUTION
The Company's books, magazines, software and other materials and products are
manufactured by third parties through arm's length negotiation or competitive
bidding. The Company, when it deems it to be appropriate, enters into multi-year
agreements that guarantee specified volume in exchange for favorable pricing
terms. Paper is purchased from third party sources. Grolier's manufacturing and
purchasing practices are generally consistent with Scholastic's practices. The
Company does not anticipate any difficulty in continuing to satisfy its
manufacturing and paper requirements.
In the United States, the Company processes school book club, trade and export
orders from its primary warehouse and distribution facility in Jefferson City,
Missouri, and fulfills continuity orders primarily from its warehouse and
distribution facility in Des Plaines, Illinois. In connection with its trade
business, the Company generally outsources certain services, including
invoicing, billing, returns processing and collection services and may also ship
product directly from printers to customers. School book fair orders are
fulfilled through a network of warehouses across the country. The Company's
international operations use similar distribution systems.
Grolier outsources the majority of its fulfillment and distribution under
contracts with third parties. The Company does not anticipate any difficulty in
continuing to distribute effectively Grolier's products.
SEASONALITY
The Company's school book clubs, school book fairs and most of its magazines
operate on a school-year basis. Therefore, the Company's business is highly
seasonal. As a consequence, generally, the Company's revenues in the first and
third quarters of the fiscal year are lower than its revenues in the other two
fiscal quarters, and the Company experiences a substantial loss from operations
in the first quarter. Typically, school book club and school book fair revenues
are proportionately larger in the second quarter of the fiscal year, while
revenues from the sale of instructional materials are the highest in the first
quarter.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August, have generally peaked in September or October, and have been at
their lowest point in May.
The Grolier acquisition is not expected to significantly change the seasonality
of the Company's results.
COMPETITION
The market for children's educational and entertainment materials is highly
competitive. Competition is based on the quality and range of educational
materials made available, price, promotion and customer service. In the United
States, competitors include one other national school book club operator and one
other
6 SCHOLASTIC
<PAGE>
national school book fair operator as well as smaller regional operators,
including local bookstores. Competitors in the entertainment market include
well-established companies, networks and cable operators. Domestically and
internationally, competitors include numerous other book, textbook and
supplementary text publishers, distributors and other resellers (including over
the Internet) of children's books and other educational materials, national
publishers of classroom and professional magazines with substantial circulation,
numerous producers of television, video and film programming (many of which are
substantially larger than the Company), publishers of computer software and
distributors of products and services on the Internet. Competition may increase
further to the extent that other entities enter the market and to the extent
that current competitors or new competitors develop and introduce new materials
that compete directly with the products distributed by the Company or develop or
expand competitive sales channels.
EMPLOYEES
At May 31, 2000, Scholastic employed approximately 5,500 people in full-time
jobs and 2,300 people in hourly or part-time jobs in the United States and
approximately 1,800 people internationally. The number of part-time employees
fluctuates during the year because the Company's business is closely correlated
with the school year. The acquisition of Grolier added approximately 900 people
in full time jobs and 400 people in hourly or part-time jobs in the United
States and approximately 600 people internationally. The Company believes that
relations with its employees are good.
COPYRIGHT AND TRADEMARKS
SCHOLASTIC is a registered trademark in the United States and in a number of
countries where the Company conducts business. Scholastic Inc., the Company's
principal U.S. operating subsidiary, has registered and/or has pending
applications to register its trademarks in the United States for the names of
each of its domestic book clubs, the titles of its magazines and the names of
all its core curriculum programs. The Company's international subsidiaries have
also registered trademarks in the name of Scholastic Inc. for the names of their
respective book clubs and magazines. Although individual book titles are not
subject to trademark protection, Scholastic Inc. has registered and/or has
pending applications to register trademarks in the United States and in a number
of countries for the names of certain series of books and consumer products,
such as THE MAGIC SCHOOL BUS, ANIMORPHS, CLIFFORD THE BIG RED DOG and HORRIBLE
HISTORIES. GROLIER is a registered trademark in the United States and a number
of countries where it conducts business. With the acquisition of Grolier, the
Company acquired all trademarks and copyrights registered in the name of Grolier
Incorporated or its wholly-owned subsidiaries. All of the Company's
publications, including books, magazines and software, are subject to copyright
protection and the Company consistently copyrights its magazines, books and
software in the name of Scholastic Inc., except for Grolier's publications,
which currently continue to be copyrighted under the name of Grolier
Incorporated or its wholly-owned subsidiaries. Copyrights and trademarks are
vigorously defended by the Company and, as necessary, outside counsel may be
retained to assist in such protection.
ITEM 2 PROPERTIES
The Company maintains its headquarters in the metropolitan New York area, where
it leases approximately 480,000 square feet of space for executive offices and
certain of its operating divisions. The Company is expanding its New York
facilities by constructing a 120,000 square foot facility adjoining its current
headquarters. The Company also owns or leases approximately 1.5 million square
feet of office and warehouse space for its National Service Operation located in
the Jefferson City, Missouri area. In addition, the Company owns or leases
approximately 2.1 million square feet of office and warehouse space in over 80
facilities in the United States for Scholastic Book Fairs.
Additionally, the Company owns or leases approximately 810,000 square feet of
office and warehouse space in over thirty facilities in Canada, the United
Kingdom, Australia, New Zealand and elsewhere around the world for its
international businesses.
Grolier Incorporated owns an industrial/office building complex in Danbury,
Connecticut, consisting of approximately 140,000 square feet of office space and
a 152,000 square foot warehouse facility. In addition, Grolier leases
approximately 63,000 square feet of office space and 12,000 square feet of
warehouse space to support its United States operations. Grolier also leases
approximately 93,000 square feet of office space to support its international
operations.
The Company considers its properties adequate for its present needs. With
respect to the Company's leased properties, no difficulties are anticipated in
negotiating renewals as leases expire or in finding other satisfactory space, if
current premises become unavailable. For further information concerning the
Company's obligations under its leases, see Note 4 of Notes to Consolidated
Financial Statements.
ITEM 3 LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were
SCHOLASTIC 7
<PAGE>
consolidated. The Consolidated Amended Class Action Complaint (the "Complaint")
was served and filed on August 13, 1997. The Complaint was styled as a class
action, In RE SCHOLASTIC CORPORATION SECURITIES LITIGATION, 97 CIV.II 2447
(JFK), on behalf of all persons who purchased Company common stock from December
10, 1996 through February 20, 1997. The Complaint alleged, among other things,
violations of Sections 10(b) and 20 (a) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder, resulting from purportedly materially false and
misleading statements to the investing public concerning the financial condition
of the Company. Specifically, the Complaint alleged misstatements and omissions
by the Company pertaining to adverse sales and returns of its popular GOOSEBUMPS
book series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. In dismissing both
complaints, which alleged substantially similar claims, the court held that
plaintiffs failed to state a claim upon which relief can be granted. Plaintiffs
have appealed the most recent dismissal. The Company continues to believe that
the litigation is without merit and will continue to vigorously defend against
it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court of New York County
of New York against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the GOOSEBUMPS series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
SCHOLASTIC INC. AND SCHOLASTIC ENTERTAINMENT INC. V. PARACHUTE PRESS, INC.,
PARACHUTE PUBLISHING, LLC, PARACHUTE CONSUMER PRODUCTS, LLC, AND R.L. STINE
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, PARACHUTE PRESS,
INC. V. SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS, INC. AND SCHOLASTIC
ENTERTAINMENT INC., 97 CIV. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. Parachute has filed an
appeal of the dismissal. In August 2000, the Court of Appeals for the Second
Circuit vacated the dismissal and remanded the case for further proceedings. The
second action, captioned PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC
PRODUCTIONS, INC. AND SCHOLASTIC ENTERTAINMENT INC. (Index No. 99/600507), was
filed contemporaneously with the filing of the Company's complaint on February
1, 1999 in the Supreme Court of the State Court of New York County of New York.
In its two complaints and its counterclaims, Parachute alleges that the exercise
of contractual remedies by the Company was improper and seeks declaratory relief
and unspecified damages for, among other claims, alleged breaches of contract
and acts of unfair competition. Damages sought by Parachute include the payment
of the total of approximately $36.1 million of advances over the term of the
contract, of which approximately $15.3 million had been paid at the time the
first Parachute litigation began and payment of royalties set-off by Scholastic
against amounts claimed by the Company. On July 21, 2000, the Company and
Parachute each filed motions for partial summary judgement in the pending state
court cases. The Company is seeking declaratory relief and damages for, among
other claims, breaches of contract, fraud and acts of unfair competition.
Damages sought by the Company include repayment by Parachute of a portion of the
$15.3 million advance already paid. The Company intends to vigorously defend its
position in these proceedings. The Company does not believe that this dispute
will have a material adverse effect on its financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to the vote of security holders, through the solicitation of
proxies or otherwise.
8 SCHOLASTIC
<PAGE>
--------------------------------------------------------------------------------
PART II
--------------------------------------------------------------------------------
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under
the symbol SCHL. The Class A Stock is convertible into Common Stock on a
share-for-share basis. There is no active market for the Class A Stock. The
following table sets forth, for the periods indicated, the quarterly and
one-year high and low selling prices on the NASDAQ National Market System for
the Company's Common Stock.
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
HIGH LOW HIGH LOW
--------------------------------------------------------------------------------
FIRST QUARTER 53 3/4 39 5/8 45 3/4 35 3/4
SECOND QUARTER 55 5/8 39 52 3/4 35 1/2
THIRD QUARTER 70 3/4 48 59 1/2 46 5/8
FOURTH QUARTER 57 43 1/2 56 1/4 44
YEAR 70 3/4 39 59 1/2 35 1/2
--------------------------------------------------------------------------------
The Company has not paid any dividends since its initial public offering in
February 1992 and has no current plans to pay any dividends on its Class A and
Common Stock. In addition, certain of the Company's credit facilities restrict
the payment of dividends. See Note 3 of Notes to Consolidated Financial
Statements for further information.
The number of holders of record of Class A and Common Stock as of August 9, 2000
were 3 and approximately 5,000, respectively.
ITEM 6 SELECTED FINANCIAL DATA
FOR FISCAL YEARS ENDED MAY 31, (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
TOTAL REVENUES(1) $1,402.5 $1,165.5 $1,069.8 $972.5 $933.4
COST OF GOODS SOLD(1) 678.3 571.9 548.2 536.9 470.8
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 592.6 493.3 440.3 399.6 367.4
OTHER OPERATING COSTS:
GOODWILL AND TRADEMARK
AMORTIZATION AND
DEPRECIATION 24.1 22.4 21.7 18.3 13.1
NON-RECURRING CHARGES 8.5 -- 11.4 -- 24.3
OPERATING INCOME 99.0 77.9 48.2 17.7 57.8
GAIN ON SALE OF THE
SOHO GROUP -- -- 10.0 -- --
INTEREST EXPENSE, NET (18.6) (19.0) (20.1) (16.7) (11.2)
NET INCOME 51.4(2) 36.8 23.6(3) 0.4 31.9(4)
EARNINGS PER SHARE-BASIC $ 3.07 $ 2.25 $ 1.46 $ 0.02 $ 2.02
EARNINGS PER
SHARE-DILUTED $ 2.96(2) $ 2.20 $ 1.45(3) $ 0.02 $ 1.97(4)
WEIGHTED AVERAGE SHARES
OUTSTANDING-BASIC 16.7 16.4 16.2 16.0 15.8
WEIGHTED AVERAGE SHARES
OUTSTANDING-DILUTED 18.6 16.7 16.4 16.3 16.2
--------------------------------------------------------------------------------
BALANCE SHEET DATA
(END OF YEAR):
WORKING CAPITAL $253.9 $222.4 $201.0 $215.7 $177.1
TOTAL ASSETS 983.2 842.3 763.6 784.4 673.2
LONG-TERM DEBT 241.1 248.0 243.5 287.9 186.8
TOTAL STOCKHOLDERS'
EQUITY 430.0 361.4 318.1 297.5 288.6
--------------------------------------------------------------------------------
(1) Certain amounts have been reclassified in accordance with EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs."
(2) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $3.25,
respectively.
(3) Fiscal 1998 net income and earnings per diluted share excluding the $11.4
pre-tax non-recurring charges and the non-operating gain of $10.0 would
have been $24.5 and $1.50, respectively.
(4) Fiscal 1996 net income and earnings per diluted share excluding the $24.3
pre-tax non-recurring charges would have been $46.8 and $2.85,
respectively.
SCHOLASTIC 9
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Scholastic is a global children's publishing and media company. The Company has
four operating segments: CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION;
EDUCATIONAL PUBLISHING; MEDIA, LICENSING AND ADVERTISING (which collectively
represent the Company's domestic operations); and INTERNATIONAL. Such segment
classification reflects the nature of the Company's products and services
consistent with how the chief operating decision maker assesses operating
performance and allocates resources. Certain prior year amounts have been
reclassified to conform with the current year presentation. The following
discussion and analysis of the Company's financial position should be read in
conjunction with the Company's Consolidated Financial Statements, the related
Notes and the Selected Financial Data included in this report.
OVERVIEW
During the three-year period ended May 31, 2000, the Company reported revenue
growth with significant improvement in net income, operating margins and
earnings per share. This improved performance reflects the Company's efforts to
manage its core business, capital expenditures and costs.
On June 22, 2000, the Company acquired Grolier Incorporated ("Grolier") for $400
million in cash (See Item 7 - Subsequent Events). During fiscal 2001, the
Company plans to maintain its overall strategic objective of strengthening and
developing its core businesses. Over the next years, the Company will seek to
build shareholder value through continued revenue growth coupled with improved
margins, while funding strategic initiatives such as developing internet
opportunities.
RESULTS OF OPERATIONS
FOR FISCAL YEARS ENDED MAY 31, (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
$ % (1) $ % (1) $ % (1)
REVENUES(2):
CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION 872.4 62.2 667.2 57.2 562.9 52.6
EDUCATIONAL PUBLISHING 219.8 15.7 203.8 17.5 210.6 19.7
MEDIA, LICENSING AND
ADVERTISING 104.3 7.4 103.5 8.9 99.9 9.3
INTERNATIONAL 206.0 14.7 191.0 16.4 196.4 18.4
--------------------------------------------------------------------------------
TOTAL REVENUES 1,402.5 100.0 1,165.5 100.0 1,069.8 100.0
COST OF GOODS SOLD(2) 678.3 48.4 571.9 49.1 548.2 51.2
GROSS PROFIT 724.2 51.6 593.6 50.9 521.6 48.8
SELLING, GENERAL AND
ADMINISTRATIVE COSTS 592.6 42.3 493.3 42.3 440.3 41.2
NON-RECURRING CHARGES 8.5 0.6 -- -- 11.4 1.1
OPERATING INCOME 99.0 7.1 77.9 6.7 48.2 4.5
INCOME BEFORE TAXES 80.4 5.7 58.9 5.1 38.1 3.6
NET INCOME 51.4(3) 3.7 36.8 3.2 23.6(4) 2.2
EARNINGS PER SHARE:
BASIC 3.07 2.25 1.46
DILUTED 2.96(3) 2.20 1.45(4)
--------------------------------------------------------------------------------
(1) Represents percentage of total revenues.
(2) Certain amounts have been reclassified in accordance with EITF Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs."
(3) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $3.25,
respectively.
(4) Fiscal 1998 net income and earnings per diluted share excluding the $11.4
pre-tax non-recurring charges and non-operating gain of $10.0 would have
been $24.5 and $1.50, respectively.
10 SCHOLASTIC
<PAGE>
RESULTS OF OPERATIONS - CONSOLIDATED
Revenue in fiscal 2000 grew significantly, increasing $237.0 million or 20.3%,
from fiscal 1999. Revenue growth in fiscal 1999 was $95.7 million, or 8.9%, when
compared to fiscal 1998. The revenue growth in fiscal 2000 was driven primarily
by the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment, which
accounted for 62.2% of the Company's revenues in fiscal 2000, versus 57.2% and
52.6% in fiscal 1999 and 1998, respectively.
Gross profit margin improved to 51.6% for fiscal 2000, up approximately one
percentage point from fiscal 1999, and up approximately three percentage points
from fiscal 1998. This trend reflects the Company's continued focus on cost
containment in the manufacturing and distribution process and favorable paper
prices, combined with improved sales mix in the Company's CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION segment.
Operating income increased over the prior fiscal years by $21.1 million in
fiscal 2000 and $29.7 million in fiscal 1999. In the second quarter of fiscal
2000, the Company incurred non-recurring charges of $8.5 million related to the
establishment of a litigation reserve and the liquidation of certain stock
options. Excluding the non-recurring charges, the operating margin in fiscal
2000 would have been 7.7% of revenues. In the third quarter of fiscal 1998, the
Company incurred non-recurring charges of $11.4 million related to the
impairment of certain assets including unamortized prepublication costs and
inventory. Excluding the charges, the operating margin for fiscal 1998 would
have been 5.6% of sales.
Selling, general and administrative costs as a percentage of fiscal 2000
revenues did not change from the prior fiscal year. Selling, general and
administrative costs increased as a percentage of sales to 42.3% in fiscal 1999
from 41.2% in fiscal 1998 due primarily to increased information technology
spending and planned expansion of internet development spending.
Results for fiscal 1998 include a non-operating pre-tax gain of $10.0 million
resulting from the January 1998 sale of the Company's SMALL OFFICE HOME OFFICE
GROUP ("SOHO Group"), for $19.2 million.
Net interest expense decreased slightly to $18.6 million in fiscal 2000 from
$19.0 million in fiscal 1999 primarily reflecting lower average debt levels.
Fiscal 1999 interest expense was $1.1 million less than in fiscal 1998, as a
result of lower weighted average interest rates and lower debt levels compared
to the prior year.
Operating margin improvements from 4.5% in fiscal 1998 to 6.7% in fiscal 1999
and 7.1% in fiscal 2000 were primarily due to favorable sales mix, benefits of
the Company's cost containment program and lower manufacturing costs.
The Company's effective tax rates were 36.1%, 37.5% and 38.1% of earnings before
taxes, for fiscal years 2000, 1999 and 1998, respectively. The decreasing trend
from fiscal 1998 reflects the impact of lower relative state and local tax
burdens.
Net income was $51.4 million in fiscal 2000, $36.8 million in fiscal 1999 and
$23.6 million in fiscal 1998. The basic and diluted earnings per Class A and
Common Share were $3.07 and $2.96, respectively, in fiscal 2000, $2.25 and
$2.20, respectively, in fiscal 1999 and $1.46 and $1.45, respectively, in fiscal
1998. Diluted net income per share, excluding the non-recurring charges and
non-operating gain, was $3.25 in fiscal 2000, $2.20 (unchanged) in fiscal 1999,
and $1.50 in fiscal 1998.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in and from the United States
through school book clubs, continuity programs, school book fairs and the trade
channel.
(AMOUNTS IN MILLIONS)
-------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------
REVENUES $ 872.4 $ 667.2 $ 562.9
OPERATING PROFIT 169.6 111.9 82.6
-------------------------------------------------------------------------------
OPERATING MARGIN 19.4% 16.8% 14.7%
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION revenues accounted for 62.2% of the
Company's revenues in fiscal 2000, 57.2% in fiscal 1999 and 52.6% in fiscal
1998. These revenues increased 30.8% to $872.4 million in fiscal 2000 from
$667.2 million in fiscal 1999. The Company's trade distribution channel
accounted for 26.4% of CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION sales in
fiscal 2000, as compared to 17.0% in fiscal 1999 and 14.9% in fiscal 1998. Net
trade sales more than doubled in fiscal 2000 due to the success of HARRY POTTER,
the licensed property, POKEMON, and other book series including DEAR AMERICA, I
SPY and CAPTAIN UNDERPANTS. Trade sales for fiscal 1999 increased by 35.1% due
to the success of Scholastic branded book properties, including ANIMORPHS, DEAR
AMERICA, I SPY, CLIFFORD THE BIG RED DOG and HARRY POTTER, as well as titles
based on licensed properties such as STAR WARS and TELETUBBIES. School book club
revenues accounted for 37.5% of CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
sales in fiscal 2000. Revenues from school book clubs increased 16.4% in fiscal
2000 and 12.9% in fiscal 1999 reflecting growth in the number of orders and
revenue per order. Home continuity programs represented 9.2% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION and increased 8.8% in fiscal 2000 compared to the
prior fiscal year. Revenues from school book fairs accounted for 26.9% of
SCHOLASTIC 11
<PAGE>
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION sales in fiscal 2000. Sales growth
for school book fairs of 18.1% in fiscal 2000 and 19.8% in fiscal 1999 was due
in part to an increased number of fairs and in part to an increase in revenue
per fair which resulted from broader product offerings. In fiscal 1999, growth
in the number of fairs was primarily due to the benefit of the June 1998
acquisition of the assets of Pages Book Fairs Inc.
Operating income for CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION increased $87.0
million over the three fiscal years ended May 31, 2000 to $169.6 million or
19.4% of sales. Operating income for the segment was $111.9 million or 16.8% of
sales for fiscal 1999 and $82.6 million or 14.7% of sales for fiscal 1998,
respectively. Operating margins improved largely as a result of sales mix and
the benefit of cost reductions in manufacturing and fulfillment activities in
both fiscal 2000 and fiscal 1999. Selling, general and administrative costs as a
percentage of revenue decreased from 37.1% in fiscal 1999 to 34.4% in fiscal
2000, due primarily to the significant increase in trade revenues, which incurs
lower costs relative to the other operations included in this segment.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of K to 12 textbooks, supplemental materials, classroom magazines,
teaching resources and instructional technology in and from the United States to
schools and libraries.
(Amounts in millions)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
REVENUES $ 219.8 $ 203.8 $ 210.6
OPERATING (LOSS)/PROFIT (10.7) 2.4 0.4
--------------------------------------------------------------------------------
OPERATING MARGIN * 1.2% 0.2%
* not meaningful
EDUCATIONAL PUBLISHING revenues accounted for 15.7% of the Company's revenues in
fiscal 2000, 17.5% in fiscal 1999 and 19.7% in fiscal 1998. In fiscal 2000,
EDUCATIONAL PUBLISHING revenues increased 7.9% to $219.8 million from $203.8
million in fiscal 1999 and revenues related to sales of core and supplemental
instructional materials to schools held steady at 74.7% of EDUCATIONAL
PUBLISHING revenues. The revenue increase in fiscal 2000 was primarily due to
higher sales of supplemental materials, sales of the Company's new reading
intervention program (READ 180), and increased sales of SCHOLASTIC READING
COUNTS!. This increase was partially offset by anticipated lower SCHOLASTIC
LITERACY PLACE sales in a year with limited reading program adoptions. In fiscal
1999, EDUCATIONAL PUBLISHING revenues decreased 3.2% from $210.6 million in
fiscal 1998. Revenues related to sales of core and supplemental instructional
materials decreased 5.4% from fiscal 1998 primarily due to the wind down of the
California adoption of SCHOLASTIC LITERACY PLACE. This decrease was partially
offset by increased sales of supplemental instructional materials.
EDUCATIONAL PUBLISHING operating results decreased $13.1 million from a profit
of $2.4 million in fiscal 1999, to a loss of $10.7 million in fiscal 2000. The
decline in margins in fiscal 2000 was primarily the result of the promotion and
selling and administrative costs associated with the Texas reading campaign and
the launch costs related to READ 180. Fiscal 1999 operating income of $2.4
million (1.2% of sales) represented an improvement of $2.0 million from $0.4
million in fiscal 1998. Fiscal 1998 included the effect of an $8.3 million
non-recurring charge related to the impairment of certain EDUCATIONAL PUBLISHING
assets. Excluding the effect of this charge, operating income decreased $6.3
million from $8.7 million in fiscal 1998 to $2.4 million in fiscal 1999. In
fiscal 1999, promotion and other selling and general administration costs
associated with the launch of SCHOLASTIC READING COUNTS! were primarily
responsible for the decline in margins.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution of programming and consumer products (including children's
television programming, videos, CD-ROM's, feature films and non-book products)
and internet services as well as advertising and promotional activities.
(AMOUNTS IN MILLIONS)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
REVENUES $ 104.3 $ 103.5 $ 99.9
OPERATING PROFIT/(LOSS) (10.3) (2.7) (7.4)
--------------------------------------------------------------------------------
OPERATING MARGIN * * *
* not meaningful
MEDIA, LICENSING AND ADVERTISING revenues accounted for 7.4% of the Company's
revenues in fiscal 2000, 8.9% in fiscal 1999 and 9.3% in fiscal 1998. In fiscal
2000, increased revenue from consumer magazines and software sales were offset
by declines in entertainment revenues and multimedia product sales. In fiscal
1999, increased sales of software, multimedia products and licensed merchandise
were partially offset by the absence of revenues of $11.8 million due to the
January 1, 1998, sale of the Company's SOHO Group.
Operating losses for the MEDIA, LICENSING AND ADVERTISING segment in fiscal 2000
reached $10.3 million, compared to a $2.7 million loss in fiscal 1999 and a $7.4
million loss in fiscal 1998. These results reflect increased promotional,
editorial and other operating costs associated with the development of
Scholastic.com. The improvement in fiscal 1999 was largely the result of strong
software product sales in the school book club and school book fair selling
channels combined with improved product cost efficiencies.
12 SCHOLASTIC
<PAGE>
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's operations in the United
Kingdom, Canada, Australia and New Zealand and its newer businesses in Mexico,
India, Ireland and Argentina. For the year ended May 31, 2000, 88.3% of the
Company's INTERNATIONAL revenues were derived from the sale of children's books.
(AMOUNTS IN MILLIONS)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
REVENUES $ 206.0 $ 191.0 $ 196.4
OPERATING PROFIT 6.4 4.9 9.7
--------------------------------------------------------------------------------
OPERATING MARGIN 3.1% 2.6% 4.9%
INTERNATIONAL sales accounted for 14.7% of the Company's revenues in fiscal
2000, 16.4% in fiscal 1999 and 18.4% in fiscal 1998. INTERNATIONAL revenues
increased 7.9% from $191.0 million in fiscal 1999 to $206.0 million in fiscal
2000. Revenues from the Company's Canadian and Australian operations increased,
with growth in the trade, book club and book fairs channels. This increase was
partially offset by a sales decline in the United Kingdom, principally in the
book club and book fair channels in part, due to the Company's decision to
discontinue an unprofitable sales channel. In fiscal 2000, revenues in the
United Kingdom and New Zealand were adversely impacted by weakness in their
respective currencies relative to the stronger U.S. dollar. In fiscal 1999,
INTERNATIONAL revenues decreased 2.7% from $196.4 million in fiscal 1998
reflecting the impact of lower United Kingdom sales in the book club, book fairs
and trade channels. In both fiscal 1999 and fiscal 1998, revenues in Canada,
Australia and New Zealand were adversely impacted by weakness in their
respective currencies relative to the stronger U.S. dollar.
INTERNATIONAL operating income increased $1.5 million to $6.4 million (3.1% of
sales) in fiscal 2000 from $4.9 million in fiscal 1999 (2.6% of sales) due to
revenue increases in Canada and Australia. These increases were offset by
certain charges incurred in the Company's United Kingdom operations as well as
the adverse impact of foreign currency exchange rates. Together these charges
and adverse foreign currency exchange rates totaled approximately $2.0 million.
During fiscal 1999, the Company's Australian subsidiary was impacted by
increased cost of product as a result of changes in product mix and higher
product costs for United States dollar denominated purchases. Also, during
fiscal 1999, the Canadian subsidiary incurred additional costs related to the
opening of its new distribution facility.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, generally, the Company's revenues in the first and third quarters
of the fiscal year are lower than its revenues in the other two fiscal quarters,
and the Company experiences a substantial loss from operations in the first
quarter. Typically, book clubs and book fairs experience the largest revenues in
the second quarter of the fiscal year, while revenues from the sale of
instructional materials are highest in the first quarter.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August, have generally peaked in September or October, and have been at the
lowest point in May. The Grolier acquisition is not expected to significantly
change the seasonality of the Company's results. (See Item 8, Supplementary
Financial Information).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $9.0 million for fiscal
year 2000, an increase of $3.1 million over fiscal 1999 and $3.9 million over
fiscal 1998.
Cash flow provided from operations was $146.2 million resulting from increased
revenue and improved operating margins partially offset by working capital
increases to support business growth. Within working capital, inventory
increased reflecting a management decision to accelerate paper inventory
purchases to take advantage of opportunistic pricing and to increase SCHOLASTIC
LITERARY PLACE inventory in advance of this summer's Texas adoption.
Cash outflows for investing activities were $145.2 million for fiscal 2000,
primarily related to prepublication costs, capital expenditures, royalty
advances and production cost expenditures. Prepublication expenditures totaled
$61.4 million, increasing $14.6 million from fiscal 1999, largely due to higher
investments in core publishing and technology-based products, including the
scheduled revision to SCHOLASTIC LITERACY PLACE and SCHOLASTIC SOLARES and the
development of READ 180. The Company's capital expenditures totaled $46.0
million in fiscal 2000. Capital expenditures, including capitalized interest,
increased $16.4 million from fiscal 1999 primarily due to the expansion of the
Company's corporate headquarters. The Company expects increases in its fiscal
2001 capital expenditures resulting from the completion of the Company's
expanded headquarters and the continued development of the Company's e-commerce
capabilities. For fiscal 2000, payments for royalty advances totaled $23.4
million.
The Company believes its existing cash position, combined with funds generated
from operations and available under the amended Loan Agreement and the Revolver,
will be sufficient to
SCHOLASTIC 13
<PAGE>
finance its ongoing working capital requirements, including the Grolier
operations, for the next fiscal year.
FINANCING
The Company maintains two unsecured credit facilities, the
Loan Agreement and the Revolver, which provide for aggregate borrowings of up to
$210.0 million (with a right, in certain circumstances, to increase to $240.0
million), including the issuance of up to $10.0 million in letters of credit.
Both the Loan Agreement and Revolver expire on August 11, 2004. The Company uses
these facilities to fund seasonal cash flow needs and other working capital
requirements. At May 31, 2000, the Company had $5.6 million in borrowings
outstanding under these facilities at a weighted average interest rate of 8.5%.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $37.1 million at May 31,
2000. These lines are used primarily to fund local working capital needs. At May
31, 2000, $8.5 million in borrowings were outstanding under these lines at a
weighted average interest rate of 6.4%.
To finance the June 22, 2000 acquisition of Grolier, the Company borrowed $350.0
million under a new unsecured loan agreement and also borrowed $50.0 million
under its existing Loan Agreement. (See Item 7 - Subsequent Events).
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects. Consistent with this
strategy, in June 1998 the Company acquired certain assets of Pages Book Fairs,
Inc. for approximately $10.5 million, and in January 1999, acquired certain
assets of Quality Education Data. On June 22, 2000 the Company consummated the
acquisition of Grolier for $400.0 million in cash. (See Item 7 - Subsequent
Events).
YEAR 2000
The Company completed the implementation of its year 2000 remediation plan on a
timely basis and such remediation plan, as implemented, addressed all mission
critical systems. The Company is not aware of any adverse effects of year 2000
issues on the Company's systems and operations, as well as its vendor, customer
and service provider relationships.
The total cost of the Company's Year 2000 program, was approximately $12.4
million, of which $4.4 million was incurred during fiscal 2000. No additional
material program costs are anticipated in fiscal 2001.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of EITF Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs". This consensus states that all shipping
and handling billings to a customer in a sale transaction represent the fees
earned for the goods provided and, accordingly, amounts billed related to
shipping and handling should be classified as revenue. All prior revenues and
expenses have been reclassified to conform to this consensus.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
hedges are included in income. The Company does not expect, based upon its
current assessment, that the adoption of SFAS 133 will have a material impact on
its financial position, results of operations or cash flows. The Company is
required to adopt the provisions of the standard in the first quarter of fiscal
2002.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." The SAB
provides the SEC's views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company is required to adopt the
provisions of the SAB no later than the fourth quarter of fiscal 2001. The
Company does not expect that the adoption of SAB 101 will have a material impact
on its financial position, result of operations or cash flows.
In June 2000, the Accounting Standards Executive Committee issued Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers or Distributors of
Films." SOP 00-2 replaces the Statement of Financial Accounting Standards No. 53
("SFAS 53"), "Financial Reporting by Producers and Distributors of Motion
Picture Films." This SOP concluded that film costs should
14 SCHOLASTIC
<PAGE>
be accounted for under an inventory model and discusses various topics such as
revenue recognition, fee allocation in multiple films, accounting for
exploitation costs and impairment assessment. The Company is required to adopt
the provisions of SOP 00-2 in the first quarter of fiscal 2002. The Company does
not expect that the adoption of SOP 00-2 will have a material impact on its
financial position, result of operations or cash flows.
SUBSEQUENT EVENTS
On June 22, 2000, pursuant to a Stock Purchase Agreement dated as of April 13,
2000 and as amended, Scholastic Inc. acquired all of the issued and outstanding
capital stock of Grolier Incorporated ("Grolier"), a Delaware corporation, for
$400.0 million in cash. No Grolier debt was assumed by the Company in connection
with the acquisition. The Company is accounting for the acquisition under the
purchase method of accounting. Grolier's business activities will be included in
the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION, EDUCATIONAL
PUBLISHING and INTERNATIONAL segments.
Grolier is the leading operator of United States direct-to-home book clubs for
children, primarily serving children age five and under, and is the leading
print and on-line publisher of children's non-fiction and reference products
(including the Children's Press and Franklin Watts imprints in the United States
and major encyclopedias) sold primarily to United States school libraries.
Grolier also has significant international operations in the United Kingdom,
Canada and Southeast Asia. Grolier also publishes books in the United States
under the Orchard Books imprint for distribution through the trade channel.
The acquisition was financed by the Company using bank debt. Of the $400.0
million Grolier purchase price, $350.0 million was borrowed under a new credit
facility (the "Grolier Facility") entered into to finance the acquisition and
$50.0 million was borrowed under the Company's existing Loan Agreement. (See
Note 3 of Notes to Consolidated Financial Statements).
The Grolier Facility is a 364-day facility and may be extended for an additional
year. Borrowings bear interest either at the prime rate or 0.39% to 1.10% over
LIBOR. The Grolier Facility also provides for a facility fee ranging from 0.085%
to 0.25%. The amounts charged vary based on the Company's credit rating. Based
on the Company's credit rating at June 22, 2000, the interest rate and facility
fee charged were 0.575% over LIBOR and 0.125%, respectively.
Effective as of June 22, 2000, the Company's Loan Agreement and Revolver were
amended to adjust for the Company's increased debt levels resulting from the
acquisition of Grolier. (See Note 3 of Notes to Consolidated Financial
Statements).
The Board of Directors of the Company has recommended that the Company's Amended
and Restated Certificate of Incorporation be amended to increase the number of
shares of authorized Common Stock to 70,000,000 shares and Preferred Stock to
2,000,000 shares, subject to the approval of the company's stockholders entitled
to vote thereon at the Company's Annual Meeting of Stockholders. If approved,
this amendment would increase the number of authorized shares of capital stock
of the Company to 74,500,000 shares, consisting of 70,000,000 shares of Common
Stock and 2,000,000 shares of Preferred Stock, together with the previously
authorized 2,500,000 shares of Class A stock.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs
and income, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to factors including the following and other risks and factors
identified from time to time in the Company's filings with the SEC:
o The Company's ability to continue to produce successful educational, trade,
entertainment and software products;
o The ability of the Company's clubs and fairs to continue to successfully meet
market needs;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment and software markets;
o Competition from other educational and trade publishers and media,
entertainment and internet companies;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
o The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
o The Company's ability to effectively use the internet to support its existing
businesses and to launch successful new internet initiatives;
SCHOLASTIC 15
<PAGE>
o The general risks attendant to the conduct of business in foreign countries;
o The general risks inherent in the market impact of rising interest rates with
regard to its variable debt facilities; and
o The Company's ability to successfully integrate the Grolier acquisition and
to achieve the savings and cross-selling opportunities it has identified.
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management believes that the impact of currency fluctuations do not represent a
significant risk in the context of the Company's current international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business, nor are such instruments used for
speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. At May 31, 2000, the majority of the Company's long-term debt
bore interest at a fixed rate. However, the fair market value of the fixed rate
debt is sensitive to changes in interest rates. The Company is subject to the
risk that market interest rates will decline and the interest rates under the
fixed rate debt will exceed the then prevailing market rates. Under its current
policies, the Company does not utilize any interest rate derivative instruments
to manage its exposure to interest rate changes.
On June 22, 2000, the Company borrowed $350.0 million to finance the acquisition
of Grolier under a new credit facility which is subject to market rate risk
which will change the Company's overall market risk exposure in future periods.
(See Note 12 of Notes to Consolidated Financial Statements).
At May 31, 2000, the balance outstanding under the facilities which have
variable rates was $5.6 million, at a weighted-average interest rate of 8.5%. A
15% increase or decrease in the average interest rate on the Company's variable
rate debt at May 31, 2000 would not have had a significant impact on the
Company's results of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
16 SCHOLASTIC
<PAGE>
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and
Financial Statement Schedule PAGE(S)
Consolidated Statement of Income for the three years ended
May 31, 2000, 1999 and 1998 19
Consolidated Balance Sheet at May 31, 2000 and 1999 20-21
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income for the three years ended
May 31, 2000, 1999 and 1998 22
Consolidated Statement of Cash Flows for the three years
ended May 31, 2000, 1999 and 1998 23
Notes to Consolidated Financial Statements 24-34
Report of Independent Auditors 35
Supplementary Financial Information -- Summary of
Quarterly Results of Operations (unaudited) 36
The following consolidated financial statement schedule
for the three years ended May 31, 2000, 1999 and 1998
is included in Item 14(d):
Schedule II-- Valuation and Qualifying Accounts and Reserves 46
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the Notes thereto.
SCHOLASTIC 17
<PAGE>
page intentionally left blank
18 SCHOLASTIC
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED MAY 31, (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
REVENUES $1,402.5 $1,165.5 $1,069.8
OPERATING COSTS AND EXPENSES:
COST OF GOODS SOLD 678.3 571.9 548.2
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 592.6 493.3 440.3
OTHER OPERATING COSTS:
DEPRECIATION 19.7 16.9 15.0
GOODWILL AND TRADEMARK AMORTIZATION 4.4 5.5 6.7
NON-RECURRING CHARGES 8.5 -- 11.4
--------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 1,303.5 1,087.6 1,021.6
--------------------------------------------------------------------------------
OPERATING INCOME 99.0 77.9 48.2
SALE OF SOHO GROUP -- -- 10.0
INTEREST EXPENSE, NET (18.6) (19.0) (20.1)
--------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 80.4 58.9 38.1
PROVISION FOR INCOME TAXES 29.0 22.1 14.5
--------------------------------------------------------------------------------
NET INCOME $ 51.4 $ 36.8 $ 23.6
================================================================================
EARNINGS PER CLASS A AND COMMON SHARE:
BASIC $ 3.07 $ 2.25 $ 1.46
DILUTED $ 2.96 $ 2.20 $ 1.45
--------------------------------------------------------------------------------
See accompanying notes
SCHOLASTIC 19
<PAGE>
CONSOLIDATED BALANCE SHEET
BALANCES AT MAY 31, (AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
ASSETS 2000 1999
--------------------------------------------------------------------------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 9.0 $ 5.9
ACCOUNTS RECEIVABLE (LESS ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $14.7 AT
MAY 31, 2000 AND $12.3 AT MAY 31, 1999) 153.7 136.4
INVENTORIES 290.7 227.4
DEFERRED INCOME TAXES 57.2 41.8
PREPAID AND OTHER CURRENT ASSETS 29.1 22.7
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 539.7 434.2
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
LAND 7.0 6.7
BUILDINGS 41.4 40.1
FURNITURE, FIXTURES AND EQUIPMENT 115.7 97.9
LEASEHOLD IMPROVEMENTS 90.8 72.9
--------------------------------------------------------------------------------
254.9 217.6
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (78.5) (65.4)
--------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 176.4 152.2
--------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES:
PREPUBLICATION COSTS 116.1 95.3
GOODWILL AND TRADEMARKS 66.4 71.1
ROYALTY ADVANCES 48.7 54.4
PRODUCTION COSTS 14.2 9.0
OTHER 21.7 26.1
--------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND DEFERRED CHARGES 267.1 255.9
--------------------------------------------------------------------------------
TOTAL ASSETS $983.2 $842.3
================================================================================
20 SCHOLASTIC
<PAGE>
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
--------------------------------------------------------------------------------
CURRENT LIABILITIES:
LINES OF CREDIT AND CURRENT PORTION OF LONG-TERM DEBT $ 8.7 $ 18.2
ACCOUNTS PAYABLE 129.7 97.0
ACCRUED ROYALTIES 32.8 23.7
ACCRUED TAXES 23.8 7.7
DEFERRED REVENUE 10.3 6.7
OTHER ACCRUED EXPENSES 80.5 58.5
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 285.8 211.8
--------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
LONG-TERM DEBT 241.1 248.0
OTHER NONCURRENT LIABILITIES 26.3 21.1
--------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 267.4 269.1
--------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE
AUTHORIZED-1,000,000 SHARES; ISSUED-NONE -- --
CLASS A STOCK, $.01 PAR VALUE
AUTHORIZED-2,500,000 SHARES; ISSUED-828,100 SHARES 0.0 0.0
COMMON STOCK, $.01 PAR VALUE
AUTHORIZED-25,000,000 SHARES; ISSUED-17,027,190
SHARES (16,946,803 SHARES AT MAY 31, 1999) 0.2 0.2
ADDITIONAL PAID-IN CAPITAL 222.7 212.3
ACCUMULATED OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (11.1) (5.7)
RETAINED EARNINGS 242.8 191.4
LESS 851,006 SHARES (1,301,658 SHARES AT MAY 31, 1999)
OF COMMON STOCK IN TREASURY, AT COST (24.6) (36.8)
--------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 430.0 361.4
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 983.2 $ 842.3
================================================================================
See accompanying notes
SCHOLASTIC 21
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, 2000, 1999 AND 1998 (AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
-----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
CLASS A COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL LOSS EARNINGS STOCK EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 1, 1997 $ 0.0 $ 0.2 $ 203.8 $ (0.7) $ 131.0 $ (36.8) $ 297.5
COMPREHENSIVE INCOME:
NET INCOME 23.6 23.6
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (4.3) (4.3)
------
TOTAL COMPREHENSIVE INCOME 19.3
PROCEEDS FROM ISSUANCE OF
COMMON STOCK PURSUANT
TO EMPLOYEE STOCK PLANS
(69,500 SHARES ISSUED) 0.0 0.7 0.7
TAX BENEFIT REALIZED FROM STOCK
OPTION TRANSACTIONS 0.6 0.6
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 0.0 0.2 205.1 (5.0) 154.6 (36.8) 318.1
COMPREHENSIVE INCOME:
NET INCOME 36.8 36.8
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (0.7) (0.7)
------
TOTAL COMPREHENSIVE INCOME 36.1
PROCEEDS FROM ISSUANCE OF
COMMON STOCK PURSUANT
TO EMPLOYEE STOCK PLANS
(205,613 SHARES ISSUED) 0.0 5.8 5.8
TAX BENEFIT REALIZED FROM STOCK
OPTION TRANSACTIONS 1.4 1.4
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 0.0 0.2 212.3 (5.7) 191.4 (36.8) 361.4
COMPREHENSIVE INCOME:
NET INCOME 51.4 51.4
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (5.4) (5.4)
------
TOTAL COMPREHENSIVE INCOME 46.0
PROCEEDS FROM ISSUANCE OF
COMMON STOCK PURSUANT
TO EMPLOYEE STOCK PLANS
(531,039 SHARES ISSUED,
450,652 SHARES FROM
TREASURY STOCK, NET OF
25,072 SHARES SURRENDERED) 0.0 6.3 12.2 18.5
TAX BENEFIT REALIZED FROM STOCK
OPTION TRANSACTIONS 4.1 4.1
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 $ 0.0 $ 0.2 $ 222.7 $ (11.1) $ 242.8 $ (24.6) $ 430.0
===================================================================================================================================
</TABLE>
See accompanying notes
22 SCHOLASTIC
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, (AMOUNTS IN MILLIONS)
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
NET INCOME $ 51.4 $ 36.8 $ 23.6
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 24.1 22.4 21.7
AMORTIZATION OF PREPUBLICATION AND
PRODUCTION COSTS 47.3 50.5 42.5
ROYALTY ADVANCES EXPENSED 29.2 21.8 17.7
PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE 20.5 17.0 14.6
DEFERRED INCOME TAXES (15.1) (2.1) (8.4)
NON-CASH PORTION OF NON-RECURRING CHARGES 8.5 -- 11.4
GAIN ON THE SALE OF THE SOHO GROUP -- -- (10.0)
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (39.1) (35.5) (38.9)
INVENTORIES (66.8) (23.3) 13.8
PREPAID AND OTHER CURRENT ASSETS (6.7) (4.0) 18.6
ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES 50.1 29.6 (2.3)
ACCRUED ROYALTIES 9.2 6.8 9.3
ACCRUED TAXES 16.2 (3.1) 1.8
DEFERRED REVENUE 3.1 (3.7) 3.1
OTHER, NET 14.3 4.4 (0.8)
--------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 94.8 80.8 94.1
--------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 146.2 117.6 117.7
CASH FLOWS USED IN INVESTING ACTIVITIES:
PREPUBLICATION COSTS (61.4) (46.8) (25.4)
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (46.0) (29.6) (20.3)
ROYALTY ADVANCES (23.4) (27.8) (31.7)
PRODUCTION COSTS (13.8) (13.8) (13.0)
BUSINESS AND TRADEMARK ACQUISITION-RELATED
PAYMENTS (0.2) (14.9) (6.0)
PROCEEDS RECEIVED FROM THE SALE OF THE
SOHO GROUP -- -- 19.2
OTHER (0.4) (3.9) (2.0)
--------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (145.2) (136.8) (79.2)
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
BORROWINGS UNDER LOAN AGREEMENT AND REVOLVER 342.8 269.2 243.9
REPAYMENTS OF LOAN AGREEMENT AND REVOLVER (347.3) (264.7) (288.3)
BORROWINGS UNDER LINES OF CREDIT 122.2 66.9 68.6
REPAYMENTS OF LINES OF CREDIT (133.1) (58.7) (63.6)
PROCEEDS PURSUANT TO EMPLOYEE STOCK PLANS, NET 16.7 5.8 0.7
TAX BENEFIT REALIZED FROM STOCK OPTION
TRANSACTIONS 4.1 1.4 0.6
OTHER (3.2) -- (0.3)
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 2.2 19.9 (38.4)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.1) 0.1 0.1
--------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3.1 0.8 0.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5.9 5.1 4.9
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9.0 $ 5.9 $ 5.1
================================================================================
SUPPLEMENTAL INFORMATION:
INCOME TAXES PAID $ 17.5 $ 23.0 $ 17.1
INTEREST PAID 20.1 20.1 21.5
--------------------------------------------------------------------------------
See accompanying notes
SCHOLASTIC 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scholastic
Corporation and all wholly-owned subsidiaries (the "Company"). All intercompany
transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication and film production costs and recoverability of other long-lived
assets.
CASH EQUIVALENTS
Cash equivalents consist of short-term investments with original maturities of
less than three months.
INVENTORIES
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. Buildings have an estimated useful
life, for purposes of depreciation, of forty years. Furniture, fixtures and
equipment are depreciated over periods not exceeding ten years. Leasehold
improvements are amortized over the life of the lease or the life of the assets,
whichever is shorter. Interest is capitalized on major construction projects
based on the outstanding construction in progress balance for the period and the
average borrowing rate during the period.
OTHER ASSETS AND DEFERRED CHARGES
Prepublication costs are amortized on the straight-line basis over a two- to
five-year period commencing with publication. Goodwill and trademarks acquired
by the Company are amortized on the straight-line basis over the estimated
future periods, which are generally between fifteen and twenty-five years.
Royalty advances are expensed as related revenues are earned or when future
recovery appears doubtful. Production costs are stated at the lower of cost less
amortization or net realizable value. Production costs are amortized in the
proportion that current revenues bear to estimated remaining total lifetime
revenues.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets, including goodwill and trademarks,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets as determined by estimated discounted cash
flows. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to enter into the determination of taxable income.
REVENUE RECOGNITION
Sales of books and software are recognized upon the shipment of product. Sales
made on a returnable basis are recorded net of provisions for estimated returns
and allowances. A reserve for estimated book returns is established at the time
of sale. Actual returns are charged against the reserve as received.
Revenue from magazine subscriptions is deferred at the time of sale. As
magazines are delivered to subscribers, proportionate amounts of revenue and
related acquisition expenses are recognized.
Revenue from the sale of film rights, principally for the home video and
domestic and foreign syndicated television markets, is recognized when the film
has been delivered and is available for showing or exploitation. Income from
licensing is recorded in accordance with royalty agreements, at the time
characters are available to the licensee and collections are reasonably assured.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) in accounting for its
employee stock options. Under APB 25, compensation expense is recognized only
when the exercise price of options is below the market price of the underlying
stock on the date of grant where the exercise price and number of shares subject
to grant are fixed.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are translated
into United States dollars at the current balance
24 SCHOLASTIC
<PAGE>
sheet rates, except that revenues, costs and expenses are translated at average
current rates during each reporting period. Net gains or losses resulting from
the translation of the foreign financial statements and the effect of exchange
rate changes on long-term intercompany transactions are accumulated and charged
directly to the foreign currency translation adjustment component of
stockholders' equity.
EARNINGS PER SHARE
Earnings per share are based on the combined weighted-average number of Class A
and Common Shares outstanding using the treasury stock method. Potentially
dilutive securities are excluded from the computation of diluted earnings per
share for the periods in which they have an anti-dilutive effect.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of EITF Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs". This consensus states that all shipping
and handling billings to a customer in a sale transaction represent the fees
earned for the goods provided and, accordingly, amounts billed related to
shipping and handling should be classified as revenue. Certain prior year
amounts have been reclassified in accordance with the consensus.
In June 1998, the Financial Accounting Standards Board issued, Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
hedges are included in income. The Company does not expect, based upon its
current assessment, that the adoption of SFAS 133 will have a material impact on
its financial position, results of operations or cash flows. Under SFAS 133, the
Company is required to adopt the provisions of this standard in the first
quarter of fiscal 2002.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101 ("SAB 101"), "Revenue Recognition in Financial Statements."
The SAB provides the SEC's views in applying generally accepted accounting
principles to selected revenue recognition issues. The Company is required to
adopt the provisions of the SAB no later than the fourth quarter of fiscal 2001.
The Company does not expect that the adoption of SAB 101 will have a material
impact on its financial position, result of operations or cash flows.
In June 2000, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 00-2 ("SOP 00-2"), "Accounting by Producers or Distributors
of Films." SOP 00-2 replaces the Statement of Financial Accounting Standards No.
53 ("SFAS 53"), "Financial Reporting by Producers and Distributors of Motion
Picture Films." This SOP concluded that film costs should be accounted for under
an inventory model and discusses various topics such as revenue recognition, fee
allocation in multiple films, accounting for exploitation costs, and impairment
assessment. The Company is required to adopt the provisions of SOP 00-2 in the
first quarter of fiscal 2002. The Company does not expect that the adoption of
SOP 00-2 will have a material impact on its financial position, result of
operations or cash flows.
2. SEGMENT INFORMATION
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong, India, Ireland and Argentina, and distributes its products
and services through a variety of channels, including school book clubs, school
book fairs and trade.
The Company's businesses are categorized in the operating segments identified
below. Such segment classification reflects the nature of products and services
consistent with how the chief operating decision maker assesses operating
performance and allocates resources.
o CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION includes the publication and
distribution of children's books in and from the United States through school
book clubs, continuity programs, school book fairs and the trade channel.
o EDUCATIONAL PUBLISHING includes the publication and distribution of K to 12
textbooks, supplemental materials, classroom magazines, teaching resources
and instructional technology in and from the United States to schools and
libraries.
o MEDIA, LICENSING AND ADVERTISING includes the production and distribution of
programming and consumer products (including television programming, videos,
CD-ROM's, feature films and non-book products) and internet services, as well
as advertising and promotional activities.
o INTERNATIONAL includes the publication and distribution of products and
services outside the United States by the Company's operations in the United
Kingdom, Canada, Australia and New Zealand, and its newer businesses in
Mexico, India, Ireland and Argentina.
SCHOLASTIC 25
<PAGE>
The following table sets forth information for the three fiscal years ended
May 31 about the Company's segments:
<TABLE>
<CAPTION>
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING OVERHEAD(1) DOMESTIC INTERNATIONAL CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 872.4 $ 219.8 $ 104.3 $ 0.0 $ 1,196.5 $ 206.0 $ 1,402.5
DEPRECIATION 3.6 1.0 2.1 9.3 16.0 3.7 19.7
AMORTIZATION(2) 12.8 29.5 8.0 0.0 50.3 1.4 51.7
ROYALTY ADVANCES EXPENSED 22.6 1.6 3.4 0.0 27.6 1.6 29.2
SEGMENT PROFIT/(LOSS)(3) 169.6 (10.7) (10.3) (56.0) 92.6 6.4 99.0
SEGMENT ASSETS 356.8 223.3 61.2 204.7 846.0 137.2 983.2
LONG-LIVED ASSETS(4) 96.3 111.6 35.0 127.0 369.9 51.9 421.8
EXPENDITURES FOR LONG-LIVED ASSETS(5) 37.9 47.3 26.6 28.5 140.3 4.4 144.7
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
1999
-----------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 667.2 $ 203.8 $ 103.5 $ 0.0 $ 974.5 $ 191.0 $ 1,165.5
DEPRECIATION 3.1 0.8 0.8 8.7 13.4 3.5 16.9
AMORTIZATION(2) 12.7 24.4 15.7 0.0 52.8 3.2 56.0
ROYALTY ADVANCES EXPENSED 16.9 1.8 1.6 0.0 20.3 1.5 21.8
SEGMENT PROFIT/(LOSS)(3) 111.9 2.4 (2.7) (38.6) 73.0 4.9 77.9
SEGMENT ASSETS 314.6 166.5 52.4 163.2 696.7 145.6 842.3
LONG-LIVED ASSETS(4) 97.3 95.5 24.1 107.6 324.5 57.5 382.0
EXPENDITURES FOR LONG-LIVED ASSETS(5) 37.5 34.5 19.1 16.2 107.3 10.7 118.0
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
1998
-----------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 562.9 $ 210.6 $ 99.9 $ 0.0 $ 873.4 $ 196.4 $ 1,069.8
DEPRECIATION 2.4 0.9 0.7 7.5 11.5 3.5 15.0
AMORTIZATION(2) 12.6 20.5 13.7 0.0 46.8 2.4 49.2
ROYALTY ADVANCES EXPENSED 16.6 1.0 (1.0) 0.0 16.6 1.1 17.7
SEGMENT PROFIT/(LOSS)(6) 82.6 0.4 (7.4) (37.1) 38.5 9.7 48.2
SEGMENT ASSETS 255.9 177.2 40.8 155.6 629.5 134.1 763.6
LONG-LIVED ASSETS(4) 84.8 87.6 18.8 97.2 288.4 56.8 345.2
EXPENDITURES FOR LONG-LIVED ASSETS(5) 43.2 12.4 18.2 9.2 83.0 7.4 90.4
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Overhead includes all domestic corporate-related items not allocated to
reportable segments. As it relates to the segment profit/(loss),
unallocated expenses include costs related to the management of corporate
assets and for fiscal 2000, non-recurring charges related to the
establishment of a litigation reserve of $6.7 and to the liquidation of
certain stock options or $1.8. Unallocated assets are principally comprised
of deferred income taxes and property, plant and equipment related to the
Company's headquarters in the metropolitan New York area and its National
Service Operation located in Missouri.
(2) Includes amortization of goodwill, intangible assets, and prepublication
and production costs.
(3) Segment profit/(loss) represents earnings before interest and income taxes.
(4) Includes property, plant and equipment, prepublication costs, goodwill and
trademarks, royalty advances and production costs.
(5) Includes purchases of property, plant and equipment, investments in
prepublication and production costs, and royalty advances.
(6) Segment profit/(loss) represents earnings before interest, income taxes and
the fiscal 1998 gain on the sale of the SOHO Group. This amount includes
non-recurring charges relating to the impairment of certain assets
consisting primarily of unamortized prepublication costs of $6.9 and
related inventory costs of $4.5; with approximately $8.3 and $3.1 of the
charges relating to the Company's EDUCATIONAL PUBLISHING and MEDIA,
LICENSING AND ADVERTISING segments, respectively.
3. DEBT
Debt consisted of the following at May 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
LINES OF CREDIT $ 8.5 $ 8.5 $ 18.0 $ 18.0
LOAN AGREEMENT AND REVOLVER 5.6 5.6 10.0 10.0
7% NOTES DUE 2003, NET OF DISCOUNT 124.8 120.8 124.8 126.1
CONVERTIBLE SUBORDINATED DEBENTURES 110.0 104.4 110.0 106.7
OTHER DEBT 0.9 0.9 3.4 3.4
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT 249.8 240.2 266.2 264.2
LESS CURRENT PORTION OF LONG TERM DEBT AND LINES OF CREDIT (8.7) (8.7) (18.2) (18.2)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 241.1 $ 231.5 $ 248.0 $ 246.0
===================================================================================================================================
</TABLE>
Short-term debt is carried at cost which approximates fair value. Fair values
were estimated based on market quotes, where available, or dealer quotes.
26 SCHOLASTIC
<PAGE>
LOAN AGREEMENT
The Company and Scholastic Inc. (a wholly-owned subsidiary) are joint and
several borrowers under a loan agreement with certain banks which was amended
and restated effective August 11, 1999 (the "Loan Agreement"). The Loan
Agreement, which expires August 11, 2004, provides for aggregate unsecured
borrowings of up to $170.0 (with a right in certain circumstances to increase it
to $200.0) including the issuance of up to $10.0 in letters of credit (of which
none was outstanding at May 31, 2000). Interest under this facility is either at
the prime rate or 0.325% to 0.90% over LIBOR (as defined). There is a facility
fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to
0.15% if borrowings exceed 33% of the total facility. The amounts charged vary
based upon the Company's credit rating. Based on the Company's credit rating at
May 31, 2000, the interest rate, facility fee and utilization fee were 9.5%,
0.150%, and 0.075%, respectively. At May 31, 2000, there were no amounts
outstanding under The Loan Agreement. The Loan Agreement contains certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions. (See Note 12, Subsequent Events.)
REVOLVER
The Company and Scholastic Inc. are joint and several borrowers under a
Revolving Loan Agreement with a bank, which was amended and restated effective
November 10, 1999 (the "Revolver") and provides for unsecured revolving credit
loans of up to $40.0 and expires on August 11, 2004. Interest under this
facility is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as
defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts
charged vary based upon the Company's credit rating. Based on the Company's
credit rating at May 31, 2000, the interest rate and facility fee were 8.5% and
0.150%, respectively. At May 31, 2000, there was $5.6 outstanding under the
Revolver. The Revolver has certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions.
7% NOTES DUE 2003
On December 23, 1996, the Company issued $125.0 of 7% Notes (the "Notes"). The
Notes are unsecured and unsubordinated obligations of the Company and will
mature on December 15, 2003. The Notes are not redeemable prior to maturity.
Interest on the Notes is payable semi-annually on December 15 and June 15 of
each year.
CONVERTIBLE SUBORDINATED DEBENTURES
On August 18, 1995, the Company sold $110.0 of 5.0% Convertible Subordinated
Debentures due August 15, 2005 (the "Debentures") under Regulation S and Rule
144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg
Stock Exchange and are designated for trading in the Portal system of the
National Association of Securities Dealers, Inc.
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
principal amount plus accrued interest. Each debenture is convertible, at the
holder's option any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
The Debentures are subordinated to the Loan Agreement, the Revolver and the
Notes.
LINES OF CREDIT
The Company's international subsidiaries had unsecured lines of credit available
of $37.1 and $37.9 at May 31, 2000 and 1999, respectively. There were $8.5 and
$18.0 outstanding under these credit lines at May 31, 2000 and 1999,
respectively. These lines of credit are considered short-term in nature. The
weighted-average interest rates on the outstanding amounts were 6.40% and 7.15%
at May 31, 2000 and 1999, respectively.
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases warehouse space, office space and equipment under various
operating leases. Certain of these leases provide for rent increases based on
price-level factors. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. The Company has
no significant capitalized leases. Total rent expense relating to the Company's
operating leases was $35.9, $32.2 and $26.2 for the fiscal years ended May 31,
2000, 1999 and 1998, respectively. These rentals include payments under the
terms of the escalation provisions and are net of sublease income.
The aggregate minimum future annual rental commitments at May 31, 2000, under
all non-cancelable operating leases, totaling $334.9 are as follows: 2001 -
$35.2; 2002 - $30.4; 2003 - $25.3; 2004 - $20.6; 2005 - $16.8; later years -
$206.6.
The Company had certain contractual commitments at May 31, 2000 totaling $18.7.
The aggregate annual commitments were as follows: 2001 - $14.8; 2002 - $3.0;
2003 - $0.5; 2004 - $0.1; 2005 - $0.3; later years - none.
CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company.
On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First
SCHOLASTIC 27
<PAGE>
Amendment Consolidated Complaint, with leave to amend the complaint. In
dismissing both complaints, which alleged substantially similar claims, the
court held that plaintiffs failed to state a claim upon which relief can be
granted. Plaintiffs have appealed the most recent dismissal. The Company
continues to believe that the litigation is without merit and will continue to
vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such GOOSEBUMPS rights are
licensed to the Company. The issues in the case are also, in part, the subject
of two litigations commenced by Parachute following repeated notices from the
Company to Parachute of material breaches by Parachute of the agreements under
which such rights are licensed and the exercise by the Company of its
contractual remedies under the agreements. The first Parachute action, in which
two subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on November
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. Parachute filed an appeal of the dismissal. The Court of Appeals for
the Second Circuit vacated the dismissal and remanded the case for further
proceedings. The second Parachute action was filed contemporaneously with the
filing of the Company's complaint on February 1, 1999 in the Supreme Court of
the State of New York in New York County. In its two complaints, and in its
counterclaims, Parachute alleges that the exercise of contractual remedies by
the Company was improper and seeks declaratory relief and unspecified damages
for, among other claims, alleged breaches of contract and acts of unfair
competition. Damages sought by Parachute include the payment of a total of
approximately $36.1 of advances over the term of the contract (of which
approximately $15.3 had been paid at the time the first Parachute litigation
began) and payments of royalties set-off by Scholastic against amounts claimed
by the Company. The Company is seeking declaratory relief and damages for, among
other claims, breaches of contract, fraud and acts of unfair competition.
Damages sought by the Company include lost profits and disgorgement of certain
payments received by Parachute. On July 21, 2000, the Company and Parachute each
filed motions for partial summary judgement in the state court cases. The
Company intends to vigorously pursue its claims against Parachute and the other
named defendants and to vigorously defend its position in these proceedings. The
Company does not believe that this dispute will have a material adverse effect
on its financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
5. INCOME TAXES
The provision for income taxes for the indicated fiscal years ended May 31 are
based on earnings/(losses) before taxes as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
UNITED STATES $ 82.4 $ 63.0 $ 36.6
NON-UNITED STATES (2.0) (4.1) 1.5
--------------------------------------------------------------------------------
$ 80.4 $ 58.9 $ 38.1
================================================================================
The provision for income taxes for the indicated fiscal years ended May 31
consists of the following components:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
FEDERAL
CURRENT $ 37.6 $ 21.3 $ 18.4
DEFERRED (12.8) (2.6) (8.6)
--------------------------------------------------------------------------------
$ 24.8 $ 18.7 $ 9.8
================================================================================
STATE AND LOCAL
CURRENT $ 4.2 $ 2.7 $ 3.0
DEFERRED (2.4) 0.2 0.1
--------------------------------------------------------------------------------
$ 1.8 $ 2.9 $ 3.1
================================================================================
INTERNATIONAL
CURRENT $ 2.3 $ 0.2 $ 1.5
DEFERRED 0.1 0.3 0.1
--------------------------------------------------------------------------------
$ 2.4 $ 0.5 $ 1.6
================================================================================
TOTAL
CURRENT $ 44.1 $ 24.2 $ 22.9
DEFERRED (15.1) (2.1) (8.4)
--------------------------------------------------------------------------------
$ 29.0 $ 22.1 $ 14.5
================================================================================
28 SCHOLASTIC
<PAGE>
The provision for income taxes attributable to continuing operations differ from
the amount of tax determined by applying the federal statutory rate as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
COMPUTED FEDERAL
STATUTORY PROVISION $ 28.1 $ 20.6 $ 13.3
STATE INCOME TAX PROVISION,
NET OF FEDERAL INCOME
TAX BENEFIT 1.2 1.9 2.0
DIFFERENCE IN EFFECTIVE TAX RATES
ON EARNINGS OF FOREIGN
SUBSIDIARIES 0.2 (0.1) (0.9)
CHARITABLE CONTRIBUTIONS (0.8) (0.5) 0.0
OTHER - NET 0.3 0.2 0.1
--------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $ 29.0 $ 22.1 $ 14.5
================================================================================
EFFECTIVE TAX RATES 36.1% 37.5% 38.1%
================================================================================
The undistributed earnings of foreign subsidiaries at May 31, 2000 are $18.6.
Any remittance of foreign earnings would not result in any significant
additional tax.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes as determined under enacted tax
laws and rates. The tax effects of these items that give rise to deferred tax
assets and liabilities as of May 31 for the indicated fiscal years are as
follows:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS:
TAX UNIFORM CAPITALIZATION $ 28.0 $ 23.6
INVENTORY RESERVES 14.2 11.7
OTHER ACCOUNTING RESERVES 12.8 3.6
POST-RETIREMENT, POST-EMPLOYMENT
AND PENSION OBLIGATIONS 7.6 7.0
THEATRICAL MOTION PICTURE ACCOUNTING 2.5 2.4
DEPRECIATION (4.8) (3.6)
OTHER - NET (5.3) (3.0)
--------------------------------------------------------------------------------
TOTAL NET DEFERRED TAX ASSETS $ 55.0 $ 41.7
================================================================================
Net deferred tax assets of $55.0 at May 31, 2000 and $41.7 at May 31, 1999
include $57.2 and $41.8 in deferred income taxes, $1.1 and $1.2 in Other assets,
and $(3.3) and $(1.3) in Other noncurrent liabilities at May 31, 2000 and 1999,
respectively.
6. CAPITAL STOCK AND STOCK OPTIONS
The Company has authorized capital stock of 25,000,000 shares of Common Stock,
$0.01 par value (the "Common Stock"), 2,500,000 shares of Class A Stock, $0.01
par value (the "Class A Stock"), and 1,000,000 shares of Preferred Stock, $1.00
par value (the "Preferred Stock"). (See Note 12, Subsequent Events.) At May 31,
2000, 16,176,184 shares of Common Stock, 828,100 shares of Class A Stock and no
shares of the Preferred Stock were issued and outstanding and 851,006 shares of
Common Stock were designated as Treasury Stock. At May 31, 2000, the Company had
reserved 6,307,275 shares of Common Stock. Of these shares, 3,730,998 shares
were reserved for issuance under the Company's stock option plans (including
shares available for grant and options currently outstanding), 828,100 shares
were reserved for issuance upon conversion of the Class A Stock, 317,003 shares
were reserved for future issuances under the Company's Management and Employee
Stock Purchase Plans and 1,431,174 shares were reserved for issuance upon
conversion of the Convertible Debentures.
The only voting rights vested in the holders of Common Stock, except as required
by law, are the election of such number of directors as shall equal at least
one-fifth of the members of the Board of Directors. The holders of Class A Stock
are entitled to elect all other directors and to vote on all other matters.
Holders of Class A Stock and Common Stock are entitled to one vote per share on
matters on which they are entitled to vote. The holders of Class A Stock have
the right, at their option, to convert shares of Class A Stock into shares of
Common Stock on a share-for-share basis.
With the exception of voting rights and conversion rights, and as to the rights
of holders of Preferred Stock if issued, the Class A Stock and the Common Stock
are equal in rank and are entitled to dividends and distributions, when and if
declared by the Board of Directors. The Company has not paid any dividends since
its public offering in 1992 and has no current plans to pay any dividends on its
Common Stock or Class A Stock.
PREFERRED STOCK
The Company's authorized Preferred Stock may be issued in one or more series
with full or limited voting rights, with the rights of each series to be
determined by the Board of Directors before each issuance. To date no shares of
Preferred Stock have been issued.
WARRANTS
During fiscal 1999, the Company granted a warrant to purchase 45,000 shares of
Common Stock at a price of $39.12 to a third party developer. During fiscal
2000, the Company bought back the warrant to purchase 45,000 shares of Common
Stock for an aggregate purchase price of $1.0 which was reported as
prepublication costs.
SCHOLASTIC 29
<PAGE>
STOCK OPTIONS
In fiscal 1996, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), which provides for the grant of non-qualified stock options and
incentive stock options. Initially, 2,000,000 shares of Common Stock were
reserved for issuance upon the exercise of options granted under this plan. In
September 1998, the holders of the Class A Stock authorized the issuance of an
additional 1,500,000 shares of Common Stock under the 1995 Option Plan. The 1995
Plan supplemented the 1992 Stock Option Plan (the "1992 Plan"). At May 31, 2000,
options to purchase 2,182,758 and 520,725 shares of Common Stock were
outstanding under the 1995 and 1992 Plans, respectively; 856,515 and no shares
of Common Stock were available for additional awards under the 1995 and 1992
Plans, respectively.
In fiscal 1998, the Company adopted the stockholder approved 1997 Outside
Directors' Stock Option Plan (the "1997 Directors' Option Plan"), which provides
for the grant of non-qualified options to purchase Common Stock, with 180,000
shares originally reserved for issuance. This plan provides for the automatic
grant of options to non-employee directors each January to purchase 3,000 shares
of Common Stock. The 1997 Directors' Option Plan supplemented the 1992 Outside
Directors' Stock Option Plan (the "1992 Directors' Option Plan"). At May 31,
2000, options to purchase 63,000 and 18,000 shares of Common Stock were
outstanding and options on 90,000 and zero shares of Common Stock were available
for additional awards under the 1997 and 1992 Directors' Option Plans,
respectively. In January 2000 and 1999, options were awarded under the 1997
Directors' Option Plan at exercise prices of $60.77 and $56.94, respectively.
Generally, options granted under the various plans may not be exercised for a
minimum of one year after the date of grant and expire ten years and one day
after the date of grant.
The following table sets forth activity under the various stock option plans for
the three fiscal years ended May 31:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING - BEGINNING OF YEAR 2,717,997 $ 39.87 2,617,659 $ 38.42 900,850 $ 41.94
GRANTED 655,100 52.08 333,400 43.64 1,870,560 35.43
EXERCISED (523,114) 31.79 (205,613) 28.15 (69,500) 9.93
CANCELLED (65,500) 47.34 (27,449) 35.40 (84,251) 44.12
-----------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - END OF YEAR 2,784,483 $ 44.09 2,717,997 $ 39.87 2,617,659 $ 38.42
===================================================================================================================================
EXERCISABLE - END OF YEAR 1,590,407 $ 42.34 1,663,721 $ 38.46 539,651 $ 36.49
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Information regarding weighted-average exercise prices and weighted-average
remaining contractual lives of the remaining outstanding stock options, under
the various stock option plans at May 31, 2000, sorted by range of exercise
price is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
OPTIONS WEIGHTED-AVERAGE REMAINING NUMBER WEIGHTED-AVERAGE
PRICE RANGE NUMBER EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 13.76 - $ 34.40 15,000 $ 19.97 1.3 years 15,000 $ 19.97
$ 34.41 - $ 41.28 1,602,833 $ 36.38 7.2 years 1,135,833 $ 36.43
$ 41.29 - $ 55.04 667,700 $ 50.94 8.7 years 62,750 $ 47.32
$ 55.05 - $ 68.81 498,950 $ 60.40 6.3 years 376,824 $ 60.22
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30 SCHOLASTIC
<PAGE>
Under the provisions of SFAS 123, the Company applies APB 25 and related
interpretations in accounting for its stock option plans. In accordance with APB
25, no compensation expense was recognized because the exercise price of the
Company's stock options was equal to the market price of the underlying stock on
the date of grant and the exercise price and number of shares subject to grant
were fixed. During fiscal 2000, the Company recorded an expense of $1.8 relating
to the liquidation of certain stock options.
If the Company had elected to recognize compensation expense based on the fair
value of the options granted at the date of grant as prescribed by SFAS 123, net
income and diluted earnings per share for the three fiscal years ended May 31
would have been reduced to the proforma amounts indicated in the table below:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
NET INCOME - AS REPORTED $ 51.4 $ 36.8 $ 23.6
NET INCOME - PROFORMA $ 43.7 $ 27.7 $ 14.5
DILUTED EARNINGS PER SHARE -
AS REPORTED $ 2.96 $ 2.20 $ 1.45
DILUTED EARNINGS PER SHARE -
PROFORMA $ 2.54 $ 1.67 $ 0.89
--------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the three fiscal years ended May 31 as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
EXPECTED DIVIDEND YIELD 0.00% 0.00% 0.00%
EXPECTED STOCK PRICE VOLATILITY 0.417 0.409 0.346
RISK-FREE INTEREST RATE 5.80% 5.24% 6.02%
EXPECTED LIFE OF OPTIONS 5 years 5 years 5 years
--------------------------------------------------------------------------------
The weighted-average fair value of options granted during fiscal 2000, 1999, and
1998 were $22.84, $18.89 and $14.64 per share, respectively. For purposes of
proforma disclosure, the estimated fair value of the options is amortized over
the options' vesting period. The proforma information above is not likely to be
representative of the effects on reported net income for future years as options
are generally granted each year and vest over several years and only include
grants on or subsequent to June 1, 1997.
EMPLOYEE STOCK PURCHASE PLAN
In fiscal 2000, the Company implemented the Employee Stock Purchase Plan
("ESPP"). The ESPP permits participating United States employees to purchase,
through after-tax payroll deductions, the Company's Common Stock at a 15%
discount from the lower of the closing price of the Common Stock on the first or
last business day of each fiscal quarter. During fiscal 2000, the Company issued
32,997 shares under the ESPP at a weighted average price of $38.38 per share.
MANAGEMENT STOCK PURCHASE PLAN
In fiscal 2000, the Company implemented the Management Stock Purchase Plan
("MSPP"), which allows certain members of senior management in the United States
to defer up to 100% of their annual bonus payment in the form of restricted
stock units ("RSUs"). The RSUs are purchased at a 15% discount from the lowest
closing price of the Company's Common Stock during the fiscal quarter in which
such bonuses are payable and are converted into shares of the Company's Common
Stock on a one-for-one basis at the end of the deferral period. During fiscal
2000, no shares were issued under the MSPP.
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the "U.S. Pension Plan") which
covers the majority of the United States employees who meet certain eligibility
requirements. Benefits are based on years of service and on career average
compensation. Effective June 1, 1999, the U.S. Pension Plan was converted to a
cash balance plan which was funded entirely by contributions from the Company.
In prior years the U.S. Pension Plan was funded by contributions from both
participants and the Company. It is the Company's policy to fund the minimum
amount required by the Employee Retirement Income Security Act of 1974, as
amended.
The Company's United Kingdom operation has a defined benefit pension plan (the
"U.K. Pension Plan") which covers a majority of the United Kingdom employees who
meet certain eligibility requirements. Benefits are based on years of service
and on a percentage of compensation near retirement. The U.K. Pension Plan is
funded by contributions from the subsidiary and its employees.
The Company provides certain Post-Retirement benefits (the "U.S. Post-Retirement
Benefits") consisting of certain healthcare and life insurance benefits that the
Company provides to retired United States employees. A majority of the Company's
United States employees may become eligible for these benefits if they reach
normal retirement age while working for the Company.
SCHOLASTIC 31
<PAGE>
The following table sets forth the change in benefit obligation and plan assets
and reconciliation of funded status under the U.S. and U.K. Pension Plans and
the U.S. Post-Retirement Benefits for the three fiscal years ended May 31:
--------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
--------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
BENEFIT OBLIGATION AT BEGINNING OF YEAR $32.0 $26.9 $11.5 $11.0
SERVICE COST 4.6 2.5 0.7 0.5
INTEREST COST 2.1 1.9 0.8 0.8
PLAN PARTICIPANTS' CONTRIBUTIONS 0.0 0.6 0.0 0.1
AMENDMENTS (0.9) -- -- (0.2)
ACTUARIAL (GAINS)/LOSSES (1.0) 1.5 2.9 0.1
FOREIGN CURRENCY EXCHANGE RATE CHANGES (0.5) (0.1) -- --
BENEFITS PAID (1.8) (1.3) (1.3) (0.8)
--------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR 34.5 32.0 14.6 11.5
--------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
FAIR VALUE OF PLAN ASSETS AT BEGINNING
OF YEAR 26.2 24.1 -- --
ACTUAL RETURN ON PLAN ASSETS 1.4 1.3 -- --
COMPANY CONTRIBUTIONS 1.1 2.2 -- --
FOREIGN CURRENCY EXCHANGE RATE CHANGES (0.3) (0.1) -- --
BENEFITS PAID (1.8) (1.3) -- --
--------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 26.6 26.2 -- --
--------------------------------------------------------------------------------
UNDERFUNDED STATUS OF THE PLAN(S) (7.9) (5.8) (14.6) (11.5)
UNRECOGNIZED NET ACTUARIAL LOSS/(GAIN) 1.5 1.6 0.1 (2.8)
UNRECOGNIZED PRIOR SERVICE COST (0.2) 0.8 (0.2) (0.2)
UNRECOGNIZED NET ASSET OBLIGATION 0.7 0.8 0.0 0.0
--------------------------------------------------------------------------------
ACCRUED BENEFIT COST (5.9) (2.6) (14.7) (14.5)
--------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
DISCOUNT RATE 7.5% 7.0% 8.0% 7.3%
COMPENSATION INCREASE FACTOR 4.6% 4.5% -- --
--------------------------------------------------------------------------------
Plan assets consist primarily of stocks, bonds, money market funds and United
States government obligations. The assumed weighted-average long-term rate of
return on plan assets for plans with accumulated benefits obligations that
exceed their assets was 9.1% and 9.2% for fiscal 2000 and 1999, respectively.
The following table sets forth the components of the net periodic benefit costs
under the U.S. and U.K. Pension Plans and the U.S. Post-Retirement Benefits for
the three fiscal years ended May 31:
--------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
SERVICE COST $4.6 $2.5 $1.7 $0.7 $0.5 $0.4
INTEREST COST 2.1 1.9 1.6 0.8 0.8 0.8
EXPECTED RETURN ON ASSETS (1.5) (0.9) (2.9) -- -- --
NET AMORTIZATION AND DEFERRALS 0.1 0.3 0.3 (0.1) (0.1) --
RECOGNIZED NET ACTUARIAL
(GAIN)/LOSS (1.0) (1.4) 1.0 -- -- --
--------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $4.3 $2.4 $1.7 $1.4 $1.2 $1.2
================================================================================
32 SCHOLASTIC
<PAGE>
The accumulated Post-Retirement benefit obligation was determined using a
discount rate of 8.0%. Service cost and interest components were determined
using a discount rate of 7.0%. The health care cost trend rate assumed was 7.0%
with an annual decline of 1% until the rate reaches 5.0% in the year 2002. A
decrease of 1% in the health care cost trend rate would result in decreases of
approximately $1.7 in the accumulated benefit obligation and $0.3 in the annual
net periodic post-retirement benefit cost. An increase of 1% in the health care
cost trend rate would result in increases of approximately $2.1 in the
accumulated benefit obligation and $0.3 in the annual net periodic
post-retirement benefit cost.
The Company also provides other benefit plans including the 401(k) Plan.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share at May 31:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
NET INCOME FOR BASIC EARNINGS PER SHARE $51.4 $36.8 $23.6
DILUTIVE EFFECT OF DEBENTURES 3.5 -- --
--------------------------------------------------------------------------------
ADJUSTED NET INCOME FOR DILUTED EARNINGS
PER SHARE $54.9 $36.8 $23.6
WEIGHTED AVERAGE CLASS A AND COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS PER SHARE 16.7 16.4 16.2
DILUTIVE EFFECT OF SHARES ISSUABLE
PURSUANT TO EMPLOYEE STOCK PLANS 0.4 0.3 0.2
DILUTIVE EFFECT OF DEBENTURES 1.5 -- --
DILUTIVE EFFECTS OF WARRANTS 0.0 0.0 --
--------------------------------------------------------------------------------
ADJUSTED WEIGHTED AVERAGE CLASS A
AND COMMON SHARES FOR DILUTED EARNINGS
PER SHARE OUTSTANDING 18.6 16.7 16.4
================================================================================
EARNINGS PER CLASS A AND COMMON SHARE
BASIC $3.07 $2.25 $1.46
DILUTED $2.96 $2.20 $1.45
--------------------------------------------------------------------------------
For fiscal years 1999 and 1998, the effect of the 5.0% Convertible Subordinated
Debentures of approximately 1.5 million shares on the adjusted weighted-average
Class A and Common Shares outstanding for diluted earnings per share is
anti-dilutive and is not included in the calculation.
9. NON-RECURRING CHARGES
Fiscal 2000 included $8.5 of charges primarily related to the establishment of a
litigation reserve following an adverse decision in a lawsuit, which was
received on December 10, 1999. The case, SCHOLASTIC INC. AND SCHOLASTIC
PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., involves
stock appreciation rights allegedly granted to Mr. Harris in 1990 in connection
with a joint venture formed primarily to produce motion pictures. Although the
Company disagrees with the judge's decision and is appealing the ruling, the
Company has recorded a charge of $6.7 to fully reserve with respect to the case.
The $8.5 of charges also includes an unrelated expense of $1.8 for the
liquidation of certain stock options.
Fiscal 1998 includes non-cash charges relating to the impairment of certain
assets of $11.4. Approximately $8.3 and $3.1 of the charges relate to the
Company's EDUCATIONAL PUBLISHING and MEDIA, LICENSING AND ADVERTISING segments,
respectively. A significant portion of these charges was determined in
accordance with SFAS 121 and was based on the Company's assessment of the
recoverability of the assets and future net cash flows. These charges consist
primarily of unamortized prepublication costs of $6.9 and related inventory
costs of $4.5.
10. DISPOSITION
Effective January 1, 1998, the Company sold its SOHO Group, including HOME
OFFICE COMPUTING(R) magazine, for approximatelY $19.2 and the assumption of
certain liabilities, resulting in a pre-tax gain of approximately $10.0.
11. OTHER FINANCIAL DATA
Prepaid and other current assets include deferred magazine acquisition expenses
of $4.8 and $5.7 at May 31, 2000 and 1999, respectively. The Company expensed
$9.0, $8.1 and $7.3 of magazine acquisition expenses in fiscal years 2000, 1999
and 1998, respectively.
SCHOLASTIC 33
<PAGE>
Property, plant and equipment includes capitalized interest costs of $1.4 and
$0.6 for the fiscal years ended May 31, 2000 and 1999, respectively, and
construction in progress of $30.1 and $13.1 at May 31, 2000 and 1999,
respectively, related to the expansion of the Company's headquarters.
Goodwill and trademarks are net of accumulated amortization of $20.8 and $16.6
at May 31, 2000 and 1999, respectively.
Other assets are net of accumulated amortization of prepublication costs of
$95.2 and $68.1 at May 31, 2000 and 1999, respectively.
Other accrued expenses include a reserve for unredeemed credits issued in
conjunction with the Company's book club and book fair operations of $11.6 at
May 31, 2000 and 1999.
12. SUBSEQUENT EVENTS
On June 22, 2000, pursuant to a Stock Purchase Agreement dated as of April 13,
2000 and as amended, Scholastic Inc. acquired all of the issued and outstanding
capital stock of Grolier Incorporated ("Grolier"), a Delaware corporation, for
$400.0 in cash. No Grolier debt was assumed by the Company in connection with
the acquisition. The Company will account for the acquisition under the purchase
method of accounting. Grolier's business activities will be included in the
Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION, EDUCATIONAL PUBLISHING
and INTERNATIONAL segments.
Grolier is the leading operator of United States direct-to-home book clubs,
primarily serving children age five and under, and is the leading on-line and
print publisher of children's non-fiction and reference products (including the
Children's Press and Franklin Watts imprints in the United States and major
encyclopedias) sold primarily to United States school libraries. Grolier also
has significant international operations in the United Kingdom, Canada and
Southeast Asia. Grolier also publishes books in the United States under the
Orchard Books imprint for distribution through the trade channel.
The acquisition was financed by the Company using bank debt. Of the $400.0
Grolier purchase price, $350.0 was borrowed under a new credit facility (the
"Grolier Facility") entered into to finance the acquisition and $50.0 was
borrowed under the Company's existing Loan Agreement. (See Note 3.)
The Grolier Facility is a 364-day facility and may be extended for an additional
year. Borrowings bear interest at the prime rate or 0.39% to 1.10% over LIBOR.
The Grolier Facility also provides for a facility fee ranging from 0.085% to
0.25%. The amounts charged vary based on the Company's credit rating. Based on
the Company's credit rating at June 22, 2000, the interest rate and facility fee
charged were 0.575% over LIBOR and 0.125%, respectively.
Effective as of June 22, 2000, the Company's Loan Agreement and Revolver were
amended to adjust for the Company's increased debt levels resulting from the
acquisition of Grolier. (See Note 3.)
The Board of Directors of the Company has recommended that the Company's Amended
and Restated Certificate be amended to increase the number of shares of
authorized Common Stock to 70,000,000 shares and Preferred Stock to 2,000,000
shares, subject to the approval of the company's stockholders entitled to vote
thereon at the Company's Annual Meeting of Stockholders. If approved, this
amendment would increase the number of authorized shares of capital stock of the
Company to 74,500,000 shares, consisting of 70,000,000 shares of Common Stock
and 2,000,000 shares of Preferred Stock, together with the previously authorized
2,500,000 shares of Class A Stock.
34 SCHOLASTIC
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SCHOLASTIC CORPORATION
We have audited the accompanying consolidated balance sheet of Scholastic
Corporation (the "Company") as of May 31, 2000 and 1999, and the related
consolidated statement of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended May 31, 2000. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at May 31, 2000 and 1999 and the consolidated results of its operations,
and its cash flows for each of the three years in the period ended May 31, 2000
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
July 7, 2000
SCHOLASTIC 35
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
Summary of Quarterly Results of Operations
Years ended May 31, 2000 and 1999 (Unaudited, amounts in millions except per
share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER QUARTER YEAR(1)
--------------------------------------------------------------------------------
2000
--------------------------------------------------------------------------------
REVENUES(2) $182.5 $511.3 $315.0 $393.7 $1,402.5
COST OF GOODS SOLD(2) 110.8 240.3 157.8 169.4 678.3
NET INCOME/(LOSS) (23.6) 41.3 2.0 31.7 51.4
EARNINGS/(LOSS) PER SHARE:
BASIC $(1.43) $ 2.49 $ 0.12 $ 1.86 $ 3.07
DILUTED $(1.43) $ 2.30 $ 0.11 $ 1.73 $ 2.96
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------
REVENUES(2) $153.2 $406.0 $269.3 $337.0 $1,165.5
COST OF GOODS SOLD(2) 88.2 190.1 135.5 158.1 571.9
NET INCOME/(LOSS) (17.5) 31.7 0.2 22.4 36.8
EARNINGS/(LOSS) PER SHARE:
BASIC $(1.08) $ 1.94 $ 0.01 $ 1.36 $ 2.25
DILUTED $(1.08) $ 1.81 $ 0.01 $ 1.27 $ 2.20
--------------------------------------------------------------------------------
(1) The second quarter of fiscal 2000 includes non-recurring charges related to
the establishment of a litigation reserve of $6.7 and the liquidation of
certain stock options of $1.8. The impact on earnings per diluted share of
these charges is $0.29 per share.
(2) Certain amounts have been reclassified in accordance with EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs."
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
36 SCHOLASTIC
<PAGE>
--------------------------------------------
PART III
--------------------------------------------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
Executive Officers (as of August 15, 2000)
--------------------------------------------------------------------------------
Employed by
registrant
Name Age since Position(s) for Past Five Years
--------------------------------------------------------------------------------
Richard Robinson 63 1962 Chairman of the Board (since 1982),
President (since 1974) and Chief
Executive Officer (since 1975).
Kevin J. McEnery 52 1993 Executive Vice President and Chief
Financial Officer (since 1995), Vice
President, Strategic Planning and
Operations, Magazine and Technology
Groups (1993-1995).
Deborah A. Forte 46 1984 Executive Vice President (since 1996),
Senior Vice President (1995) and
Division Head, Scholastic Entertainment
Inc. ("SEI") (since 1995).
Donna M. Iucolano 36 2000 Executive Vice President, Scholastic
Internet Group (since 2000); and prior
to joining the Company with
1-800-Flowers.com (1994-2000), positions
including Senior Vice President (2000)
and Vice President (1998-2000).
Barbara A. Marcus 49 1983 Executive Vice President (since 1991),
President, Children's Book Publishing
and Distribution (since 1999), Executive
Vice President, Children's Book
Publishing and Distribution (1991-1999).
Margery W. Mayer 48 1990 Executive Vice President (since 1990) -
Learning Ventures (since 1998),
Instructional Publishing and Scholastic
School Group (1990-1997).
Ruth L. Otte 51 1996 Executive Vice President (since 1996) -
Internet and Software (1999-2000),
Education Group (1998-1999) and New
Media Division (1996-1998); and prior to
joining the Company, President,
Knowledge Adventure (1994-1995).
Hugh Roome 48 1991 Executive Vice President (since 1996),
Senior Vice President (1993-1996) -
Magazine Group (since 1993).
Richard M. Spaulding 63 1960 Director (since 1974) and Executive Vice
President (since 1974).
Judith A. Corman 62 1999 Senior Vice President, Corporate
Communications and Media Relations
(since 1999); and prior to joining the
Company, Senior Vice President, Lerer &
Montgomery (1994-1999).
Charles B. Deull 40 1995 Senior Vice President (since 1995),
General Counsel (since 1999), Senior
Vice President, Legal and Business
Affairs (1995-1999), Corporate Secretary
(since 1996).
Ernest B. Fleishman 63 1989 Senior Vice President, Education and
Corporate Relations (since 1989).
SCHOLASTIC 37
<PAGE>
--------------------------------------------------------------------------------
Employed by
registrant
Name Age since Position(s) for Past Five Years
--------------------------------------------------------------------------------
Jean L. Feiwel 47 1983 Senior Vice President, Publisher,
Children's Book Publishing and
Distribution (since 1993).
Maurice Greenfield 57 1999 Senior Vice President and Chief
Information Officer (since 1999); and
prior to joining the Company, Vice
President, MIS, National Broadcasting
Company (1985-1999).
Frank Grohowski 59 1985 Senior Vice President, Operations (since
1995) and Vice President, Operations
(1985-1995).
Larry V. Holland 41 1994 Senior Vice President, Corporate Human
Resources and Employee Services (since
1997) and Vice President, Human
Resources (1994-1997).
Linda S. Koons 45 1990 Senior Vice President, Education Group
(since 1998), Group Head, Education
Group (since 1999), Vice President,
Supplementary Publishing and Early
Childhood Division (1997-1998), Vice
President, Early Childhood Division
(1995-1997).
David J. Walsh 64 1983 Senior Vice President, International
Operations (since 1983).
Helen V. Benham 50 1974 Director (since 1992), Corporate Vice
President, Early Childhood Advisor
(since 1996), Vice President and
Publisher, Early Childhood Division
(1990-1996).
Claudia H. Cohl 60 1975 Vice President (since 1978) - Internal
Communications (since 1999), Editorial
Planning and Development, Scholastic
Education Group (1993-1999).
Raymond Marchuk 49 1983 Vice President, Finance & Investor
Relations (since 1983).
Karen A. Maloney 43 1997 Vice President and Corporate Controller
(since 1998), Director of Accounting and
Financial Operations (1997-1998); and
prior to joining the Company, Vice
President and Corporate Controller,
Calvin Klein, Inc. (1996-1997); Vice
President and Corporate Controller,
Bernard Chaus, Inc. (1995-1996).
Vincent M. Marzano 37 1987 Treasurer (since 1993).
David D. Yun 52 1988 President, Scholastic Book Fairs (since
1992).
38 SCHOLASTIC
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
--------------------------------------------
PART IV
--------------------------------------------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following consolidated financial statements are included in Item
8:
Consolidated Statement of Income for the three years ended May 31,
2000, 1999 and 1998
Consolidated Balance Sheet at May 31, 2000 and 1999
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the three years ended May 31, 2000, 1999 and
1998
Consolidated Statement of Cash Flows for the three years ended May 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULE:
The following consolidated financial statement schedule is included in
Item 14(d):
Schedule II- Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements or the Notes
thereto.
(a)(3) EXHIBITS:
2.1 Stock Purchase Agreement, dated April 13, 2000, among Scholastic Inc.,
a New York corporation, Hachette Book Group USA, Inc., a Delaware
corporation, and Lagardere North America, Inc., a Delaware corporation
and parent of Hachette, together with Amendment No. 1 to Stock
Purchase Agreement, dated June 22, 2000 (incorporated by reference to
the Company's Current Report on Form 8-K as filed with the Commission
on July 7, 2000).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-8 (Registration No. 33-46338) as filed with the Commission on
March 12, 1992).
3.2 Bylaws of the Company, Amended and Restated as of March 16, 2000
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Commission on April 14, 2000).
4.1 Amended and Restated Credit Agreement, dated as of August 11, 1999,
among the Company and Scholastic Inc., as borrowers, the Initial
lenders named therein, Citibank, N.A., as administrative agent,
Salomon Smith Barney Inc., as arranger, and Chase Manhattan Bank,
N.A., and Fleet Bank, N.A., as syndication agents (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 23, 2000).
SCHOLASTIC 39
<PAGE>
4.2 Amendment No. 1, dated as of June 22, 2000, to the Amended and
Restated Credit Agreement, dated as of August 11, 1999 among the
Company and Scholastic Inc., as borrowers, the Initial lenders named
therein, Citibank, N.A., as administrative agent, Salomon Smith Barney
Inc., as arranger, and Chase Manhattan Bank, N.A., and Fleet Bank,
N.A., as syndication agents.
4.3* Amended and Restated Revolving Loan Agreement, dated November 10, 1999
the Company, Scholastic Inc. and Sun Bank, National Association.
4.4* Amendment No. 1, dated June 22, 2000, to the Amended and Restated
Revolving Loan Agreement, dated as of November 10, 1999, among the
Company, Scholastic Inc. and Sun Bank, National Association.
4.5 Credit Agreement, dated as of June 22, 2000, among the Company, as
guarantor, Scholastic, Inc., as borrower, the initial lenders named
therein, Citibank, N.A., as agent for the lenders, and Salomon Smith
Barney Inc. and Credit Suisse First Boston, as joint lead arrangers,
and the other agents named therein.
4.6* Credit Agreement Facility, dated June 1, 1992, as amended on October
30, 1995, between Scholastic Canada Ltd. and CIBC.
4.7* Credit Agreement Facility, dated June 24, 1993, between Scholastic
Ltd. and Citibank, N.A.
4.8* Credit Agreement, dated May 14, 1992, as amended on June 30, 1995,
between Scholastic Ltd. (formerly known as Scholastic Publications
Ltd.) and Midland Bank.
4.9* Credit Agreement, dated February 12, 1993, as amended on January 31,
1995, between Scholastic Australia Pty. Ltd. (formerly known as Ashton
Scholastic Pty. Ltd.) and National Australia Bank Ltd.
4.10* Credit Agreement, dated April 20, 1993, between Scholastic New Zealand
Ltd. (Formerly Ashton Scholastic Ltd.) and ANZ Banking Group Ltd.
4.11* Credit Agreement, dated May 28, 1998, between Scholastic Australia
Pty. Ltd. and Hong Kong Bank of Australia Ltd.
4.12 Indenture dated August 15, 1995 for 5% Convertible Subordinated
Debentures due August 15, 2005 issued by the Company (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 28, 1995).
4.13 Indenture dated December 15, 1996 for 7% Notes due December 15, 2003
issued by the Company (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-17365) as
filed with the Commission on December 11, 1996).
10.1** Scholastic Corporation 1992 Stock Option Plan (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 27, 1992).
10.2** Scholastic Corporation 1995 Stock Option Plan, Amended and restated
effective as of July 18, 2000, replacing in its entirety the
Scholastic Corporation 1995 Stock Option Plan (incorporated by
reference to the Company's Registration Statement Form S-8
(Registration No. 33-98186) as filed with the Commission on October
16, 1995), together with Amendment No. 1 to the Scholastic Corporation
1995 Stock Option Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q as filed with the Commission on October
15, 1998).
10.3** Form of Stock Option Agreement for Scholastic Corporation 1995 Stock
Option Plan (incorporated by reference to the Company's Annual Report
on Form 10-K as filed with the Commission on August 26, 1998).
10.4** Scholastic Corporation Employee Stock Purchase Plan, amended and
restated effective as of March 1, 2000 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q as filed with the
Commission on April 14, 2000).
10.5** Scholastic Corporation Management Stock Purchase Plan, amended and
restated effective as of December 15, 1999 (incorporated by reference
to the Company's Quarterly Report on Form 10-Q as filed with the
Commission on January 14, 2000).
10.6** Scholastic Corporation 1992 Outside Directors' Stock Option Plan
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 27, 1992).
10.7** Scholastic Corporation 1997 Outside Director Stock Option Plan,
amended and restated as of May 25, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
40 SCHOLASTIC
<PAGE>
10.8** Form of Stock Option Agreement for Scholastic Corporation 1997 Outside
Director Plan (incorporated by reference to the Company's Annual
Report on Form 10-K as filed with the Commission on August 26, 1998).
10.9** Scholastic Corporation 1995 Director's Deferred Compensation Plan,
amended and restated as of May 25, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
10.10** Scholastic Corporation Executive Performance Incentive Plan, effective
as of June 1, 1999 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q as filed with the Commission on October
15, 1999).
10.11** Employment Agreement between Jean L. Feiwel and Scholastic Inc., dated
as of May 25, 2000.
10.12** Description of contingent long-term incentive arrangement between
David D. Yun and Scholastic Inc., effective September 16, 1998
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 23, 1999).
10.13** Description of split dollar life insurance arrangements for the
benefit of Richard Robinson and Helen Benham.
10.14 Amended and Restated Lease, effective as of August 1, 1999, between
ISE 555 Broadway, LLC, landlord, and Scholastic Inc., tenant, for the
building known as 555 Broadway, NY, NY (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
10.15 Amended and Restated Sublease, effective as of October 9, 1996,
between Kalodop Corp., as sublandlord, and Scholastic Inc., as
subtenant, for the premises known as 557 Broadway, NY, NY
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 23, 1999).
10.16 Agreements with Industrial Development Agency of the City of New York
including (i) Lease Agreement dated December 1, 1993; (ii) Indenture
of Trust agreement dated December 1, 1993; (iii) Project Agreement
dated December 1, 1993; (iv) Sales Tax letter dated December 3, 1993
(each of the foregoing are incorporated by reference to the Company's
Annual Report on Form 10-K as filed with the Commission on August 26,
1994).
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule(s).
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed on April 13, 2000, noticing
that Scholastic Corporation entered into a definitive agreement with
Lagardere S.C.A. of France to acquire Grolier Incorporated for $400
million in cash.
2. A Current Report on Form 8-K was filed on July 7, 2000 in connection
with the consummation of the acquisition of Grolier Incorporated.
--------------------------------------------------
* Such long-term debt does not individually amount to more than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such
instrument is not filed herewith. The Company hereby agrees to furnish a copy
of any such instrument to the Securities and Exchange Commission upon
request.
** The referenced exhibit is a management contract or compensation plan or
arrangement described in Item 601(b) (10) (iii) of Regulation S-K.
SCHOLASTIC 41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 25, 2000 SCHOLASTIC CORPORATION
By: /s/ RICHARD ROBINSON
--------------------
Richard Robinson, Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard Robinson his or her true and lawful
attorney-in-fact and agent, with power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing necessary and requisite to be done, as fully and to all the
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Richard Robinson Chairman of the Board, President, August 25, 2000
-------------------------- Chief Executive Officer and
Richard Robinson Director (Principal Executive
Officer)
/s/ Kevin J. McEnery Executive Vice President and Chief August 25, 2000
------------------------- Financial Officer (Principal
Kevin J. McEnery Financial Officer)
/s/ Karen A. Maloney Vice President and Corporate August 25, 2000
-------------------------- Controller (Principal Accounting
Karen A. Maloney Officer)
/s/ Rebeca M. Barrera Director August 25, 2000
--------------------------
Rebeca M. Barrera
/s/ Helen V. Benham Director August 25, 2000
--------------------------
Helen V. Benham
/s/ Ramon C. Cortines Director August 25, 2000
--------------------------
Ramon C. Cortines
/s/ Charles T. Harris, III Director August 25, 2000
--------------------------
Charles T. Harris, III
/s/ Andrew S. Hedden Director August 25, 2000
--------------------------
Andrew S. Hedden
42 SCHOLASTIC
<PAGE>
SIGNATURE TITLE DATE
/s/ Linda B. Keene Director August 25, 2000
------------------------
Linda B. Keene
/s/ Mae C. Jemison Director August 25, 2000
------------------------
Mae C. Jemison
/s/ John G. McDonald Director August 25, 2000
------------------------
John G. McDonald
/s/ Peter M. Mayer Director August 25, 2000
------------------------
Peter M. Mayer
/s/ Augustus K. Oliver Director August 25, 2000
--------------------------
Augustus K. Oliver
/s/ Richard M. Spaulding Director August 25, 2000
--------------------------
Richard M. Spaulding
SCHOLASTIC 43
<PAGE>
page intentionally left blank
44 SCHOLASTIC
<PAGE>
SCHOLASTIC
CORPORATION
Financial Statement Schedule
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 2000
ITEM 14(D)
SCHOLASTIC 45
<PAGE>
-------------------------------------------
SCHEDULE II
-------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended May 31, 2000, 1999 and 1998 (Amounts in millions)
BALANCE AT
BEGINNING OF CHARGED WRITE-OFFS BALANCE AT
OF YEAR TO INCOME AND OTHER END OF YEAR
--------------------------------------------------------------------------------
MAY 31, 2000
--------------------------------------------------------------------------------
RESERVE FOR ROYALTY ADVANCES $31.9 $ 8.1 $ 1.2 $38.8
--------------------------------------------------------------------------------
RESERVE FOR OBSOLESCENCE 37.1 23.9 19.2 41.8
--------------------------------------------------------------------------------
RESERVE FOR RETURNS 25.8 82.9 64.7(1) 44.0
--------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS 12.3 20.5 18.1 14.7
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MAY 31, 1999
--------------------------------------------------------------------------------
RESERVE FOR ROYALTY ADVANCES $29.7 $ 2.3 $ 0.1 $31.9
--------------------------------------------------------------------------------
RESERVE FOR OBSOLESCENCE 30.7 19.8 13.4 37.1
--------------------------------------------------------------------------------
RESERVE FOR RETURNS 21.3 48.3 43.8(1) 25.8
--------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS 10.1 17.0 14.8 12.3
--------------------------------------------------------------------------------
MAY 31, 1998
--------------------------------------------------------------------------------
RESERVE FOR ROYALTY ADVANCES $25.1 $ 4.6 $ -- $29.7
--------------------------------------------------------------------------------
RESERVE FOR OBSOLESCENCE 34.0 15.7 19.0 30.7
--------------------------------------------------------------------------------
RESERVE FOR RETURNS 30.9 42.8 52.4(1) 21.3
--------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS 7.8 14.6 12.3 10.1
--------------------------------------------------------------------------------
(1) Represents actual returns charged to the reserve.
46 SCHOLASTIC
<PAGE>
EXHIBIT INDEX
REGULATION S-K
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
4.1 Amendment No. 1, dated as of June 22, 2000, to the Amended and
Restated Credit Agreement, dated as of August 11, 1999 among
the Company and Scholastic Inc., as borrowers, the Initial
lenders named therein, Citibank, N.A., as administrative
agent, Salomon Solomon Smith Barney Inc., as arranger, and
Chase Manhattan Bank, N.A., and Fleet Bank, N.A., as
syndication agents.
4.5 Credit Agreement, dated as of June 22, 2000, among the
Company, as guarantor, Scholastic Inc., as borrower, Citibank,
N.A., as agent for the lenders, and Salomon Smith Barney Inc.
and Credit Suisse First Boston, as joint lead arrangers and
the other agents named therein.
10.12 Employment Agreement between Jean L. Feiwel and Scholastic
Inc., dated as of May 25, 2000.
10.13 Description of split dollar life insurance arrangement for the
benefit of Richard Robinson and Helen Benham.
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule(s).
