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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19860
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SCHOLASTIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
Common Stock, $.01 par value The NASDAQ Stock Market(SM)
NASDAQ National Market(R)
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 Registrant's Voting Stock held by
non-affiliates was approximately $436.5 million based on the average bid and
asked prices of the Common Stock on the National Association of Securities
Dealers, Inc., Automated Quotations National Market System on July 31, 1997.
On June 30, 1997, 828,100 shares of Class A Stock, par value $.01, and
15,370,032 shares of Common Stock, par value $.01, were outstanding exclusive of
treasury shares. The Class A Stock is convertible at the option of the holders
into shares of Common Stock at any time on a share-for-share basis.
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 16, 1997.
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PART I
ITEM I. BUSINESS
Scholastic Corporation, together with its subsidiaries and affiliates
(collectively "Scholastic" or the "Company"), is among the leading publishers
and distributors of children's books, classroom and professional magazines and
other educational materials, with its principal operations in the United States,
Canada, the United Kingdom, Australia, New Zealand and Mexico. Scholastic
distributes most of its products directly to children and teachers in elementary
and secondary schools. During its seventy-seven years of serving schools,
Scholastic has developed strong name recognition associated with quality and
dedication to learning and has achieved a leading market position in the
school-based distribution of children's books and magazines.
The Company's domestic book publishing business consists primarily of the
publication and distribution of children's books in paperback editions through
school book clubs, school book fairs, retail stores and classroom and library
sales. Based on its market research, competitive intelligence and information
obtained through the conduct of its business, the Company believes that it
operates the largest school book club program and the largest school book fair
businesses in the United States, Canada, Australia, the United Kingdom and New
Zealand. In fiscal 1997, Scholastic sold in excess of 200 million children's
books in the United States. The Company's book publishing operations also
include the publication of supplementary texts for classroom use as well as
professional books and other materials sold to classroom teachers. Additionally,
the Company has entered the market for core curriculum materials and has
invested heavily in this area as a source of future growth in sales and profits.
Scholastic's domestic magazine publishing business consists primarily of
the publication of classroom magazines distributed to children in school,
professional magazines directed to teachers and other education professionals
and two consumer magazines. In fiscal 1997, the United States circulation of the
Company's classroom magazines was 7.5 million. The Company's other domestic
operations include the production and distribution of educational computer
software, the production and distribution of children's video and television
programming, and merchandising and licensing of successful book properties.
The Company's School Group, formed in June 1997, manages the development
and distribution of substantially all Scholastic's school material designed for
curriculum use and paid for with school funds. The School Group encompasses the
Company's instructional publishing, classroom and professional magazines
(excluding two consumer magazines), early childhood and professional books
divisions, as well as the Company's sales of supplementary materials to
classrooms and libraries.
Most of the Company's domestic revenues are generated by targeted direct
mail programs to schools and by telephone sales representatives. Additionally,
the Company has a sales force of full-time and part-time representatives calling
on schools to sell its supplementary texts, educational software, magazines and
library book programs, and its core curriculum materials. For trade
distribution, the Company has a retail sales force calling on bookstores and
other retail outlets that include the sale of children's books.
The Company's international business consists of six operating
subsidiaries, four of which publish and distribute children's books, magazines,
supplementary text products and educational software and two of which primarily
distribute through schools children's books published by Scholastic as well as
outside publishers. For the year ended May 31, 1997, approximately 90% of
international revenues were derived from the sale of children's books.
The following table sets forth revenues by product line for the five fiscal
years ended May 31:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(AMOUNTS IN MILLIONS)
Domestic
Book publishing........................... $646.0 $657.5 $516.8 $428.3 $361.3
Magazine publishing ...................... 81.3 81.6 84.0 73.0 66.7
Media, TV/movie productions & licensing 60.2 39.8 19.5 18.0 17.5
International............................... 178.8 149.7 129.6 112.3 106.8
------ ------ ------ ------ ------
Total................................... $966.3 $928.6 $749.9 $631.6 $552.3
====== ====== ====== ====== ======
Scholastic's revenues have grown at an average annual compounded rate (the
"compounded growth rate") of approximately 15% from fiscal 1993 through fiscal
1997.
1
DOMESTIC BOOK PUBLISHING (67% OF REVENUES)
CHILDREN'S BOOK PUBLISHING
The Company has published books since 1948 and is one of the largest
English language publishers of children's books. The majority of children's
books sold by the Company are distributed in the United States and
internationally directly to children and teachers through its school-based clubs
and book fairs. The Company has created and maintained a long-standing franchise
in the educational market and is one of the leading sellers of children's books
through the trade channel. Domestic book publishing revenues nearly doubled from
fiscal 1993 through fiscal 1996 before declining 2% in fiscal 1997, primarily
due to lower trade and club sales.
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 Caldecott and the Newbery awards. 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 rights to sell these original titles in all channels
of distribution including school and trade. The second source consists of
paperback 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 for titles is from the Company's purchase of
finished books from other publishers to be sold in the school market. The
Company currently maintains a backlist (a list of titles published as new titles
in prior years) of over 5,000 titles.
All of the Company's books are manufactured by outside printers. The
printers are generally selected on a basis of competitive bidding, and the
Company, when it deems it to be appropriate, enters into multi-year agreements
which guarantee printers a certain percentage of Scholastic volume in exchange
for favorable pricing terms. Scholastic purchases its paper from paper
manufacturers, wholesalers, distributors and printers.
The Company distributes its children's books principally through four
distribution channels: school book clubs, school book fairs, sales to classrooms
and libraries and retail book stores. In the school market, the Company
distributes books directly to teachers and students through school book clubs
(including continuity programs) and school book fairs. The Company believes that
it is the largest operator of school book clubs and school book fairs in the
United States. The Company also distributes books to the school market through
sales to classrooms and libraries. The fourth distribution channel is sales to
the trade market. By utilizing these distribution channels and distributing its
products internationally, the Company's volumes permit it to realize economies
in book production and distribution. The Company believes its multiple
distribution channels and volume help attract top quality authors, editors,
illustrators and publishers seeking widespread distribution in both the
specialized school market and the trade market.
In September 1996, the Company acquired Lectorum Publications, Inc., the
largest distributor in the U.S. of Spanish language books to schools and
libraries.
BOOK CLUBS
In fiscal 1997, the Company operated ten school based book clubs:
FIREFLY(R), serving pre-kindergarten 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, which were acquired from Bantam Doubleday Dell in 1996 and
together serve pre-K through sixth grade students. IN addition, the Company
creates special theme-based offers targeted to the different grade levels during
the year, such as holiday offers, science offers, curriculum offers, Spanish
offers etc. The Company also operates FUN-TASTIC-AT-HOME!, THE BABY-SITTERS
COLLECTOR CLUB, and THE BABY-SITTERS LITTLE SISTER FRIENDSHIP CLUB, THRILLS &
CHILLS(R), CLIFFORD'S LEARNING LIBRARY, HELLO READER(R), BOX CAR, THRILLER, THE
MAGIC SCHOOL BUS(R), ARTHUR'S ADVENTURE and FRANKLIN & FRIENDS, which are book
club continuity programs promoted primarily through schools, which deliver
paperback books to children at home and bill parents at home.
From fiscal 1993 through fiscal 1996 domestic book club revenues grew
primarily as a result of the expansion of book club continuity programs, volume
increases in the Company's school-based book clubs, the purchase of additional
clubs, increases in special book club offers, and to a lesser degree, because of
2
inflation-related price increases and the selection by children of higher priced
items. In fiscal 1997, a decrease in domestic book club revenues due to fewer
orders and lower revenue per order was only partially offset by revenues
resulting from the January 1996 acquisition of the TRUMPET book clubs.
The Company founded its first book club in 1948 and believes that it
currently operates the largest school book club program in the United States.
The Company estimates that over 80% of all elementary school teachers in the
United States participate in book clubs, with approximately 75% of these
teachers using Scholastic book clubs at least once during the year.
The Company believes that teachers participate in school book clubs because
they feel that quality books at affordable prices will be of interest to
students and improve students' reading skills. The Company also believes
teachers are attracted because the 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 on a monthly basis throughout the school year. Participation
in any month does not create an obligation to participate in any subsequent
month, nor does it preclude participation in a competitor's book club.
Teachers who wish to participate in a book club distribute the order forms
to their students, who may choose from approximately 40 to 50 selections at
substantial reductions from retail prices. The teacher consolidates the
students' orders and payments and mails or phones orders to the Company, which
then delivers the books to the teacher for distribution to the students.
Teachers who participate in the book clubs may accumulate credits for the
purchase of additional books and other items for use in their classrooms.
The sources of books for the Company's school book clubs are original
publications, reprints licensed from other publishers for school distribution
and finished books purchased from other publishers. The Company generally
re-offers titles from its backlist through the book clubs every two or three
years.
The Company processes and fulfills orders for its book clubs, as well as
for its other school sales (except book fairs) and trade distribution, from its
warehouse and distribution facilities in Jefferson City, Missouri and Des
Plaines, Illinois. Orders for the book clubs are shipped to customers by Roadway
Package System, U.S. Mail and United Parcel Service and generally are delivered
within 10-14 days from the time the teacher places the order in the mail.
The Jefferson City facility has an automated inventory picking and order
processing system which allows the Company to provide a high level of customer
service and timely delivery to its customers. Customer service representatives
are also available to handle customer inquiries, expedite shipments and handle
phone orders.
In its 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 unit manufacturing costs and its
large number of promotion mailings, enable the Company to compete effectively.
BOOK FAIRS
The Company believes it operates the largest school book fair business in
the United States. The Company entered the book fair business in 1981 through an
acquisition in California. In 1983, the Company became a national book fair
operator as a result of its acquisition of Great American Book Fairs(R). Since
that time, the Company's book fair business has grown primarily through
geographic expansion, selected acquisitions and increased penetration of its
existing markets. The Company operates book fairs in all 50 states under the
name SCHOLASTIC BOOK FAIRS(R). The sources of books for the Company's book fairs
are finished books purchased from other publishers, reprints licensed from other
publishers for school distribution and original publications.
Book fairs are generally week-long events conducted on school premises and
sponsored by school librarians and/or parent-teacher organizations. Book fair
events expose children to hundreds of new books and allow children the
opportunity to purchase books of their choice. Although the Company provides the
school with the books and book display cases, the school actually conducts the
book fair. The Company believes that the primary motivation of the schools is to
provide their students with quality books at reasonable prices in order to help
them become more interested in reading. In addition, the school retains a
portion of book fair revenues to be used to purchase books, supplies and
equipment for the school.
3
In fiscal 1994, the Company launched a new class of fairs called SCHOLASTIC
BOOKS ON TOUR(R). This program features an expanded list of titles supported by
exciting merchandise displays and book character costumes designed to create a
dynamic Book Fair event open to the entire family.
The Company operates its book fairs in the United States on a regional
basis through over 20 sales offices and over 70 warehouse locations. The
marketing of book fairs is performed from the sales offices by telephone sales
representatives. 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
customer service function is performed from the regional and branch offices,
supported by field representatives.
The Company believes that its competitive advantages in the book fair
business includes the strength of the relationship between its sales
representatives and schools, broad geographic coverage, a high level of customer
service and breadth of product selection. Approximately 90% of the schools that
sponsored a Scholastic Book Fair in fiscal 1996 sponsored a Scholastic Book Fair
again in fiscal 1997.
TRADE
The Company distributes its original publications through the trade
distribution channel. Almost all of the titles distributed to the trade market
are also offered in the Company's school book clubs and book fairs. In the
Company's publishing program, over 2,000 titles are maintained for trade
distribution, including the popular GOOSEBUMPS(R), ANIMORPHS(TM), THE
BABY-SITTERS CLUB(R), THE MAGIC SCHOOL BUS(R) and CLIFFORD THE BIG RED DOG(R)
series. The Company believes that its presence in the trade market is important
IN attracting outside authors for publication and complements the Company's
school-based book distribution business.
The Company has a field sales organization which focuses on selling the
broad range of Scholastic books to book store accounts. Penguin USA performs
invoicing, billing, returns processing and collecting for Scholastic in
connection with trade distribution.
The Company's sales in the trade market have been led by the successful
GOOSEBUMPS series, with 103 titles and approximately 200 million copies in
print, and THE BABY-SITTERS CLUB, series, with 279 titles published and
approximately 155 million copies in print. Another Scholastic-developed property
that also generates significant sales is THE MAGIC SCHOOL BUS, series, with 33
titles published and 29 million copies in print. Two new series, ANIMORPHS and
DEAR AMERICA(TM), are building quickly with ten and five published titleS,
respectively. Series such as I SPY(TM), CLIFFORD THE BIG RED DOG and HELLO
READER(R) continue to anchor the successful CARTWHEEL BOOKS(R), imprint. LITTLE
BILL(TM), a new young reader series written by Bill Cosby, will be distributed
in the fall of 1997. The SCHOLASTIC CHILDREN'S DICTIONARY was published in the
summer of 1996 and immediately became a best seller, greatly enhancing the
reference line. THE BLUE SKY PRESS and SCHOLASTIC PRESS imprints have attracted
some of the best talents in children's publishing, including Leo and Diane
Dillon, Virginia Hamilton, Barry Moser, Walter Dean Myers, Dav Pilkey, Cynthia
Rylant, Mark Teague and Audrey Wood.
CLASSROOM AND LIBRARY SALES
Many elementary school teachers use paperback books in conjunction with
basal textbooks to teach reading and other subjects. In addition to offering
book clubs and book fairs, Scholastic serves this need by offering individual
titles and collections of paperback books for classrooms and school libraries.
In fiscal 1997, approximately two-thirds of the school districts in the United
States ordered books and collections from the Company. The majority of the
titles sold directly to school classrooms and libraries are the same as those
offered through the Company's book clubs and book fairs.
The purchase of individual titles and book collections are generally funded
by school budgets. Classrooms and libraries may order directly through catalogs
mailed to the schools and through the Company's school group sales force.
Processing and fulfillment of these orders are handled in the Jefferson City
distribution center.
INSTRUCTIONAL PUBLISHING
The Instructional Publishing group develops and distributes instructional
materials (both supplemental and core curriculum programs) directly to schools.
Based on industry research, the Company believes that the kindergarten through
sixth grade ("K-6") market for instructional material in the areas of language
arts and science is approximately $1.0 billion annually.
4
Publishing for the K-6 market is being affected by a number of factors
which include the shift toward skill-based instruction balanced with the
philosophy of literature-based instruction (the teaching of reading and other
subjects utilizing whole books such as trade or paperback books) and the
increasing role of teachers in selecting materials for use in the classroom.
Additionally, there is increasing flexibility in "adoption" states, where state
boards approve or "list" instructional materials that local school boards,
individual schools and teachers can purchase. In these states, the state boards
are listing a greater number of instructional materials, thereby giving the
local school boards, individual schools and teachers a wider range of
instructional materials from which to select.
The Company believes that these changes provide an opportunity to
substantially expand its presence in the instructional materials market. To
capitalize on this opportunity, the Company's strategies are the following:
focus its publishing in language arts and science where the Company has
successful book and magazine publishing programs; publish multimedia programs
which provide schools with innovative alternatives to programs offered by other
publishers; concentrate its publishing in the K-6 grade market, which is the
largest part of the market; use existing books and magazines from other
Scholastic publishing groups; and cross-market its new programs to the more than
one million teachers who currently participate in Scholastic's book clubs and
use its magazines.
Pursuant to this strategy, the Company published SCHOLASTIC LITERACY
PLACE(R), its K-6 market reading program, and SCHOLASTIC SOLARES(TM), its
Spanish elementary reading program. In fiscal 1997, SCHOLASTIC LITERACY PLACE
was adopted by a number of major schoOl districts including the U.S. Department
of Defense, San Francisco, CA., San Bernadino, CA., Atlanta, GA., Tampa, FL. and
Milwaukee, WI. The Company, through its sales of SCHOLASTIC LITERACY PLACE and
SCHOLASTIC SOLARES, is among the leading suppliers in the California reading
market.
In fiscal 1997, the Company also completed publication of SCHOLASTIC
SPELLING(TM), a K-6 spelling program, which was submitted In Texas for its
upcoming spelling adoption. The Company expects that the market shift to
skill-based instruction will help sales of SCHOLASTIC SPELLING beyond Texas.
The Company launched a series of phonics products in fiscal 1997. Over 4.5
million phonics readers were sold to teachers and parents through the Book
Clubs. The PHONEMIC AWARENESS KIT, PHONICS CHAPTER BOOKS and PHONICS WORKBOOKS
were also published to meet the growing demand for phonics instruction.
In fiscal 1997, the Company introduced network versions of Wiggleworks(R),
its standard-setting CD-ROM-based beginning literacY program. Demand remains
strong for this popular technology.
The Early Childhood Publishing division's SCHOLASTIC EARLY CHILDHOOD
WORKSHOP(TM), a pre-kindergarten and kindergarten coRe curriculum program, was
successfully sold in Texas, primarily in the Company's first quarter of fiscal
1996, garnering approximately two-thirds of the market.
MAGAZINE PUBLISHING (8% OF REVENUES)
GENERAL
Scholastic complements its school-based book publishing business with the
publication of classroom magazines, which are used as supplementary educational
materials, and professional magazines, directed at teachers and education
professionals. Most of the Company's classroom and professional magazines carry
the Scholastic name, which reinforces the Company's widely recognized
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 help generate
customers for its book clubs and other Scholastic products as well as its
magazines. At the same time, the Company uses its book club mailings to help
secure additional circulation for its classroom and professional magazines. The
Company is exploring the possible sale of its Small Office, Home Office ("SOHO")
group, which includes two consumer magazines for small business and home office
professionals.
CLASSROOM MAGAZINES
The Company's 35 classroom magazines are designed to encourage students to
read and to supplement the 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 domestic magazines are
SCHOLASTIC NEWS(R) and JUNIOR SCHOLASTIC(R).
5
The Company's classroom magazine circulation in the United States for
fiscal 1997 and 1996 was 7.5 and 7.1 million, respectively. Approximately
two-thirds of the circulation is in K-6, with the balance in grades seven
through twelve. In fiscal 1997, teachers in approximately 60% of the elementary
schools and 70% of the high schools in the United States used the Company's
classroom magazines.
The various classroom magazines are distributed on a weekly, bi-weekly and
monthly basis during the school year. A majority of circulation revenue is paid
for by the schools and the remainder by students. Circulation revenue accounted
for approximately two-thirds of the Company's classroom magazine revenues in
fiscal 1997. Several of the magazines distributed in secondary schools carry
advertising.
The Company markets its classroom magazines largely by direct mail and
telephone sales representatives and field sales representatives. The Company
maintains an extensive database of teachers and schools which it utilizes for
promotional efforts. The order processing for classroom magazines is conducted
at the Company's Jefferson City facility.
Additionally, the Company develops and distributes customized marketing
programs sponsored by major corporations, government agencies and other
organizations which want to reach young people and educators. Customized
programs may include single-sponsor magazines, posters, teaching guides,
integrated teaching kits, educational videos and other promotional media and are
developed principally for Fortune 500 corporations and governmental agencies.
PROFESSIONAL PUBLISHING AND EARLY CHILDHOOD PUBLISHING
The Company publishes three magazines directed at teachers and educational
professionals: INSTRUCTOR, SCHOLASTIC EARLY CHILDHOOD TODAY and COACH AND
ATHLETIC DIRECTOR(TM). Total circulation for these magazines in fiscal 1997 was
in excess of 300,000. The magazines are distributed throughout the academic
year. Subscriptions are solicited by direct mail and are cross-marketed to
teachers through the book clubs. The Company also publishes SCHOLASTIC PARENT
AND CHILD(R) magazine, which is directed at parents and distributed through
schools and day care programs. PARENT AND CHILD's circulation is approximately
1.1 million. The magazines carry outside advertising, advertising for the
Company's other products and advertising for clients that sponsor customized
programs. In fiscal 1997, advertising revenue represented the majority of the
professional publishing and early childhood magazine revenues.
The professional publishing division also publishes professional books and
continuity programs consisting of instructional materials designed for and
generally purchased by teachers. Professional books are marketed through
Scholastic book clubs, catalogs, direct mail solicitations and by the Company's
trade sales force to teacher stores and book stores. The early childhood
division also publishes children's books and a pre-kindergarten and kindergarten
curriculum program, the SCHOLASTIC EARLY CHILDHOOD WORKSHOP. Revenues from these
items are included in domestic book publishing revenues.
SCHOLASTIC SOHO GROUP
The SOHO Group is comprised of four complementary businesses: HOME OFFICE
COMPUTING(R), now in its 14th year, a monthly magazine targeted at technology
reliant home-office professionals; SMALL BUSINESS COMPUTING(TM), Home Office
Computing's sister publication launched in 1996, targeted at professionals in
small business; SOHO Publishing, which produces specialized newsletters,
principally for Fortune 100 companies and Smalloffice.com, an advertising
supported web site. In fiscal 1997, the SOHO group carried approximately 950
pages of advertising.
MEDIA, TV/MOVIE PRODUCTIONS & LICENSING (6% OF REVENUES)
FILMED ENTERTAINMENT/MARKETING AND CONSUMER PRODUCTS
Scholastic Productions, Inc. ("SPI"), a wholly-owned subsidiary of the
Company, extends the Company's franchises worldwide by developing and producing
quality children's programming for distribution in multimedia formats. In
addition, SPI licenses consumer products and creates and develops global
branding campaigns for major Scholastic properties.
In fiscal 1997, the SPI-produced Scholastic's THE MAGIC SCHOOL BUS(R)
("MSB") television series aired its third season, and moved from a weekly
program to a daily series airing Monday through Friday and Sunday on PBS.
Thirteen additional episodes commenced production in fiscal 1997 to be completed
in fiscal 1998, bringing the total number of episodes to 52. MSB, which has won
6
numerous awards including an Emmy for Lily Tomlin, is the most popular series
for school-aged children on PBS and will start its fourth season in the fall of
1997. In November 1995, SPI launched Scholastic's Traveling Magic School Bus, a
recreation of the bus from the book and animated series, which through May 1997
has visited over 100 schools, libraries, retail stores and book fairs in the
U.S., reaching over 600,000 fans. In addition to the worldwide marketing and
consumer products programs for MSB managed by SPI, television rights to MSB
continue to be licensed internationally by Nelvana Ltd. and the home video
rights to certain international territories have been licensed to Twentieth
Century Fox Home Video. Domestically, Warner Home Video has successfully
released a total of 14 episodes on video cassette. SPI and Microsoft introduced
the fifth and sixth titles, "Dinosaurs" and "Rain Forest" in the award-winning
series of MSB CD-ROM's co-produced with Microsoft. "MSB Explores the Rain
Forest" received the 1997 Kids First! Seal of Approval. All of the MSB-CD ROM's
are in the top 20 best-selling titles for children.
During fiscal 1997, SPI continued to produce the GOOSEBUMPS(R) TV series
for Fox Children's Network ("FCN") with the completion of the second season
order of 17 one-half hour episodes and five one hour specials. FCN has ordered
an additional 24 episodes for the third season of the series which officially
commences in the fall of 1997. This will bring the total number of episodes to
54 and the total number of specials to six. The series will be aired weekday
afternoons in addition to Saturday mornings. GOOSEBUMPS continues to be rated
the #1 children's series on television. In addition, during the fiscal year, Fox
Home Video released three more GOOSEBUMPS(R) videos. The first release, "The
Haunted Mask," continues to hold the record for the most successful video
release of a TV show. The popularity of the TV show helped to launch and sustain
the successful worldwide marketing and consumer products program. There are
currently over 35 domestic GOOSEBUMPS licensees producing over 1,000 different
products. SPI received the 1996 Reggie Award for its GOOSEBUMPS Halloween
Promotion with Pepsi, Frito-Lay, Hershey, Taco Bell and Target retail stores.
Additionally, in June 1997, SPI was awarded the prestigious 1997 LIMA (Licensing
Industry Merchandisers' Association) award for "Licensing Agency of the Year"
and GOOSEBUMPS was named "License of the Year". During fiscal 1997, licensing of
consumer products and promotions were launched in Australia, New Zealand, the
United Kingdom and Canada with roll-outs commencing throughout Europe. Also
during fiscal 1997, Saban International, the international distributor of
GOOSEBUMPS, licensed the series in all major territories; it is currently airing
in Australia, New Zealand, Spain and Portugal with most of the remaining
European territories launching in the fall of 1997. SPI co-produced the first in
a series of CD-ROM's with Dreamworks SKG, "Escape from Horrorland." Released
during the 1996 holiday season, it became an instant success, reaching #1 on the
best-seller list. The second CD-ROM, "Attack of the Mutant," is expected to be
released in the fall of 1997.
SPI has received an order from the popular children's basic cable
television channel, Nickelodeon, for 13 one-half hour live-action episodes of
ANIMORPHS(TM), based on Scholastic's new best-selling book series. These
episodes will be substantially produced during fiscal 1998 for a series launch
in the fall of 1998. Nickelodeon has licensed the U.S. and international TV
rights; SPI has retained the worldwide home video and other ancillary
distribution rights. SPI is developing its domestic and international branding
and consumer products campaigns in coordination with the development and launch
of the TV series.
Other Scholastic franchises in development for potential exploitation in
multiple media platforms include CLIFFORD and DEAR AMERICA. SPI also has a
variety of original children's and family oriented projects in development as
the basis of future programming opportunities and has licensed media and other
rights to properties not originally published by Scholastic.
SPECIAL MARKETS
In fiscal 1997, SPI's Special Markets group launched a new line of high
quality plush toys, SIDEKICKS(TM), based on book-based company franchises. The
first products, which were introduced in the spring of 1997, are available
through independent toy/gift stores, specialty chains, department stores, mail
order catalogs, book stores and through Scholastic's proprietary channels (i.e.
book clubs and book fairs). The initial product line was based on CLIFFORD THE
BIG RED DOG and CLIFFORD THE SMALL RED PUPPY(R).
SPI also manages the sale of books and other items through non-traditional
channels. These revenues are included in domestic book publishing revenues.
7
TECHNOLOGY AND NEW MEDIA
The mission of the Technology and New Media division is threefold: publish
and sell educational software and multimedia products to schools and homes;
support other Scholastic divisions' technology efforts (including the creation
of technology components integrated into the instructional publishing group's
core curriculum materials); and explore and develop opportunities in
telecommunications and interactive networks, including the SCHOLASTIC
NETWORK(TM), which is available to educators via the Internet, as well as
Internet-based applications for delivery of Scholastic products and services.
The Company has published educational software since 1982, which is sold to
schools by sales representatives, catalog and other direct marketing methods and
educational distributors serving the school market. The Company also sells
consumer software through book clubs, and since 1991, has also sold software
through a classroom software club modeled on its classroom book clubs. In fiscal
1997, the Company launched a second software club aimed at younger children. The
Company acquires software for distribution in all of these channels through a
combination of licensing, internal development, contracting with independent
software developers and third-party distribution arrangements.
In fiscal 1994, the Company launched the SCHOLASTIC NETWORK, the first
online service developed especially for educators and students, which moved to
the Internet in fiscal 1997. It offers teachers supporting material and
compelling in-class experiences for the kindergarten through eighth grade
market. The Company has operated its home page on the World Wide Web since 1994.
This site, SCHOLASTIC.COM, provides an overview of the Company's activities,
resource libraries for educators, an education store and special programming
tied to SCHOLASTIC NETWORK'S content. The SCHOLASTIC NETWORK is featured on
SCHOLASTIC.COM and is a paid service.
In fiscal 1998, the Company will initiate sales of its internally developed
CD-ROM titles in the retail channel through a new distribution arrangement with
CUC Software. This distribution will complement sales through the Company's book
clubs, software clubs and school fairs.
The Company also produces and markets videos to the school market through
Weston Woods, a producer of videos based on higher quality children's books,
which was acquired in 1996.
Revenues from Media, TV/Movie Production & Licensing in the aggregate have
historically been less than 5% of the Company's revenues and profitability has
been marginal, although, fiscal 1997 was highly profitable due to the large
amount of GOOSEBUMPS licensing revenue. The SCHOLASTIC NETWORK has generated a
loss since its launch in fiscal 1994.
INTERNATIONAL (19% OF REVENUES)
Scholastic conducts its international operations through six wholly-owned
subsidiaries located in Canada, Australia, the United Kingdom, New Zealand,
Mexico and India. The Company's Canada, Australia, the United Kingdom, and New
Zealand subsidiaries publish and distribute children's books, magazines, school
text materials, and educational software. The Company's subsidiary in Mexico
primarily distributes children's books through schools. In fiscal 1997, the
Company established a subsidiary to distribute children's books through schools
in India. Approximately 90% of international revenues were derived from the sale
of children's books in fiscal 1997.
The Company markets its products internationally in the same manner as in
the United States, primarily to schools through book clubs and book fairs.
Although book clubs account for the largest share of international revenues,
book fairs and the trade market have grown rapidly in recent years.
Each subsidiary is responsible for its own editorial, production, sales and
fulfillment operations. The Canadian subsidiary primarily distributes United
States originated Scholastic product. Approximately 45% of the books distributed
by the Australian and New Zealand companies are originally published by
Scholastic in the United States. The United Kingdom company primarily
distributes material developed in the United Kingdom.
In fiscal 1997, the Company acquired the Red House Books Ltd. ("Red
House"), a leading United Kingdom distributor of children's books to the school
and home markets. The Company is in the process of integrating its own school
book clubs with the Red House book clubs. Also in 1997, the Company acquired a
children's book publisher in Australia, Margaret Hamilton Books.
In fiscal 1996, the Company acquired School Book Fairs, Ltd. ("School Book
Fairs"), the United Kingdom subsidiary of Pages, Inc. School Book Fairs has been
integrated into the Company's United Kingdom school book fair business,
Scholastic Book Fairs.
8
The Company is in the process of closing its operations in France. The
Company, however, remains a small shareholder in Gallimard, the well known
French publisher. The Company represents Gallimard Jeunesse, the children's
division of Gallimard, in the United States. The Company also owns a minority
interest in Usborne Publishing Ltd., the United Kingdom based publisher of
children's reference books.
COMPETITION
The domestic market for educational materials is highly competitive.
Competition is based on the quality and range of educational materials made
available, price, promotion and customer service. There are many competitors in
the domestic market, including one other national book club operator, two other
national school book fair operators (together with smaller regional operators,
including local bookstores), numerous other paperback book, textbook and
supplementary text publishers, national publishers of classroom, professional
and personal computer magazines with substantial circulation, numerous producers
of television, video and filmed programming (many of which are larger than the
Company) and publishers of computer software. 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 educational
materials that compete directly with the products distributed by the Company.
The Company also has numerous competitors in each of the foreign countries
in which it conducts business.
EMPLOYEES
As of May 31, 1997, Scholastic employed approximately 4,200 persons in
full-time jobs and 670 in hourly or part-time jobs in the United States and
approximately 1,700 persons in its international subsidiaries. The number of
part-time employees fluctuates during the year because the Company's business is
closely correlated with the school year. The Company believes that its relations
with employees are good.
COPYRIGHT AND TRADEMARKS
The name "Scholastic" is a registered trademark in the United States and in
a number of countries where the Company conducts business. The Company has also
registered in the United States the names of each of its domestic book clubs,
the titles of all of its magazines and the names of all of its core curriculum
programs. The Company's international subsidiaries have also registered some
names of their respective book clubs and magazines. Although individual book
titles are not subject to trademark protection, the Company has registered the
names of certain series, such as THE BABY-SITTERS CLUB, and THE MAGIC SCHOOL
BUS.
All of the Company's publications, including books, magazines and software,
are subject to copyright protection. The Company consistently copyrights its
magazines, books and software in the name of the Company. Copyright and
trademark infringement is vigorously defended by the Company and, as necessary,
outside counsel may be retained to assist in such protection.
(Space Intentionally Left Blank)
9
ITEM 2. PROPERTIES
The principal facilities of the Company are as follows:
===========================================================================================================
LOCATION USE SIZE OWNED/LEASED
===========================================================================================================
UNITED STATES
Jefferson City, Missouri Office and warehouses 1,270,312 sq. ft. Owned
New York, New York Offices and warehouse 422,075 sq. ft. Leased
Des Plaines, Illinois Warehouse 127,800 sq. ft. Leased
Anaheim, California Office and warehouse 64,570 sq. ft. Leased
Monroe, Connecticut Office and warehouse 50,000 sq. ft. Leased
Lake Mary, Florida Office and warehouse 45,000 sq. ft. Owned
Land only 4.2 acres Owned
Olympia, Washington Office and warehouse 30,000 sq. ft. Leased
Union City, California Office and warehouse 43,000 sq. ft. Leased
Longwood, Florida Office and warehouse 42,000 sq. ft. Owned
Elk Grove, Illinois Office and warehouse 39,416 sq. ft. Leased
Cranbury, New Jersey Office and warehouse 39,000 sq. ft. Leased
Lyndhurst, New Jersey Office 30,510 sq. ft. Leased
Boone County, Missouri Office and warehouse 15,000 sq. ft. Owned
San Diego, California Office and warehouse 10,104 sq. ft. Leased
Tempe, Arizona Office and warehouse 8,584 sq. ft. Leased
Norwalk, Connecticut Warehouse 6,385 sq. ft. Leased
Weston, Connecticut Office 5,882 sq. ft. Owned
Land only 5 acres Owned
Bartlett, Tennessee Office and warehouse 5,550 sq. ft. Leased
Westport, Connecticut Office 3,695 sq. ft. Leased
INTERNATIONAL
Gosford, N.S.W., Australia Office and warehouses 121,332 sq. ft. Owned
Land only 10 acres Owned
Lindfield, Australia Office 12,411 sq. ft. Leased
Victoria, Australia Land and residence 24 acres Owned
Somersby, N.S.W., Australia Land only 17 acres Owned
Richmond Hill, Ontario, Canada Office and warehouse 141,837 sq. ft. Leased
Office and warehouse 85,364 sq. ft. Owned
Land only 5 acres Owned
Southam, England Office and warehouse 51,500 sq. ft. Owned
Warehouse 48,851 sq. ft. Leased
Christchurch, England Office and warehouse 33,972 sq. ft. Leased
Leamington Spa, England Office 23,358 sq. ft. Leased
London, England Office 9,230 sq. ft. Leased
Sussex, England Warehouse 7,417 sq. ft. Leased
Somerset, England Warehouse 6,630 sq. ft. Leased
Mexico City, Mexico Office and warehouse 6,466 sq. ft. Leased
Auckland, New Zealand Office and warehouse 39,197 sq. ft. Leased
10
In addition to the facilities listed, the Company's book fair group leases
various regional warehouse locations in the United States comprising 944,014
square feet in total. The Company also owns or leases other smaller facilities
and property in the United States, Canada, Australia, the United Kingdom and New
Zealand. Management believes that these facilities are adequate and suitable for
the Company's current needs.
See Note 5--"Commitments and Contingencies" in the Notes to Consolidated
Financial Statements for information concerning the Company's obligations under
all leases.
ITEM 3. LEGAL PROCEEDINGS
Three purported class action complaints were filed in the United States
District Court for the Southern District of New York against Scholastic
Corporation and certain officers, seeking, among other remedies, damages
resulting from defendants' alleged violations of federal securities laws. The
complaints have now been consolidated. The Consolidated Amended Class Action
Complaint (the "Consolidated Complaint"), served and filed on August 13, 1997.
The Consolidated Complaint is styled as a class action on behalf of all persons
who purchased Company common stock from December 10, 1996 through February 20,
1997. The Consolidated Complaint 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 purported materially false and misleading statements
to the investing public concerning the financial condition of the Company.
Specifically, the Consolidated Complaint alleges 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. The litigation is still in the preliminary stages. The Company has not yet
answered or moved against the Consolidated Complaint and discovery has not yet
begun. The Company believes that the suit is without merit and intends to
vigorously defend against this action.
A number of lawsuits and administrative proceedings which have arisen in
the ordinary course of business are pending or threatened against the Company.
The Company believes there are meritorious defenses to substantially all such
claims.
From time to time the Company is involved in proceedings with states
seeking to collect sales and use taxes, for which the Company accrues a reserve
it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's Common
Stock during the last quarter of its fiscal year ended May 31, 1997.
(Space Intentionally Left Blank)
11
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. Class A Stock is convertible into Common Stock on a
share-for-share basis. The table below 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.
YEARS ENDED MAY 31,
-----------------------------------
1997 1996
------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter................... 70 1/4 59 66 3/4 52 1/4
Second Quarter.................. 78 1/2 66 3/4 71 58 3/4
Third Quarter................... 74 1/2 32 3/4 78 3/4 65 3/4
Fourth Quarter.................. 33 3/8 20 3/4 73 3/4 60
Year............................ 78 1/2 20 3/4 78 3/4 52 1/4
The Company has not paid any dividends since its initial public offering
and has no current plans to pay any dividends on its Common Stock and Class A
Stock. In addition, certain of the Company's credit facilities restrict the
payment of dividends. See Note 4 of the Notes to Consolidated Financial
Statements.
The approximate number of holders of Class A and Common Stock as of June
30, 1997 were three and 5,500, respectively.
12
ITEM 6. SELECTED FINANCIAL DATA
Years ended May 31 (Amounts in millions except per share data)
==============================================================================================================
1997 1996 1995 1994 1993
==============================================================================================================
STATEMENT OF INCOME DATA:
Total revenues................... $966.3 $928.6 $749.9 $631.6 $552.3
Cost of goods sold............... 530.7 466.0 356.0 297.1 265.7
Selling, general and
administrative expenses........ 399.6 367.4 316.2 271.3 231.7
Other operating costs:
Intangible amortization and
depreciation.............. 18.3 13.1 10.0 7.6 5.8
Impairment of assets........ -- 24.3(1) -- -- --
Operating income................. 17.7 57.8 67.7 55.6 49.1
Interest expense, net............ 16.7 11.2 5.4 2.9 2.3
Net income....................... 0.4 31.9(1) 38.6 24.8(2) 28.1
Net income per share--
fully diluted.................. $0.02 $1.97(1) $2.37 $1.53(2) $1.75
Weighted average shares
outstanding--fully diluted...... 16.4 16.2 16.3 16.2 16.4
BALANCE SHEET DATA (END OF YEAR):
Working capital.................. $215.7 $177.1 $136.8 $100.3 $ 63.0
Total assets..................... 784.4 673.2 505.9 390.0 263.2
Long-term debt................... 287.9 186.8 91.5 39.6 3.3
Stockholders' equity............. 297.5 288.6 250.2 205.8 153.5
- ---------------
(1) Fiscal 1996 includes a non-cash pre-tax charge relating to the impairment of
certain assets of $24.3. A significant portion of this charge was determined
in connection with the Company's early adoption of Statement of Financial
Accounting Standards No. 121 (SFAS 121), which requires an evaluation of the
realization of long-lived asset carrying values. Fiscal 1996 net income and
net income per share-fully diluted excluding the $24.3 non-cash pre-tax
charge would have been $46.8 and $2.85, respectively.
(2) Fiscal 1994 includes a provision for a nonrecurring charge of $8.1 (net of
tax) with an impact of $0.51 per share relating to the cumulative effect of
changes in accounting principles due to the adoption of financial accounting
standards on postretirement benefits (other than pensions), postemployment
benefits and income taxes. Also included is a $1.3 tax benefit to reflect
the effect on net deferred income taxes resulting from the increase in the
federal tax rate from 34% to 35%.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related Notes and Selected Financial
Data.
FISCAL 1997 COMPARED TO FISCAL 1996
Fiscal 1997 revenues increased approximately 4% from $928.6 million in
fiscal 1996 to $966.3 million in fiscal 1997.
Domestic book publishing revenues accounted for a majority of the Company's
revenues in fiscal 1997. Domestic book publishing revenues decreased 2% from
$657.5 million in fiscal 1996 to $646.0 million in fiscal 1997. Book club
revenues (including continuity programs) accounted for approximately 42% of
domestic book publishing sales. Book club revenues decreased approximately 4%
over fiscal 1996. The decrease in book club revenues due to lower orders and
decreased revenue per order was only partially offset by revenues due to the
January 1996 acquisition of the Trumpet book clubs. Book fairs accounted for
approximately 23% of domestic book publishing sales and generated sales growth
of 18%, as a result of an increased number of fairs held and an increase in the
average revenue generated per fair. The trade or retail based distribution
channel accounted for approximately 16% of domestic book publishing sales. Net
trade sales decreased approximately $40 million or 30% due primarily to
increases in the rate of returns and a decline in the sales of the GOOSEBUMPS
series, particularly beginning in January/February 1997. Also included in
domestic book publishing revenues are sales of instructional materials to
schools. Instructional publishing sales accounted for approximately 14% of
domestic book publishing revenues and were approximately at the same level of
last year as first year sales of the Company's reading program SCHOLASTIC
LITERACY PLACE more than offset a decrease in sales of the SCHOLASTIC EARLY
CHILDHOOD WORKSHOP.
In fiscal 1997, domestic magazine publishing revenue remained at the same
level as in the prior year at approximately $81 million. Domestic magazine
publishing revenues are comprised primarily of advertising revenues and
circulation revenues. The Company's SOHO group accounted for 27% of total
domestic magazine publishing revenues. The Company is exploring the possible
sale of the SOHO group.
Domestic media, TV/movie production & licensing revenues increased from
$39.8 million in fiscal 1996 to $60.2 million in fiscal 1997. This revenue
growth was largely due to the increases in licensing revenue from the sale of
GOOSEBUMPS products.
International revenues grew by 19% in U.S. dollars from $149.7 million in
fiscal 1996 to $178.8 million in fiscal 1997. The United Kingdom revenue
significantly benefited from the fiscal 1996 acquisition of School Book Fairs
and the fiscal 1997 acquisition of Red House. The United Kingdom and Canada also
had increases in trade sales.
Cost of goods sold increased 14% from $466.0 million in fiscal 1996 to
$530.7 million in fiscal 1997. Cost of goods sold as a percentage of revenues
increased from 50% in fiscal 1996 to 55% in fiscal 1997. This increase resulted
from a planned increase in prepublication amortization, restructuring charges,
increases in inventory reserves and the impact of increases in trade returns
reserves. The major components of cost of goods sold and their respective
approximate percentage of total cost of goods sold in fiscal 1997 were as
follows: printing and binding (35%), paper (13%), royalty expense (9%),
prepublication costs (6%) and editorial expense (8%). The balance of cost of
goods sold includes shipping and labor, delivery charges and other manufacturing
costs. As a percentage of total cost of goods sold, printing and binding
increased from 27% in fiscal 1996 due to product mix and the impact of
increasing trade returns reserves and paper costs decreased from 19% in fiscal
1996, due primarily to changes in product mix and decreases in paper prices.
Selling, general and administrative expenses increased by 9%, from $367.4
million in fiscal 1996 to $399.6 million in fiscal 1997, due primarily to
increased salaries, marketing and promotion costs and the Company's
restructuring charge. Selling, general and administrative expenses as a
percentage of revenue remained approximately 40%. Marketing and promotion costs,
which include the costs of catalogs, direct mail, book club kits, book club
credits and advertising, constituted approximately 57% of selling, general and
administrative expenses in fiscal 1997, approximately the same as in fiscal
1996. The balance of selling, general and administrative expenses is comprised
of facility-related costs, office equipment rentals, salary, salary related
expenses and the majority of the Company's restructuring charge.
14
Other operating costs decreased from $37.4 million in fiscal 1996 to $18.3
million in fiscal 1997. In the fourth quarter of fiscal 1996, the Company
incurred a non-cash charge related to the impairment of certain assets of $24.3
million. A significant portion of this charge was determined in connection with
the Company's early adoption of Statement of Financial Accounting Standards No.
121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
Operating income decreased $40.1 million or 69% from $57.8 million in
fiscal 1996 (6% of sales) to $17.7 million in fiscal 1997 (2% of sales).
Net interest expense increased from $11.2 million in fiscal 1996 to $16.7
million in fiscal 1997. This increase was principally attributable to higher
debt levels incurred to fund working capital growth, mid-year fiscal 1996
acquisitions of approximately $19 million, acquisitions in fiscal 1997 totalling
approximately $32 million and a higher interest rate in part resulting from the
December 23, 1996 issuance of $125.0 million of 7% Notes due 2003.
Earnings before provision for income taxes decreased from $46.6 million in
fiscal 1996 to $1.0 million in fiscal 1997.
Income tax expense decreased from $14.7 million in fiscal 1996 to $0.6
million in fiscal 1997. In fiscal 1997 and 1996, the Company's effective tax
rates were 64.6% and 31.6% of earnings before taxes, respectively. The increase
in the effective tax rate primarily is due to state and local taxes, which are
computed on an unconsolidated basis.
Net income decreased from $31.9 million in fiscal 1996 to $0.4 million in
fiscal 1997. The primary and fully diluted net income per Class A, Common and
Class A Share and Common Share Equivalents was $0.02 in fiscal 1997 and $1.97 in
fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Fiscal 1996 revenues increased approximately 24% from $749.9 million in
fiscal 1995 to $928.6 million in fiscal 1996.
Domestic book publishing revenues accounted for a majority of the Company's
revenues in both fiscal 1996 and fiscal 1995. Domestic book publishing revenues
increased 27% from $516.8 million in fiscal 1995 to $657.5 million in fiscal
1996. Book clubs (including continuity programs) accounted for 43% of domestic
book publishing sales in fiscal 1996. Book club revenues increased approximately
12% over fiscal 1995 primarily as a result of the growth and expansion of the
book club continuity programs and the purchase of Trumpet book clubs. The trade
or retail based distribution channel accounted for 21% of domestic book
publishing sales in fiscal 1996. It led the increase in domestic book publishing
by recording more than 60% growth in fiscal 1996 over fiscal 1995. This growth
reflected the continued success of the Company's series publishing, particularly
the GOOSEBUMPS book series. Book fairs accounted for approximately 19% of
domestic book publishing sales in fiscal 1996 and generated sales growth in
excess of 20%, as a result of an increased number of fairs held and an increase
in the average revenue generated per fair. Also included in domestic book
publishing revenues are sales of instructional materials to schools.
Instructional publishing sales accounted for approximately 13% of domestic book
publishing revenues in fiscal 1996 and experienced a growth of 56% due largely
to the success of the Early Childhood Workshop sales recorded in the first
quarter of fiscal 1996 relating to the Texas adoption.
Domestic magazine publishing revenue decreased 3% from $84.0 million in
fiscal 1995 to $81.6 million in fiscal 1996. Domestic magazine publishing
revenues are comprised primarily of advertising revenues and circulation
revenues. A decrease in circulation revenues of $1.9 million from fiscal 1995
contributed to the majority of the decrease in domestic magazine publishing
revenue. The Company's SOHO group accounted for 25% of total domestic magazine
publishing revenues and had an increase of 16% from fiscal 1995 as a result of
increased advertising and custom publishing revenues.
Domestic media, TV/movie productions & licensing revenues more than doubled
from $19.5 million in fiscal 1995 to $39.8 million in fiscal 1996. This revenue
growth was led by Scholastic Productions, Inc., due in a large part to the
increase in television programming, merchandising and licensing revenue of $13.8
million from fiscal 1995. The success of the GOOSEBUMPS and THE MAGIC SCHOOL BUS
television series were major contributors to this increase.
15
International revenues grew by 16% in U.S. dollars from $129.6 million in
fiscal 1995 to $149.7 million in fiscal 1996. Sales increases in Canada, the
United Kingdom and Australia were fueled by strong trade sales. The United
Kingdom also showed an increase in book fair sales, in part due to the March
1996 acquisition of School Book Fairs Ltd.
Cost of goods sold increased 31% from $356.0 million in fiscal 1995 to
$466.0 million in fiscal 1996. Cost of goods sold as a percentage of revenues
increased from 47.5% in fiscal 1995 to 50% in fiscal 1996 primarily due to the
Company's sales mix, specifically the impact of trade sales growth, which has a
higher cost of sales than the Company's other channels. The major components of
cost of goods sold and their respective approximate percentage of total cost of
goods sold in fiscal 1996 were as follows: printing and binding (27%), paper
(19%), royalty expense (12%) and editorial expense (10%). The balance of cost of
goods sold includes amortization of prepublication costs, shipping and labor,
delivery charges and other manufacturing costs.
Selling, general and administrative expenses increased by 16%, from $316.2
million in fiscal 1995 to $367.4 million in fiscal 1996, due to volume increases
in trade and increased costs associated with the launch of SCHOLASTIC LITERACY
PLACE. Selling, general and administrative expenses decreased as a percentage of
revenues due to sales mix, specifically the impact of trade sales growth, which
has lower selling, general and administrative expenses than the Company's other
channels (42% in fiscal 1995 and 40% in fiscal 1996). Marketing and promotion
costs, which include the costs of catalogs, direct mail, book club kits, book
club credits and advertising, constituted approximately 57% of selling, general
and administrative expenses in fiscal 1996 compared to 58% in fiscal 1995. The
balance of selling, general and administrative expenses is comprised of
facility-related costs, office equipment rentals, salary and salary related
expenses.
Other operating costs increased from $10.0 million in fiscal 1995 to $37.4
million in fiscal 1996. In the fourth quarter of fiscal 1996, the Company
incurred a non-cash charge related to the impairment of certain assets of $24.3
million. A significant portion of this charge was determined in connection with
the Company's early adoption of Statement of Financial Accounting Standards No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The charge consisted of the unamortized
prepublication ($10.8 million) and inventory ($13.5 million) costs of the
Company's K-2 math program, several older supplemental instructional publishing
programs and other selected titles.
Operating income, excluding the fourth quarter charge of $24.3 million,
increased 21% from $67.7 million in fiscal 1995 to $82.1 million in fiscal 1996.
Operating income (excluding the charge) as a percentage of sales has remained
stable at approximately 9.0%. Operating income and profit margins for the
Company's international operations increased in fiscal 1996 compared to fiscal
1995 due to growth in the Australian, United Kingdom and Canadian subsidiaries'
businesses.
Net interest expense increased from $5.4 million in fiscal 1995 to $11.2
million in fiscal 1996. This increase was attributable to higher debt levels in
part resulting from the August 18, 1995, issuance of $110.0 million of
Convertible Subordinated Debentures. During fiscal 1996, higher debt levels were
necessary to fund working capital growth arising from increased sales and
changes in mix of sales. Higher debt levels also helped fund various business
acquisitions in fiscal 1996, which totaled $32.1 million.
Earnings before provision for income taxes decreased 25% from $62.3 million
in fiscal 1995 to $46.6 million in fiscal 1996. Excluding the $24.3 million
charge, earnings would have increased approximately 14% from $62.3 million in
fiscal 1995 to $71.0 million in fiscal 1996.
Income tax expense decreased from $23.7 million in fiscal 1995 to $14.7
million in fiscal 1996. In fiscal 1996 and 1995, the Company's effective tax
rates were 31.6% and 38.0% of earnings before taxes, respectively. The decrease
in the effective tax rate is primarily due to the tax benefit realized from
charitable contributions, as well as the Company's utilization of foreign tax
credit carryforwards in fiscal 1996.
Net income decreased from $38.6 million in fiscal 1995 to $31.9 million in
fiscal 1996. The primary and fully diluted net income per Class A, Common and
Class A Share and Common Share Equivalents was $1.97 in each case in fiscal 1996
and $2.38 and $2.37, respectively, in fiscal 1995.
Excluding the effect of the fourth quarter charge relating to the
impairment of assets, fiscal 1996 net income and fully diluted earnings per
share would have been $46.8 million and $2.85, respectively.
16
SEASONALITY
The Company's book clubs, book fairs, and most of its magazines operate on
a school-year basis, and the Company's business is, therefore, highly seasonal.
As a consequence, the Company's revenues in the first quarter of the fiscal year
are lower than its revenues in the following fiscal quarters, and the Company
experiences a substantial loss from operations in that quarter. Typically, book
club and book fair revenues are proportionately greatest in the second quarter
of the fiscal year, while instructional publishing revenues are greatest in the
first quarter. See Supplementary Financial Information in Item 8.
For the June through September time period, the Company experiences
negative cash flow due to the seasonality of the business. Historically,
seasonal borrowings increase during June, July and August, generally peak in
September and October each year, and are at the lowest point in May, as a result
of the Company's business cycle. In fiscal years 1996 and 1997, borrowings
increased to fund working capital growth as well as business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents remained virtually unchanged for
fiscal years 1997, 1996 and 1995. In each of these fiscal years, the net cash
used in investing activities were funded from cash provided by financing and
operating activities.
Net cash provided by operating activities in fiscal 1997, 1996 and 1995 was
$46.7 million, $52.7 million and $29.1 million, respectively. In each of these
fiscal years, net cash provided by operating activities was derived from the net
income of the Company adjusted for the addback of non-cash charges offset by the
effect of increased working capital requirements. In fiscal 1997, inventory
increased primarily in anticipation of SCHOLASTIC LITERACY PLACE(R) summer sales
and the increase in prepaid expense related to an overpayment of federal income
tax.
Cash outflows for investing activities were $137.5 million, $156.5 million
and $95.6 million for fiscal 1997, 1996 and 1995, respectively. Investing
activities primarily consist of payments for royalty advances, business and
trademark acquisition-related payments, payments for capital expenditures and
prepublication and production cost expenditures.
Payments for royalty advances totaled $33.2 million, $20.1 million and
$14.6 million for fiscal 1997, 1996 and 1995, respectively. The $13.1 million
increase in advance payments from fiscal 1996 to fiscal 1997 primarily reflects
the impact of an extended agreement entered into by the Company to publish
GOOSEBUMPS. The Company expects royalty advances to decrease slightly in fiscal
1998, including continuing advance payments under the extended GOOSEBUMPS
agreement. Business and trademark acquisition-related payments were $32.1
million, $32.1 million and $7.8 million in fiscal 1997, 1996 and 1995,
respectively. Fiscal 1997 acquisitions include Lectorum Publications, Inc. on
September 4, 1996, the United Kingdom subsidiary's acquisition of Red House
Books Ltd. on January 22, 1997 and the Company's investment in Gallimard S. A.
on October 16, 1996. The Company's capital expenditures totaled $29.5 million in
fiscal 1997, $30.4 million in fiscal 1996 and $21.7 million in fiscal 1995.
Prepublication cost expenditures totaled $26.9 million, $54.3 million and $45.3
million in fiscal 1997, 1996 and 1995, respectively. Prepublication costs
decreased $27.4 million and $18.4 million from fiscal 1996 and fiscal 1995,
respectively, largely due to higher investments by the Company during prior
years in its instructional publishing and technology based activities, primarily
in the development of SCHOLASTIC LITERACY PLACE. The Company expects capital and
prepublication expenditures in fiscal 1998 to be approximately equivalent to
fiscal 1997. Production cost expenditures decreased $4.4 million from fiscal
1996 reflecting lower spending for THE MAGIC SCHOOL BUS and GOOSEBUMPS
television series. The $6.9 million increase from fiscal 1995 resulted primarily
from the Company's development of these series.
Increases in investing activities were funded by cash flows from
operations, the issuance of debt instruments described below and borrowings
under the loan agreement, which the Company entered into on May 27, 1992 with a
group of banks, and which was last amended on May 28, 1997 (the "Loan
Agreement") the revolving loan agreement, which the Company entered into June
19, 1995 with Sun Bank, National Association (the "Revolver") and which was last
amended on May 30, 1997. Both the Loan Agreement and the Revolver expire May 31,
2000. On December 23, 1996, the Company issued $125.0 million of 7% Notes due
2003 (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. The net proceeds (including accrued interest) from the
issuance of the Notes were $123.9 million, after deducting an underwriting
discount and other related offering costs. On August 18, 1995 the Company sold
17
$110.0 million of 5.0% Convertible Subordinated Debentures (the "Debentures")
which bear interest at 5.0% and mature on August 15, 2005. The funds received in
connection with the issuance of the Notes and Debentures have also been a
primary source of the Company's liquidity. See Note 4 of the Notes to
Consolidated Financial Statements for additional information on the Loan
Agreement, the Revolver, the Notes and the Debentures.
In fiscal 1997, 1996 and 1995, net cash provided by financing activities
was $91.4 million, $104.2 million and $66.2 million, respectively. Financing
activities consisted of borrowings and paydowns under the Loan Agreement and the
Revolver, the issuance of the Notes in fiscal 1997, the sale of Debentures in
fiscal 1996 and borrowings and paydowns on lines of credit, which resulted from
overdraft agreements between the international subsidiaries and various banks.
In fiscal 1997, 1996 and 1995, options to purchase a total of 338,175,
165,579 and 185,180 shares of Common Stock were exercised at aggregate exercise
prices of $4.7 million, $2.1 million and $2.6 million, respectively. The
exercise of options in fiscal 1997 and 1996 reduced current taxes payable by
$4.2 million and $3.0 million, respectively. In fiscal 1995, the exercise of
options combined with a net operating loss carryforward, which resulted from the
exercise of options in fiscal 1994 and 1993, reduced current taxes payable by
$10.0 million.
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This Statement specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. See Note 1 of the Notes to Consolidated Financial
Statements for additional information on the impact of adopting SFAS 128.
The Company believes its existing cash position, combined with funds
generated from operations and funds available under the Loan Agreement and the
Revolver, will be sufficient to finance its on-going working capital
requirements for the next fiscal year.
FORWARD LOOKING STATEMENTS
This 10-K includes certain forward looking statements. Such forward looking
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including (i) the Company's ability to produce successful educational products
(ii) the effect on the Company of volatility in the price of paper and periodic
increases in postage rates, (iii) the Company's ability to manage seasonality,
(iv) the Company's ability to maintain relationships with its creative talent,
(v) significant changes in the publishing industry, especially relating to the
distribution and sale of books, (vi) competition in the publishing industry from
other educational publishers and media and entertainment companies and (vii) the
general risks attendant to the conduct of business in foreign countries.
18
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, 1997, 1996 and 1995................................ 21
Consolidated Balance Sheet at May 31, 1997 and 1996................. 22-23
Consolidated Statement of Changes in Stockholders'
Equity for the three years ended May 31, 1997, 1996 and 1995..... 24
Consolidated Statement of Cash Flows for the three years
ended May 31, 1997, 1996 and 1995................................ 25
Notes to Consolidated Financial Statements.......................... 26-35
Report of Independent Auditors...................................... 36
Supplementary Financial Information - Summary of Quarterly
Results of Operations (unaudited)................................ 37
The following consolidated financial statement schedule of Scholastic
Corporation is included in Item 14(d):
PAGE
----
Schedule II-- Valuation and Qualifying Accounts and Reserves.......... S-1
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.
19
This page left blank intentionally.
20
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED MAY 31, 1997, 1996 AND 1995
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
================================================================================
1997 1996 1995
================================================================================
Revenues........................................... $966.3 $928.6 $749.9
Operational costs and expenses:
Cost of goods sold............................... 530.7 466.0 356.0
Selling, general and administrative expenses..... 399.6 367.4 316.2
Other operating costs:
Intangible amortization........................ 5.5 3.1 2.1
Depreciation................................... 12.8 10.0 7.9
Impairment of assets........................... -- 24.3 --
----- ----- -----
Total operating costs and expenses................. 948.6 870.8 682.2
----- ----- -----
Operating Income................................... 17.7 57.8 67.7
Interest expense, net.............................. 16.7 11.2 5.4
----- ----- -----
Earnings before taxes.............................. 1.0 46.6 62.3
Provision for income taxes......................... 0.6 14.7 23.7
----- ----- -----
Net income......................................... $ 0.4 $ 31.9 $ 38.6
===== ====== ======
Net income per Class A, Common and Class A Share
and Common Share Equivalents:
Primary........................................ $0.02 $1.97 $2.38
Fully diluted.................................. $0.02 $1.97 $2.37
Weighted average Class A, Common and Class A Share
and Common Share Equivalents outstanding:
Primary......................................... 16.4 16.2 16.2
Fully diluted................................... 16.4 16.2 16.3
SEE ACCOMPANYING NOTES
21
CONSOLIDATED BALANCE SHEET
BALANCES AT MAY 31, 1997 AND 1996 (DOLLARS IN MILLIONS EXCEPT SHARE DATA)
ASSETS
================================================================================
1997 1996
================================================================================
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 4.9 $ 4.3
Accounts receivable (less allowance for doubtful
accounts of $7.8 in 1997 and $9.2 in 1996)....... 100.5 118.4
Inventories:
Paper............................................ 8.1 9.1
Books and other.................................. 213.9 180.9
Deferred taxes..................................... 30.2 22.7
Prepaid and other deferred expenses................ 38.7 15.1
----- -----
Total current assets........................... 396.3 350.5
PROPERTY, PLANT AND EQUIPMENT:
Land............................................... 6.5 6.3
Buildings.......................................... 41.0 37.5
Furniture, fixtures and equipment.................. 68.4 53.8
Leasehold improvements............................. 61.3 48.5
----- -----
177.2 146.1
Less accumulated depreciation and amortization..... (43.2) (32.0)
----- -----
Net property, plant and equipment................ 134.0 114.1
OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs............................... 102.1 104.4
Goodwill and trademarks............................ 67.8 41.6
Royalty advances................................... 43.4 24.8
Other.............................................. 40.8 37.8
----- -----
Total other assets and deferred charges........ 254.1 208.6
----- -----
$784.4 $673.2
====== ======
SEE ACCOMPANYING NOTES
22
LIABILITIES AND STOCKHOLDERS' EQUITY
================================================================================
1997 1996
================================================================================
CURRENT LIABILITIES:
Lines of credit................................................$ 5.0 20.9
Current portion of long-term debt.............................. 0.3 0.3
Accounts payable............................................... 74.2 62.9
Accrued royalties.............................................. 12.2 19.1
Deferred revenue............................................... 9.0 9.2
Other accrued expenses......................................... 79.9 61.0
----- -----
Total current liabilities..................................180.6 173.4
NONCURRENT LIABILITIES:
Long-term debt.................................................287.9 186.8
Other noncurrent liabilities................................... 18.4 24.4
----- -----
Total noncurrent liabilities...............................306.3 211.2
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--16,671,690 shares (16,331,698 shares at 5/31/96)..... 0.2 0.2
Additional paid-in capital.................................... 203.8 194.8
Foreign currency translation adjustment........................ (0.7) (0.2)
Accumulated earnings........................................... 131.0 130.6
Less 1,301,658 shares of Common Stock in treasury, at cost... (36.8) (36.8)
------ ------
Total stockholders' equity................................. 297.5 288.6
------ ------
$784.4 $673.2
====== ======
23
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED MAY 31,
1997, 1996 AND 1995 (DOLLARS IN MILLIONS)
================================================================================
FOREIGN
ADDITIONAL CURRENCY TOTAL
CLASS A COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
----- ----- ------- --------- ----------- -------- -------------
BALANCE AT JUNE 1, 1994 ............... $0.0 $0.2 $184.4 $(2.1) $60.1 $(36.8) $205.8
Net income............................. 38.6 38.6
Translation adjustment................. 0.6 0.6
Stock options exercised................ 0.0 2.6 2.6
Tax benefit realized from
stock option transactions............ 2.6 2.6
Stock granted.......................... 0.0 0.0
---- ---- ----- ---- ----- ----- -----
BALANCE AT MAY 31, 1995 ............... 0.0 0.2 189.6 (1.5) 98.7 (36.8) 250.2
Net income............................. 31.9 31.9
Translation adjustment................. 1.3 1.3
Stock options exercised................ 0.0 2.1 2.1
Tax benefit realized from
stock option transactions............ 3.0 3.0
Stock granted.......................... 0.1 0.1
---- ---- ----- ---- ----- ----- -----
BALANCE AT MAY 31, 1996 ............... 0.0 0.2 194.8 (0.2) 130.6 (36.8) 288.6
Net income............................. 0.4 0.4
Translation adjustment................. (0.5) (0.5)
Stock options exercised................ 0.0 4.7 4.7
Tax benefit realized from
stock option transactions............ 4.2 4.2
Stock granted.......................... 0.1 0.1
---- ---- ----- ---- ----- ----- -----
BALANCE AT MAY 31, 1997 ............... $0.0 $0.2 $203.8 $(0.7) $131.0 $(36.8) $297.5
==== ==== ====== ===== ====== ====== ======
SEE ACCOMPANYING NOTES
24
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995 (DOLLARS IN MILLIONS)
=============================================================================================================
1997 1996 1995
=============================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 0.4 $ 31.9 $ 38.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation........................ 58.4 42.5 24.0
Royalty advances expensed............................ 15.2 13.5 11.7
Provision for losses on accounts receivable.......... 11.7 9.6 6.6
Deferred income taxes................................ (7.0) (4.7) 2.6
Impairment of assets................................. -- 24.3 --
Changes in assets and liabilities net of effects
from business acquisitions and dispositions:
Decrease (increase) in accounts receivable....... 7.6 (49.2) (27.5)
Increase in inventory............................ (29.3) (31.6) (42.8)
(Increase) decrease in prepaid expenses.......... (19.8) 1.5 (2.5)
Increase in accounts payable
and other accrued expenses..................... 17.3 3.8 12.6
(Decrease) increase in accrued royalties......... (6.9) 5.5 3.9
(Decrease) increase in deferred revenues......... (0.2) (2.7) 2.6
Other, net......................................... (0.7) 8.3 (0.7)
---- ---- ----
Total adjustments.................................... 46.3 20.8 (9.5)
---- ---- ----
Net cash provided by operating activities.......... 46.7 52.7 29.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Royalty advances paid.................................... (33.2) (20.1) (14.6)
Business and trademark acquisition--related payments...... (32.1) (32.1) (7.8)
Additions to property, plant and equipment............... (29.5) (30.4) (21.7)
Prepublication cost expenditures......................... (26.9) (54.3) (45.3)
Production cost expenditures............................. (12.5) (16.9) (5.6)
Other expenditures....................................... (3.3) (2.7) (0.6)
---- ---- ----
Net cash used in investing activities.............. (137.5) (156.5) (95.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver............. 301.5 209.6 158.9
Principal paydowns on loan agreement and revolver........ (326.2) (224.2) (106.6)
Proceeds from issuance of 7% Notes due 2003.............. 123.9 -- --
Proceeds from issuance of convertible debt............... -- 107.3 --
Borrowings under lines of credit......................... 39.3 53.9 45.3
Principal paydowns on lines of credit.................... (55.6) (46.7) (43.7)
Proceeds from exercise of stock options.................. 4.7 2.1 2.6
Tax benefit realized from stock option transactions...... 4.2 3.0 10.0
Other.................................................... (0.4) (0.8) (0.3)
---- ---- ----
Net cash provided by financing activities.......... 91.4 104.2 66.2
Effect of exchange rate changes on cash.................. 0.0 0.2 (0.1)
---- ---- ----
Net increase (decrease) in cash and cash equivalents..... 0.6 0.6 (0.4)
Cash and cash equivalents at beginning of year........... 4.3 3.7 4.1
---- ---- ----
Cash and cash equivalents at end of year................. $ 4.9 $ 4.3 $ 3.7
===== ===== =====
SUPPLEMENTAL INFORMATION:
Income taxes paid........................................ $24.7 $22.3 $12.2
Interest paid............................................ 13.1 9.8 5.0
SEE ACCOMPANYING NOTES
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT 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. Certain prior year amounts have been reclassified
to conform to the current year presentation.
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 costs and litigation reserves.
NATURE OF OPERATIONS
The Company has operations in the United States, Canada, Mexico, the United
Kingdom, Australia and New Zealand and distributes its materials through a
variety of channels, including book clubs, book fairs and retail. The Company is
engaged in one segment of business--the production, publication and sale of
educational materials.
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.
OTHER ASSETS AND DEFERRED CHARGES
Prepublication costs are amortized on the straight-line basis over a two to
five year period commencing with publication. The Company regularly evaluates
the remaining lives and recoverability of such costs. The accumulated
amortization of prepublication costs at May 31, 1997 and 1996 was $41.8 and
$24.9, respectively.
Royalty advances are expensed as earned or when future recovery appears
doubtful. The reserve for royalty advances was $25.1 and $18.4 at May 31, 1997
and 1996, respectively.
Goodwill and trademarks acquired by the Company are being amortized on the
straight-line basis over the estimated future periods to be benefited, not
exceeding 40 years. The accumulated amortization of goodwill and other
intangible assets at May 31, 1997 and 1996 was $8.2 and $4.5, respectively.
INCOME TAX
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "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
26
effect when the differences are expected to enter into the determination of
taxable income.
OTHER ACCRUED EXPENSES
Other accrued expenses include a reserve for book returns of $19.0 at May
31, 1997. Other accrued expenses also include a reserve for unredeemed credits
issued in conjunction with the Company's book club operations of $8.8 and $8.9,
accrued taxes of $8.8 and $9.0 and accrued interest of $6.2 and $2.1, at May 31,
1997 and 1996, respectively.
DEFERRED REVENUE
Revenues from magazine subscriptions are deferred at the time of sale. As
magazines are delivered to subscribers, proportionate shares of the receipts are
credited to revenue.
EARNINGS PER SHARE
Earnings per share are based on the combined weighted average number of
Class A, Common and Class A Share and Common Share Equivalents outstanding using
the treasury stock method, in accordance with the Accounting Principles Board
("APB"), Opinion No. 15, "Earnings per Share." Common Share Equivalents are
excluded from the computation of primary earnings per share in which they have
an anti-dilutive effect.
RECENT ACCOUNTING PRINCIPLES
Effective March 1, 1996, the Company early adopted Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets to be Disposed of." This statement requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. It also requires
that long-lived and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair market value less cost to sell.
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation", was adopted by the Company for fiscal 1997. The
statement requires expanded disclosure of stock-based compensation arrangements
and encourages, but does not require, compensation cost to be measured based on
the fair value of the equity instrument awarded. Companies are permitted to
continue to apply the provisions of APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees", which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company applied APB 25 and
related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost due to the exercise price of
options being at fair market value at date of grant. Note 6 contains a summary
of the pro forma effects on reported net income and earnings per share for 1997
and 1996 if the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS 123.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. The Company is required to adopt the provisions of SFAS 128 for
the quarter ended February 28, 1998. The principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements is related to
the exclusion of common stock equivalents in the determination of basic earnings
per share and the market price at which common stock equivalents are calculated
in the determination of diluted earnings per share. In accordance with the
provisions of SFAS 128, basic and diluted earnings per share are $0.02 and $0.02
at May 31, 1997, $2.02 and $1.97 at May 31, 1996 and $2.48 and $2.38 at May 31,
1995, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, (SFAS 130), "Reporting Comprehensive Income". This
statement establishes the standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company is required to adopt the provisions of SFAS
130 for fiscal 1999.
27
2. RESTRUCTURING COSTS
The Company established certain restructuring reserves in fiscal 1997,
resulting in a pretax charge of approximately $5.0. This charge consisted
primarily of employee severance and relocation costs of $3.3. The balance of the
reserve, $1.7, related to the restructuring of the Company's operations
including the closedown of the French operations, productivity improvements at
its distribution facility in Jefferson City, Missouri and the consolidation of
certain of its school publishing operations. At May 31, 1997, other accrued
liabilities include remaining reserves for severance and the closedown of the
French operations of $2.8.
3. INTERNATIONAL AND DOMESTIC OPERATIONS
International operations consist of the Company's book publishing and
distribution operations in Canada, Australia, the United Kingdom, New Zealand,
Mexico and India. As of May 31, 1997, 1996 and 1995, equity in the wholly-owned
subsidiaries in these countries was $48.2, $40.8 and $36.2, respectively.
The following table summarizes certain information for the fiscal years
ended May 31, 1997, 1996 and 1995, regarding the Company's domestic and
international operations.
DOMESTIC INTERNATIONAL
OPERATIONS OPERATIONS CONSOLIDATED
================================================================================
1997
================================================================================
Revenues $787.4 $178.9 $966.3
Operating income 9.4 8.3 17.7
Identifiable assets 653.4 131.0 784.4
================================================================================
1996
================================================================================
Revenues $778.9 $149.7 $928.6
Operating income 48.9 8.9 57.8(1)
Identifiable assets 566.0 107.2 673.2
===-============================================================================
1995
================================================================================
Revenues $620.3 $129.6 $749.9
Operating income 63.6 4.1 67.7
Identifiable assets 423.6 82.3 505.9
(1) Includes a non-cash charge relating to the impairment of certain assets of
$24.3.
4. LONG-TERM DEBT
Long-term debt consisted of the following at May 31, 1997 and 1996:
================================================================================
1997 1996
================================================================================
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
Loan agreement and revolver $ 49.5 $ 49.5 $ 74.0 $ 74.0
7% Notes due 2003, net of discount 124.7 122.0 -- --
Convertible subordinated debentures 110.0 89.4 110.0 115.0
Other debt 4.0 4.0 3.1 3.1
------ ------ ------ ------
Total debt 288.2 264.9 187.1 192.1
Less current portion (.3) (.3) (.3) (.3)
------ ------ ------ ------
Total long-term debt $287.9 $264.6 $186.8 $191.8
====== ====== ====== ======
Fair values were estimated based upon market quotes.
LOAN AGREEMENT
The Company and Scholastic Inc. are joint and several borrowers under a
Loan Agreement (the "Loan Agreement") with certain banks, which provides for
revolving credit loans and letters of credit. On April 11, 1995, the Company
amended and restated the Loan Agreement, extending the expiration date to May
31, 2000 and expanding the facility to $135.0, with a right, in certain
circumstances, to increase it to $160.0. The Loan Agreement was amended further
on May 1, 1996 and May 28, 1997. Interest charged under this facility is either
at the prime rate or .325% to .90% over LIBOR (as defined). There is a
28
commitment fee charged which ranges from .10% to .3625% on the unused portion.
The amounts charged vary based upon certain financial measurements. The Loan
Agreement contains certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions.
REVOLVER
On June 19, 1995, Scholastic Corporation and Scholastic Inc., (the
"Borrowers") entered into a Revolving Loan Agreement (the "Revolver") with Sun
Bank, N. A., which provides for revolving credit loans and expires on May 31,
2000. The Revolver has certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions. On
August 14, 1996, the Revolver was amended to increase the aggregate principal
amount to $35.0 and was amended further on May 30, 1997.
7% NOTES DUE 2003
On December 23, 1996, the Company issued $125.0 million of 7% Notes due
2003 (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. The proceeds (including accrued interest) from the
issuance of the Notes were $123.9 after deducting an underwriting discount and
other related offering costs. The Company utilized the net proceeds primarily to
repay amounts outstanding under the Loan Agreement and the Revolver.
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 the portion sold under Rule 144A is 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 net proceeds from the sale of the Debentures were $107.3 after
deduction of underwriting fees and offering expenses.
OTHER LINES OF CREDIT
The Company's international subsidiaries had lines of credit available of
$33.0 at May 31, 1997. There was $5.0 and $20.9 outstanding under these credit
lines at May 31, 1997 and 1996, respectively. The weighted average interest rate
on the outstanding amounts was 6.25% and 7.5% at May 31, 1997 and 1996,
respectively.
5. COMMITMENTS AND CONTINGENCIES
LEASE 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 $24.4, $20.5 and $16.9 for the fiscal
years ended May 31, 1997, 1996 and 1995, 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, 1997,
under all noncancelable operating leases, totaling $130.0, are as follows:
1998-$23.5; 1999-$18.5; 2000-$15.5; 2001-$12.0; 2002-$9.5; later years-$51.0.
29
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 and 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. The
litigation is in the early stages and the Company believes that such litigation
is without merit and plans to vigorously defend against it.
The Company is also engaged in various legal proceedings incident to its
normal business activities. In the opinion of the Company, none of such
proceedings is material to the consolidated financial position of the Company.
6. CAPITAL STOCK AND STOCK OPTIONS
The voting rights of the holders of Common Stock, except as provided by
statute, and except as may be established by the Board of Directors in favor of
any series of Preferred Stock which may be issued, are limited to the election
of such number of directors as shall equal at least one-fifth of the members of
the Board of Directors; the remainder are elected by the holders of Class A
Stock. 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.
At May 31, 1997, there were 23,000 options available for grant under the
Company's 1992 Stock Option Plan (the "Stock Option Plan"), which provides for
the grant of incentive stock options ("ISO's") and nonqualified stock options.
The Stock Option Plan expired on July 16, 1997 and no ISO's have been granted
under the Stock Option Plan.
On September 21, 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), which provides for the grant of ISO's and nonqualified stock
options. Two million shares of Common Stock were reserved for issuance upon the
exercise of options granted under this plan. At May 31, 1997, there were
1,977,875 options available for grant under the 1995 Plan.
Generally, options granted under the various plans may not be exercised for
a minimum of one year after grant and expire ten years and one day after grant.
Activity under the various stock option plans for the indicated fiscal
years ended May 31 was as follows:
================================================================================================================
1997 1996 1995
================================================================================================================
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ---------------- -------- ---------------- -------- ----------------
OUTSTANDING--
BEGINNING OF YEAR 1,075,400 $29.32 953,729 $17.88 1,067,159 $15.35
Granted 218,500 64.23 288,750 57.70 82,500 44.14
Exercised (338,175) 13.88 (165,579) 12.87 (185,180) 14.01
Cancelled (54,875) 56.30 (1,500) 34.50 (10,750) 34.50
-------- --------- --------
OUTSTANDING--
END OF YEAR 900,850 $41.94 1,075,400 $29.32 953,729 $17.88
======== ========= ========
EXERCISABLE--
END OF YEAR 436,363 $25.33 643,250 $14.50 737,479 $11.93
At May 31, 1997, for each of the following classes of options as determined
by range of exercise price, the information regarding weighted-average exercise
prices and weighted-average remaining contractual lives of each said class is as
follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE REMAINING NUMBER OF WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE OF CONTRACTUAL LIFE OF OPTIONS EXERCISE PRICE OF
OPTION OPTIONS OUTSTANDING OUTSTANDING CURRENTLY OPTIONS CURRENTLY
PRICE RANGE OUTSTANDING OPTIONS OPTIONS EXERCISABLE EXERCISABLE
----------- ----------- -------------- --------------- ----------- -----------------
$9.03 - $14.78 220,000 $9.39 3.0 years 220,000 $9.39
$27.75 - $39.68 193,400 $34.96 6.5 years 138,100 $34.52
$46.69 - $68.81 487,450 $59.40 8.3 years 78,263 $53.94
30
The Company adopted SFAS 123 for fiscal 1997. As provided for 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 option price of the Company's
stock options equaled the market price of the underlying stock on the date of
grant.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
================================================================================
1997 1996
================================================================================
Net income - as reported........................... $0.4 $31.9
Net income (loss) - pro forma...................... (0.8) 31.1
Primary earnings per share - as reported........... $0.02 $1.97
Primary earnings (loss) per share- pro forma....... (0.05) 1.93
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:
================================================================================
1997 1996
================================================================================
Expected dividend yield............................ 0.00% 0.00%
Expected stock price volatility ................... 0.184 0.195
Risk-free interest rate............................ 6.63% 6.53%
Expected life of options........................... 5 years 5 years
The weighted average fair value of options granted during 1997 and 1996
were $20.39 and $18.54 per share, respectively. For purposes of proforma
disclosure, the estimated fair value of the options is amortized to expense over
the options' vesting period and does not include grants prior to June 1, 1995.
As such, the pro forma net income and earnings per share are not indications of
future years.
On July 15, 1997, the Company granted options to purchase 1,277,738 shares
of Common Stock at a per share price of $35.19, which was the fair market value
as defined in the option plan at the date of grant. A portion of these were
issued in lieu of cash compensation and all vest over one to four years.
On December 14, 1993, the Company adopted the Non-Employee Director
Stock-For-Retainer Plan (the "Stock-For-Retainer Plan"). During the years ended
May 31, 1997, 1996 and 1995, the Company issued 1,683, 1,474 and 891 shares of
Common Stock at per share prices of $65.50, $74.88 and $50.63, respectively,
pursuant to the Stock-For-Retainer Plan.
31
7. INCOME TAX EXPENSE
Consolidated income tax expense for the indicated fiscal years ended May 31
was based on earnings before taxes as follows:
================================================================================
1997 1996 1995
================================================================================
Domestic.......................................... $(3.3) $40.6 $61.3
International wholly owned subsidiaries........... 4.3 6.0 1.0
----- ----- -----
$1.0 $46.6 $62.3
===== ===== =====
Income tax expense (benefit) for the indicated fiscal years ended May 31
consists of the following components:
================================================================================
1997 1996 1995
================================================================================
FEDERAL
Current (1) .................................... $1.9 $15.1 $18.9
Deferred........................................ (7.6) (5.3) 2.8
----- ----- -----
$(5.7) $ 9.8 $21.7
===== ===== =====
STATE AND LOCAL
Current.........................................$ 2.9 $1.7 $1.7
Deferred........................................ 0.6 (0.1) (0.1)
----- ----- -----
$ 3.5 $1.6 $1.6
===== ===== =====
INTERNATIONAL
Current.........................................$ 2.8 $ 2.6 $0.4
Deferred........................................ 0.0 0.7 0.0
----- ----- -----
$ 2.8 $ 3.3 $0.4
===== ===== =====
TOTAL
Current.........................................$ 7.6 $19.4 $21.0
Deferred........................................ (7.0) (4.7) 2.7
----- ----- -----
$ 0.6 $14.7 $23.7
===== ===== =====
- ----------
(1) For the fiscal years ended May 31, 1997, 1996 and 1995 current taxes payable
(receivable) are ($2.0), $12.2 and $9.1, respectively. The difference
between the current taxes payable or receivable and the current federal
income tax expense for each year is due to the federal tax benefit
associated with stock option exercises which have been reflected as an
increase to additional paid-in capital.
Total tax expense for the fiscal years ended May 31, 1997, 1996 and 1995
results in effective tax rates of 64.6%, 31.6% and 38.0%, respectively. The
provisions for income taxes attributable to continuing operations differ from
the amount of tax determined by applying the federal statutory rate as follows:
================================================================================
1997 1996 1995
================================================================================
Computed federal statutory provision................ $ 0.4 $16.3 $21.8
State income tax provision net of
federal income tax benefit........................ 2.2 1.0 1.0
Difference in effective tax rates on earnings of
foreign subsidiaries.............................. (0.2) (0.8) 0.1
Charitable contributions............................ (1.8) (2.0) (0.3)
Other - net......................................... 0.0 0.2 1.1
----- ----- -----
Total provision for income taxes.................. $ 0.6 $14.7 $23.7
===== ===== =====
32
The undistributed earnings of foreign subsidiaries at May 31, 1997 are
$35.8. It is the Company's intention to reinvest all remaining unremitted
earnings of its subsidiaries where permitted by foreign jurisdictions. The tax
on any distribution of such earnings would be substantially reduced by foreign
tax credits.
At May 31, 1997, the Company has a charitable deduction carryforward of
$15.1 which expires in fiscal years ended May 31, 2001 and 2002.
Deferred income taxes reflect tax carryforwards and 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 at May 31 for the indicated fiscal years
are as follows:
================================================================================
1997 1996
================================================================================
Deferred tax assets:
Inventory accounting..................................... $12.6 $9.0
Other accounting reserves................................ 7.6 9.3
Tax carryforwards........................................ 6.0 1.5
Postretirement, postemployment and pension obligations... 5.6 5.1
Theatrical motion picture accounting..................... 2.6 2.8
Other--net............................................... 1.5 --
----- ----
Total deferred tax assets.............................. 35.9 27.7
===== ====
Deferred tax liabilities:
Depreciation............................................. 2.3 2.7
Other--net............................................... -- 2.9
----- ----
Total deferred tax liabilities......................... 2.3 5.6
----- ----
Net deferred tax assets................................ $33.6 $22.1
===== ====
8. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the "Plan") which covers a
majority of the U.S. employees who meet certain eligibility requirements.
Benefits are based on years of service and on career average compensation. The
Plan is funded by contributions from 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 international subsidiaries in Australia and the United Kingdom have
defined benefit pension plans which cover those employees meeting minimum length
of service requirements. Benefits are based on years of service and on a
percentage of compensation near retirement. The plans are funded by
contributions from these subsidiaries and their employees. In fiscal year ended
May 31, 1995, the majority of the employees of the Australian subsidiary
terminated participation in the defined benefit pension plan and began
participating in a defined contribution plan. For fiscal years ended May 31,
1997, 1996 and 1995 the total expenses for these plans were $0.6, $0.5 and $0.4,
respectively. Canada's pension plan was terminated in fiscal 1993. Contributions
made to the pension plan were rolled over to a private plan to which employees
now have an option to contribute.
Total defined benefit pension plan costs for the indicated fiscal years
ended May 31 are summarized as follows:
================================================================================
1997 1996 1995
================================================================================
Service cost............................... $ 1.6 $ 1.4 $ 1.1
Interest cost.............................. 1.5 1.2 1.1
Actual return on plan assets............... (3.2) (2.2) (1.5)
Net amortization........................... 2.0 1.2 0.8
----- ----- -----
Total pension cost....................... $ 1.9 $ 1.6 $ 1.5
===== ===== =====
33
The funded status of the pension plans at May 31 is as follows:
ACCUMULATED PLAN ASSETS EXCEED
BENEFITS ACCUMULATED
EXCEED PLAN ASSETS BENEFITS
------------------ -----------------
=============================================================================================================
1997 1996 1997 1996
=============================================================================================================
Actuarial present value of benefit obligations:
Vested benefits....................................... $15.3 $13.1 $2.2 $1.8
Non-vested benefits................................... 0.6 0.7 -- --
----- ----- ---- ----
Accumulated benefit obligation.......................... 15.9 13.8 2.2 1.8
Effect of projected future salary increases........... 2.2 1.8 0.6 0.3
----- ----- ---- ----
Projected benefit obligation............................ 18.1 15.6 2.8 2.1
Plan assets at fair value............................... 17.7 13.5 2.9 2.3
----- ----- ---- ----
Plan assets less than (greater than) projected
benefit obligation.................................. 0.4 2.1 (0.1) (0.2)
Unrecognized net gain................................. 3.0 1.4 0.2 0.2
Unrecognized net transition asset (obligation)........ (1.2) (1.3) 0.2 0.1
Unrecognized prior service cost....................... (0.9) (1.0) (0.3) (0.1)
----- ----- ---- ----
Accrued pension cost included in
financial statements.................................. $1.3 $1.2 $-- $--
===== ===== === ====
Assumed rates:
Discount rate......................................... 8.0% 8.0% 9.0% 9.0%
Compensation increase factor.......................... 5.0% 5.0% 7.0% 7.0%
Plan assets consist primarily of stocks, bonds, money market funds,
insurance contracts and U.S. government obligations. The weighted-average
long-term rate of return on plan assets was 9.5% for plans with accumulated
benefits obligations that exceed their assets and 9.0% for plans with assets in
excess of their accumulated benefit obligations for fiscal 1997, 1996 and 1995.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. A majority of the
Company's domestic employees may become eligible for these benefits if they
reach normal retirement age while working for the Company.
The components of the net periodic postretirement benefit costs for the
indicated fiscal years ended May 31 are as follows:
================================================================================
1997 1996 1995
================================================================================
Service cost.......................................... $0.3 $0.5 $0.4
Interest cost on accumulated benefit obligation....... 0.8 0.8 0.9
---- ----- -----
Net periodic postretirement benefit cost.............. $1.1 $ 1.3 $ 1.3
==== ===== =====
The components of the accumulated postretirement benefit obligation included in
other noncurrent liabilities at May 31 are as follows:
================================================================================
1997 1996
================================================================================
Retirees........................................... $ 6.9 $ 6.7
Fully eligible active plan participants............ 1.6 2.0
Other active plan participants..................... 2.9 2.8
----- -----
Accumulated postretirement benefit obligation...... 11.4 11.5
Unrecognized net actuarial gain.................... 2.0 1.2
----- -----
Accrued postretirement benefit obligation.......... $13.4 $12.7
===== =====
34
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.0%. Service cost and interest components were determined
using a discount rate of 8.0%. The health care cost trend rate assumed was 11.0%
with an annual decline of 1.0% until the rate reaches 5.0% in the year 2002. An
increase of 1.0% in the health care cost trend rate would result in increases of
approximately $1.5 in the accumulated benefit obligation and $0.2 in the annual
net periodic postretirement benefit cost.
The Scholastic Inc. 401(k) Savings and Retirement Plan (the "401(k)")
allows participating employees to authorize payroll deductions up to 15%, except
for highly compensated employees who are limited to 10%, of their income on a
pretax basis and/or an after-tax basis. The payroll deductions are invested at
the direction of the participant in certain investment funds or in the Company's
Common Stock. For the 401(k) plan years ended May 31, 1997, 1996 and 1995, the
Company matched the employees' pretax payroll deductions (up to the lesser of 6%
of compensation or $9,500) by one dollar for each dollar of the first one
hundred dollars contributed and fifty cents for each dollar above one hundred
dollars. Such matching was made in cash. The terms of the 401(k) provide that
the Company's Board of Directors shall determine the Company's matching
contributions for each 401(k) plan year. The Company, at its sole discretion,
may also make discretionary contributions for the benefit of all participants
regardless of whether they elected to make pretax contributions to the 401(k).
For the fiscal years ended May 31, 1997, 1996 and 1995, the Company's 401(k)
matching contributions were $2.6, $2.0 and $1.9, respectively.
9. IMPAIRMENT OF ASSETS
Fiscal 1996 includes a non-cash charge relating to the impairment of
certain assets of $24.3 pre-tax, $14.9 after-tax, or $0.88 per fully diluted
share. A significant portion of this charge was determined in connection with
the Company's early adoption of SFAS 121. This charge consists of unamortized
prepublication and inventory costs of the Company's K-2 math program, several
older supplemental instructional publishing programs and other selected titles.
35
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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended May 31, 1997. 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 based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996 and the consolidated results of its
operations, and its cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles. 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.
Ernst & Young LLP
New York, New York
July 3, 1997
36
Supplementary Financial Information
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31,
1997 AND 1996 (UNAUDITED, AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
==============================================================================================================
1997
==============================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
Revenues............................... $158.6 $342.2 $210.7 $254.8 $966.3
Cost of goods sold..................... 93.7 165.8 118.8 152.4 530.7
Net income (loss)...................... (14.0) 38.5 (12.5) (11.6) 0.4
Net income (loss) per share:
Primary.............................. (0.88) 2.36 (0.78) (0.72) 0.02
Fully diluted........................ (0.88) 2.21 (0.78) (0.72) 0.02
==============================================================================================================
1996
==============================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
Revenues............................... $135.2 $294.6 $216.1 $282.7 $928.6
Cost of goods sold..................... 78.8 134.6 108.2 144.4 466.0
Net income (loss)...................... (9.8) 31.1 8.9 1.7(1) 31.9
Net income (loss) per share:
Primary.............................. (0.62) 1.92 0.55 0.10(1) 1.97
Fully diluted........................ (0.62) 1.81 0.55 0.10(1) 1.97
- -------------------
(1) The fourth quarter of fiscal year 1996 includes a charge of $14.9 net of tax
($0.84 per share) which relates to the write off of unamortized
prepublication costs and related inventory provisions. A significant portion
of the charge relates to the early adoption of Statement of Financial
Accounting Standards No. 121 (SFAS 121) which requires an evaluation of the
realization of long-lived asset carrying values.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
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 1, 1997)
NAME AGE POSITION
---- --- --------
Richard Robinson.................................. 60 Chairman of the Board, President and
Chief Executive Officer
Kevin J. McEnery.................................. 49 Executive Vice President and Chief
Financial Officer
Deborah A. Forte.................................. 43 Executive Vice President; Division Head,
Scholastic Productions
Barbara A. Marcus................................. 46 Executive Vice President, Children's
Book Publishing
Margery W. Mayer.................................. 45 Executive Vice President, Instructional
Publishing, Scholastic School Group
Ruth Otte......................................... 48 Executive Vice President, New Media
Hugh Roome........................................ 45 Executive Vice President, Promotion and
Sales, Scholastic School Group
Richard M. Spaulding.............................. 60 Director, Executive Vice President
Charles B. Deull.................................. 37 Senior Vice President, Legal and Business Affairs, Secretary
Jean L. Feiwel.................................... 44 Senior Vice President, Publisher, Children's Book Publishing
Ernest B. Fleishman............................... 60 Senior Vice President, Education and
Corporate Relations
Frank Grohowski................................... 56 Senior Vice President, Operations
David J. Walsh.................................... 61 Senior Vice President, International Operations
Helen V. Benham................................... 47 Director, Corporate Vice President,
Early Childhood Advisor
Claudia H. Cohl................................... 57 Vice President, Editorial Planning and
Development, Scholastic School Group
Larry V. Holland.................................. 38 Vice President, Corporate Human Resources
and Employee Services
Raymond Marchuk................................... 46 Vice President, Finance & Investor Relations
David D. Yun...................................... 49 President, Scholastic Book Fairs, Inc.
Karen A. Maloney.................................. 40 Director, Accounting and Financial Operations
Leslie G. Lista................................... 38 Corporate Controller
Vincent M. Marzano................................ 34 Treasurer
Richard Robinson has held his position with the Company or Scholastic Inc.,
for more than five years and has been a Director of Scholastic Inc. since 1971.
Kevin J. McEnery became Executive Vice President and Chief Financial
Officer in August 1995. Mr. McEnery joined the Company in September 1993 as Vice
President of Strategic Planning and Operations of the Magazine and Technology
groups. From April 1992 through September 1993 he was associated with the ITC
Group, a telecommunications consulting group based in Westport, CT as a Senior
Consultant. Prior to that he was a Senior Vice President and Chief Financial
Officer of a privately held consumer and medical products company.
Deborah A. Forte has been with Scholastic since 1984 serving as a Vice
President of Scholastic Productions, Inc., until 1994 when she was appointed
Executive Vice President, Scholastic Productions, Inc. Ms. Forte was appointed
Senior Vice President; Division Head, Scholastic Productions in January 1995 and
Executive Vice President; Division Head - Scholastic Productions in December
1996.
38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Barbara A. Marcus became Executive Vice President, Children's Book
Publishing in October 1991. Ms. Marcus joined Scholastic Inc. in July 1983 as
Vice President of Marketing and in October 1984, Ms. Marcus was also appointed
to the position of Associate Publisher.
Margery W. Mayer joined Scholastic Inc. in April 1990 as Executive Vice
President - Instructional Publishing and was appointed Executive Vice President,
Instructional Publishing, Scholastic School Group in June 1997. From 1987 until
1990, she was associated with the Ginn Division of Silver Burdett & Ginn Inc.,
as General Manager until August 1988 and as President, thereafter.
Ruth Otte became Executive Vice President, New Media in 1996. From 1986 to
1994 she served as President and Chief Operating Officer of Discovery Networks
and from 1994 until September 1995, she was President of Knowledge Adventure.
Hugh Roome joined the Company in September 1991 as Vice President, Home
Office Computing and in May 1993, he was appointed to the position of Senior
Vice President, Magazine Group. He was appointed Executive Vice President in
September 1996 and Executive Vice President, Promotions and Sales, Scholastic
School Group in June 1997. He was Vice President of MCI from 1989 until joining
the Company. From 1979 to 1989, Mr. Roome was the Director of Marketing and
Associate Publisher at Newsweek, Inc.
Richard M. Spaulding has held his position with the Company or Scholastic
Inc., for more than five years and has been a Director of Scholastic Inc. since
1974.
Charles B. Deull joined the Company in January 1995 as Senior Vice
President, Legal and Business Affairs. Mr. Deull was associated with the law
firm of Cleary, Gottlieb, Steen and Hamilton from 1986 until joining Scholastic.
He was appointed Secretary in July 1997.
Jean L. Feiwel was appointed Senior Vice President, Publisher - Children's
Book Publishing in December 1993 and was appointed Publisher in April 1997. Ms.
Feiwel joined Scholastic Inc. in July 1983 and has served as Vice President,
Editor-in-Chief of the Book Group since 1990.
Ernest B. Fleishman joined Scholastic Inc. in June 1989 as Senior Vice
President, Education and Corporate Relations. Mr. Fleishman was the
Superintendent for the Greenwich, Connecticut Public School System from 1976
until joining Scholastic Inc.
Frank Grohowski was appointed Senior Vice President, Operations of the
Company in August 1995. Mr. Grohowski was Vice President of Manufacturing for
Scholastic Inc. since 1985.
David J. Walsh was elected Senior Vice President in charge of International
Operations for Scholastic Inc. in November 1983.
Helen V. Benham joined Scholastic Inc. in 1974. In June 1990 she was named
Vice President and Publisher of the Early Childhood Division and in 1996 was
named Corporate Vice President, Early Childhood Advisor. She became a Director
of the Company in September 1992.
Claudia H. Cohl has been associated with Scholastic Inc. since 1975 and has
been a Vice President of Scholastic Inc. for more than five years. She is
currently Vice President - Editorial Planning and Development - Scholastic
School Group. She has served in many capacities, including Editor-in-Chief of
HOME OFFICE COMPUTING(R).
Larry V. Holland joined the company in August 1994 as Vice President, Human
Resources and in fiscal 1997 was appointed Vice President, Corporate Human
Resources and Employee Service. Prior to joining the Company, Mr. Holland held
various positions with MCI since 1990 and left MCI as Senior Director of Human
Resources.
Raymond Marchuk has been associated with Scholastic Inc. since November
1983 and has been Vice President for more than five years. He is currently Vice
President of Finance and Investor Relations.
David D. Yun became President of Scholastic Book Fairs, Inc. ("SBF, Inc.")
in January 1992. Mr. Yun joined the Company in June 1988 as Vice President of
Marketing for SBF, Inc. In July 1990, he was appointed to the position of
Executive Vice President of SBF, Inc.
39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Karen A. Maloney joined Scholastic in July 1997 as Director of Accounting
and Financial Operations. From July 1996 through January 1997, she was employed
by Calvin Klein as Vice President, Corporate Controller and subsequently worked
as an independent consultant. From July 1995 through June 1996, she was employed
by Bernard Chaus, Inc. as Vice President, Corporate Controller. From December
1990 through July 1995, she was employed by Bidermann Industries Corp., and from
June 1992 served as Vice President, Controller.
Leslie G. Lista has been associated with Scholastic Inc. since April 1984
and has served in many capacities. She became Corporate Controller in April
1987.
Vincent M. Marzano has been associated with Scholastic Inc. since August
1987. He became Treasurer of the Company in December 1993. Previously, he served
the Company in many capacities, including Manager of Planning and Analysis.
Helen V. Benham is the wife of Richard Robinson. There are no other family
relationships among any of the executive officers of the Company.
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.
40
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 years ended May 31,
1997, 1996 and 1995
- Consolidated Balance Sheet at May 31, 1997 and 1996
- Consolidated Statement of Changes in Stockholders' Equity for the
years ended May 31, 1997, 1996 and 1995.
- Consolidated Statement of Cash Flows for the years ended May 31,
1997, 1996 and 1995.
- 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:
EXHIBIT
NUMBER
-------
3 (a) - Amended and Restated Certificate of Incorporation of the
Registrant. (1)
(b) - By-Laws of the Registrant. (2)
4 (a) - Amended and Restated Loan Agreement dated April 11, 1995
between the Registrant and Citibank, N.A., as agent,
Marine Midland Bank, Chase Manhattan Bank, N.A., The
First National Bank of Boston and United Jersey Bank.
(3)
(b) - Amendment to the Amended and Restated Loan Agreement
dated May 1, 1996. (4)
(c) - Amendment to the Amended and Restated Loan Agreement
dated May 28, 1997.
(d) - Revolving Loan Agreement dated June 19, 1995 between
the Registrant and Sun Bank, National Association,
as amended August 14, 1996 and May 30, 1997. (5)
(e) - Overdraft Facility dated June 1, 1992, as amended on
October 30, 1995 between Scholastic Canada Ltd. and
CIBC. (5)
(f) - Overdraft Facility dated June 24, 1993 between
Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Citibank, N.A. (5)
(g) - Overdraft Facility dated May 14, 1992 as amended on
June 30, 1995, between Scholastic Ltd. (formerly
known as Scholastic Publications Ltd.) and Midland Bank.
(5)
(h) - Overdraft Facility 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. (5)
(i) - Overdraft facility dated April 20, 1993 between
Scholastic New Zealand Ltd. (formerly Ashton Scholastic
Ltd.) and ANZ Banking Group Ltd. (5)
(j) - Indenture dated August 15, 1995 relating to $110
million of 5% Convertible Subordinated Debentures due
August 15, 2005 issued by the Registrant. (6)
(k) - Indenture dated December 15, 1996, relating to $125
million of 7% Notes due December 15, 2003 issued by the
Registrant. (7)
10 Material Contracts:
(a) - Scholastic Inc. 401(k) Savings and Retirement Plan, as
amended and restated as of June 1, 1992. (6)
(b) - Amended and Restated Retirement Income Plan for
Employees of Scholastic Inc. effective as of July 1,
1989. (6)
(c) - 1992 Stock Option Plan. (8)
41
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(d) - 1995 Stock Option Plan (9)
(e) - Lease dated as of January 28, 1992 between Ise
Hiyoko, Inc. and Scholastic Inc. (10)
(f) - Amendment dated as of April 1, 1993 to the lease
agreement between Ise Hiyoko, Inc. and Scholastic Inc.
(11)
(g) - Outside Directors' Stock Option Plan. (8)
(h) - 1997 Outside Director's Stock Option Plan.
(i) - Non-Employee Director Stock-For-Retainer Plan (12)
(j) - Industrial Development Agency of the City of New York
documents:
1) Lease Agreement dated December 1, 1993. (11)
2) Indenture of Trust Agreement dated December 1, 1993.
(11)
3) Project Agreement dated December 1, 1993. (11)
4) Sales Tax Letter dated December 3, 1993. (11)
11 Computation of Net Income per Class A, Common and Class A
Share and Common Share Equivalents.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
(b) Reports on form 8-K
(c) The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Exhibits in
Exhibit Volume I.
(d) The response to this portion of Item 14 is submitted as a separate
section of this report.
- ----------
FOOTNOTES:
(1) 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.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-45022) as filed with the Commission on January 10,
1992 (the "1992 Registration Statement").
(3) Incorporated by reference to the Company's Form 10-Q for the quarter ended
February 28, 1995 as filed with the Commission on April 13, 1995 (File No.
0-19860).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28, 1996 (File No. 0-19860).
(5) Such long-term debt does not individually amount to more than 10% of the
total assets of the Registrant 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 Registrant hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28, 1995 (File No. 19860).
(7) 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.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 27, 1992 (File No. 0-19860).
(9) 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.
(10) Incorporated by reference to Amendment No. 1 to the 1992 Registration
Statement as filed with the Commission on February 21, 1992.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 26, 1994 (File No. 0-19860).
(12) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-74064) as filed with the Commission on January 11,
1994.
42
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 26, 1997 SCHOLASTIC CORPORATION
By /s/RICHARD ROBINSON
-------------------
RICHARD ROBINSON, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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 26, 1997
- ------------------------------------- Chief Executive Officer and
RICHARD ROBINSON Director (Principal Executive
Officer)
/s/ RICHARD M. SPAULDING Executive Vice President and Director August 26, 1997
- -------------------------------------
RICHARD M. SPAULDING
/s/ Kevin J. McEnery Executive Vice President, Chief August 26, 1997
- ------------------------------------- Financial Officer (Principal
KEVIN J. MCENERY Financial & Accounting Officer)
/s/ REBECA M. BARRERA Director August 26, 1997
- -------------------------------------
REBECA M. BARRERA
/s/ HELEN V. BENHAM Director August 26, 1997
- -------------------------------------
HELEN V. BENHAM
/s/ FREDERIC J. BISCHOFF Director August 26, 1997
- -------------------------------------
FREDERIC J. BISCHOFF
/s/ JOHN BRADEMAS Director August 26, 1997
- -------------------------------------
JOHN BRADEMAS
/s/ JOHN C. BURTON Director August 26, 1997
- -------------------------------------
JOHN C. BURTON
/s/ RAMON C. CORTINES Director August 26, 1997
- -------------------------------------
RAMON C. CORTINES
/s/ ALONZO A. CRIM Director August 26, 1997
- -------------------------------------
ALONZO A. CRIM
43
SIGNATURE TITLE DATE
--------- ------ -----
/s/ CHARLES T. HARRIS, III Director August 26, 1997
- -------------------------------------
CHARLES T. HARRIS, III
/s/ ANDREW S. HEDDEN Director August 26, 1997
- -------------------------------------
ANDREW S. HEDDEN
/s/ MAE C. JEMISON Director August 26, 1997
- -------------------------------------
MAE C. JEMISON
/s/ RICHARD A. KRINSLEY Director August 26, 1997
- -------------------------------------
RICHARD A. KRINSLEY
/s/ JOHN G. MCDONALD Director August 26, 1997
- -------------------------------------
JOHN G. MCDONALD
/s/ AUGUSTUS K. OLIVER, II Director August 26, 1997
- -------------------------------------
AUGUSTUS K. OLIVER II
44
SCHOLASTIC CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 1997
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
SCHOLASTIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 31, 1997, 1996 AND 1995
(AMOUNTS IN MILLIONS)
ADDITIONS
------------------------
BALANCE AT BALANCE AT
BEGINNING CHARGED TO CHARGED TO END OF
DESCRIPTION OF YEAR INCOME GOODWILL WRITE OFFS YEAR
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
May 31, 1997:
Reserve for royalty advances........ $24.9 $ 2.3 -- $ 2.1 $25.1
===== ===== ===== ===== =====
Reserve for obsolescence............ $27.1 $21.1 $ 2.2 $16.4 $34.0
===== ===== ===== ===== =====
Reserve for returns................. $27.6 $68.7 -- $66.1(1) $30.2
===== ===== ===== ===== =====
May 31, 1996:
Reserve for royalty advances........ $16.6 $ 1.9 $ 6.5 $ 0.1 $24.9
===== ===== ===== ===== =====
Reserve for obsolescence............ $18.2 $11.4 $ 7.5 $10.0 $27.1
===== ===== ===== ===== =====
Reserve for returns................. $19.8 $47.7 -- $39.9(1) $27.6
===== ===== ===== ===== =====
May 31, 1995:
Reserve for royalty advances........ $14.8 $ 2.0 -- $ 0.2 $16.6
===== ===== ===== ===== =====
Reserve for obsolescence............ $15.6 $ 7.0 -- $ 4.4 $18.2
===== ===== ===== ===== =====
Reserve for returns................. $14.9 $30.4 -- $25.5(1) $19.8
===== ===== ===== ===== =====
- -------------------
(1) Represents actual returns charged to reserve.
S-1
EXHIBIT INDEX
PAGE
EXHIBIT DESCRIPTION NUMBER
------- ----------- --------
3 (a) - Amended and Restated Certificate of Incorporation of the Registrant. (1)
(b) - By-Laws of the Registrant. (2)
4 (a) - Amended and Restated Loan Agreement dated April 11, 1995 between the Registrant and Citibank,
N.A., as agent, Marine Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of Boston
and United Jersey Bank. (3)
(b) - Amendment to the Amended and Restated Loan Agreement dated May 1, 1996. (4)
(c) - Amendment to the Amended and Restated Loan Agreement dated as of May 28, 1997.
(d) - Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National Association,
as amended August 14, 1996 and May 30, 1997. (5)
(e) - Overdraft Facility dated June 1, 1992, as amended on October 30, 1995 between Scholastic Canada Ltd.
and CIBC. (5)
(f) - Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Citibank, N.A. (5)
(g) - Overdraft Facility dated May 14, 1992 as amended on June 30, 1995, between Scholastic Ltd. (formerly
known as Scholastic Publications Ltd.) and Midland Bank. (5)
(h) - Overdraft Facility 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. (5)
(i) - Overdraft Facility dated April 20, 1993 between Scholastic New Zealand Ltd. (formerly Ashton Scholastic
Ltd.) and ANZ Banking Group Ltd. (5)
(j) - Indenture dated August 15, 1995 relating to $110 million of 5% Convertible Subordinated Debentures
due August 15, 2005 issued by the Registrant. (6)
(k) - Indenture dated December 15, 1996, relating to $125 million of 7% Notes due December 15, 2003 issued by
the Registrant. (7)
10 Material Contracts:
(a) - Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1, 1992. (6)
(b) - Amended and restated Retirement Income Plan for Employees of Scholastic Inc. effective as of July 1, 1989.
(6)
(c) - 1992 Stock Option Plan. (8)
(d) - 1995 Stock Option Plan. (9)
(e) - Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc. (10)
(f) - Amendment agreement dated as of April 1, 1993 between Ise Hiyoko, Inc. and Scholastic Inc. (11)
(g) - Outside Directors' Stock Option Plan. (8)
(h) - 1997 Outside Directors' Stock Option Plan.
(i) - Non-Employee Director Stock-For-Retainer Plan. (12)
(j) - Industrial Development Agency of the City of New York documents:
1) Lease Agreement dated December 1, 1993. (11)
2) Indenture of Trust Agreement dated December 1, 1993. (11)
3) Project Agreement dated December 1, 1993. (11)
4) Sales Tax Letter dated December 3, 1993. (11)
11 Computation of Net Income per Class A, Common and Class A Share and Common Share
Equivalents.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
FOOTNOTES:
(1) 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.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-45022) as filed with the Commission on January 10,
1992 (the "1992 Registration Statement").
(3) Incorporated by reference to the Company's Form 10-Q for the quarter ended
February 28, 1995 as filed with the Commission on April 13, 1995
(File No. 0-19860).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28,1996 (File No. 0-19860).
(5) Such long-term debt does not individually amount to more than 10% of the
total assets of the Registrant 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 Registrant hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28, 1995 (File No. 0-19860).
(7) 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.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 27, 1992 (File No. 0-19860).
(9) 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.
(10) Incorporated by reference to Amendment No. 1 to the 1992 Registration
Statement as filed with the Commission on February 21, 1992.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 26, 1994 (File No. 0-19860).
(12) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-74064) as filed with the Commission on January 11,
1994.