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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
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 $748,797,732 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, 1996.
On June 28, 1996, 828,100 shares of Class A Stock, par value $.01, and
15,048,540 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 17, 1996.
________________________________________________________________________________
PART I
ITEM I. BUSINESS
Scholastic Corporation, together with its subsidiaries and affiliates
(collectively hereinafter referred to as 'Scholastic' or the 'Company'), is
among the leading publishers and distributors of children's books, classroom and
professional magazines, and other educational materials, with operations in the
United States, Canada, the United Kingdom, Australia, New Zealand, France and
Mexico. Scholastic distributes most of its products directly to children and
teachers in elementary and secondary schools. During its seventy-six 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, trade distribution in 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 business in the United States. In fiscal 1996,
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 entered the
market for core-curriculum materials and has been investing 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 consumer magazines. In fiscal 1996, the United States circulation of the
Company's classroom magazines was 7.1 million. The Company's other domestic
operations include the distribution of educational computer software, the
production and distribution of child and family-oriented video and television
programming, and the merchandising and licensing of book properties.
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 school sales force of full-time and part-time representatives
calling on schools to sell its supplementary texts, educational software and
library book programs, and its newly developed 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 serve
primarily as distributors of children's books published by Scholastic as well as
outside publishers. For the year ended May 31, 1996, approximately 80% 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:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Domestic
Book publishing................................. $657,511 $516,827 $428,283 $361,282 $305,896
Magazine publishing............................. 81,595 84,027 72,964 66,661 64,037
Video and New Media............................. 39,795 19,491 17,998 17,550 15,762
International........................................ 149,698 129,546 112,345 106,784 103,650
-------- -------- -------- -------- --------
Total...................................... $928,599 $749,891 $631,590 $552,277 $489,345
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Scholastic's revenues have grown at an average annual compounded rate (the
'compounded growth rate') of approximately 17% from fiscal 1992 through fiscal
1996. This growth was driven primarily by
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Scholastic's domestic book publishing revenues which have yielded a compounded
growth rate of approximately 21%.
DOMESTIC BOOK PUBLISHING (71% 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 in addition, has significantly expanded its trade
presence in recent years. As a result, Scholastic's domestic book publishing
revenues have more than doubled from fiscal 1992 through fiscal 1996.
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 for titles
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 independent printers. The
printers generally are 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 trade distribution to retail bookstores. 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. The Company's trade channel has grown
significantly in recent years, with sales in fiscal 1996 up in excess of 60%
over fiscal 1995 and more than double the fiscal 1994 level. 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
volumes help attract top quality authors, editors, illustrators and publishers
seeking widespread distribution in both the specialized school market and the
trade market.
BOOK CLUBS
In fiscal 1996, the Company operated ten school-based book clubs:
Firefly'r', serving pre-kindergarten and kindergarten students; SeeSaw'r',
serving kindergarten and first grade students ('K-1' grades); 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 and TAB Book Club'r', serving sixth, seventh and eighth grade students.
As of January 23, 1996, the Company acquired and began running three Trumpet
clubs, which 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, e.g. -- 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,
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Thrills & Chills, Clifford's Learning Library, Hello Reader, Box Car, Thriller,
The Magic School Bus and Laugh Attack, which are book club continuity programs
promoted primarily through schools, which deliver paperback books to children at
home and bill parents at home.
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 more than 75% of these teachers
using Scholastic book clubs sometime during the year. Domestic book club
revenues have grown in recent years, primarily as a result of the expansion of
book club continuity programs, volume increases in its school-based book clubs,
the purchase of additional clubs, increases in special book club offers, and to
a lesser degree, because of inflation-related price increases and the selection
by children of higher-priced items.
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 them 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 primarily for use in their
classrooms.
The sources of books for the Company's school book clubs are reprints
licensed from other publishers for school distribution, original publications
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 most orders for its book clubs, as well
as for its other school sales (except book fairs) and trade distribution, from
its warehouse and distribution facility in Jefferson City, Missouri. Orders for
the book clubs are shipped to customers by Roadway Package System, United Parcel
Service and U.S. Mail and generally are delivered within 14 days from when 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 and expedite shipments.
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 has grown its book fair business 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.
Book fairs are generally one 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
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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 schools retain a portion of book fair sale proceeds to
be used to purchase books, supplies and equipment for the school.
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.
Over two-thirds of all titles offered in the Company's book fairs are
licensed reprints or are purchased directly from other publishers.
The Company operates its book fairs in the United States on a regional
basis through 15 sales offices and 73 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 service 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 1995 sponsored a Scholastic Book Fair
again in fiscal 1996.
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', The Baby-sitters Club'r', The
Magic School Bus'r', and Clifford The Big Red Dog'r' series. The Company
believes that its increased presence in the trade market is important in
attracting outside authors for publication and complements the Company's
school-based book distribution businesses.
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 and collections for Scholastic in connection with trade
distribution.
The Company's sales in the trade market are led by the highly successful
Goosebumps'r' series, with 68 titles and 150 million copies in print, and The
Baby-sitters Club'r' series, with 245 titles published and 149 million copies in
print. Another Scholastic-developed property that also generates significant
sales is The Magic School Bus'r' series with 23 titles published and 24 million
copies in print. Series such as I Spy'tm', Clifford The Big Red Dog'r' and Hello
Reader'r' continue to anchor the successful Cartwheel Books'r' imprint. The
Scholastic Children's Dictionary is being published in the Summer of 1996 and
will greatly enhance the reference line which already includes successful series
such as First Discovery and Voyages of Discovery. The Blue Sky Press'r' and
Scholastic Press'r' imprints have attracted some of the best talents in
children's publishing, including Eve Bunting, Leo and Diane Dillon, Virginia
Hamilton, Barry Moser, Walter Dean Myers, Dav Pilkey, Cynthia Rylant, Mark
Teague, Nancy Willard and Ed Young.
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 1996, 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.
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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 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
in addition to managing classroom and library sales of children's books through
the Company's school sales force. Based on industry research, the Company
believes that the K-6 market for instuctional material in such areas as language
arts, math, science, social studies, health, etc. is in excess of $2.0 billion
annually.
Publishing for the K-6 market is being affected by a number of factors,
including 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:
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; focus its publishing in
language arts and science where the Company has successful book and magazine
publishing programs; 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. To implement these strategies, the Company has expanded its
marketing and editorial staff and is investing in training and expanding its
school sales force.
Pursuant to this strategy, the Company completed the publication of
Scholastic Literacy Place'r' its K-6 reading program, and Solares'tm', a Spanish
elementary reading program. The Company is pleased with the market reaction to
Scholastic Literacy Place'r', especially in Florida and certain midwestern
states. The program is also being submitted for adoption in California, the
single largest adoption market, and several other states. The Company is
confident the program meets the curriculum requirements for California and those
other states.
In fiscal 1996, the Company also completed a revision and update of its
popular K-6 grade science program, Scholastic Science Place'r'. Sales of
Scholastic Science Place in Kentucky, Alabama and other states were strong. The
Company expects continued success in open terrritory states with the updated
program as it plans the publication of the second edition of Scholastic Science
Place.
The Company expanded Wiggleworks'r', its standard-setting CD-ROM based
beginning literacy program, to include a Windows'r' version, in addition to the
popular Macintosh-based product. Also, a network version will be ready for
shipment in fiscal 1997.
The Early Childhood publishing division's, The 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. The total spending on
prepublication costs relating to these core-curriculum programs in early
childhood, reading, language arts, science, technology and math has been
approximately $100.0 million from fiscal 1991 to fiscal 1996.
In the fourth quarter of fiscal 1996, the Company recorded a charge for
programs that did not meet market needs or are being deemphasized. This charge
consisted of the unamortized prepublication and inventory costs of the Company's
K-2 math program and several older supplemental instructional programs.
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MAGAZINE PUBLISHING (9% 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 helps
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 also publishes two consumer magazines for small business and home office
professionals and a magazine for parents of children in pre-K and Kindergarten
classes.
CLASSROOM MAGAZINES
The Company's 34 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 U.S. magazines are Scholastic
News'r' and Junior Scholastic'r'.
The Company's classroom magazine circulation in the United States for
fiscal 1996 was 7.1 million. Approximately two-thirds of the circulation is in
the K-6 grades, with the balance in grades seven through twelve. In fiscal 1996,
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 or
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 1996. Several of the magazines distributed in secondary schools carry
advertising.
The Company markets its classroom magazines largely by direct mail and
telephone 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. In
fiscal 1996, the Company developed programs for the United States Department of
Agriculture, Discover Card Services, Inc., Fuji Photo Film USA, NYNEX
Corporation, the Michael Jordan Foundation, Paramount Pictures Inc. and AT&T.
PROFESSIONAL PUBLISHING AND EARLY CHILDHOOD PUBLISHING
The Company publishes four magazines directed at teachers and educational
professionals: Instructor'tm', Early Childhood Today'tm', Electronic Learning'r'
and Scholastic Coach. Total circulation for these magazines in fiscal 1996 was
in excess of 400,000. The magazines are distributed throughout the academic
year. Subscriptions are solicited by direct mail to teachers and subscriptions
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. Scholastic Parent and
Child's circulation is approximately 1.0 million. The magazines carry outside
advertising, advertising for the Company's other products and advertising for
clients that sponsor customized programs. Sponsors include Microsoft Corp.,
Apple Computer, Viacom International Inc., General Mills, Inc., Disney and the
Chrysler Corporation. In fiscal 1996, advertising revenue represented the
majority of the professional publishing and early childhood magazine revenues.
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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-K and kindergarten curriculum
program, The Early Childhood Workshop. In fiscal 1996, sales of The Early
Childhood Workshop represented approximately two-thirds of the market share in
the Texas state adoption, producing revenues of approximately $20.0 million.
Revenues from these items are included in domestic book publishing revenues.
SCHOLASTIC SOHO GROUP
In 1983, the Company introduced a national consumer magazine, now called
Home Office Computing'r'. In its 13th year, Home Office Computing is a leading
magazine for technology reliant home office professionals. In recognition of the
magazine's rapidly expanding franchise as the leading publisher for the small
office and home office ('SOHO') market, the Company reorganized this business as
the SOHO group. In fiscal 1996, the group launched a sister publication entitled
Small Business Computing'tm'. This new offering, combined with the growth of
custom publishing, is expected to result in higher revenues for the SOHO group
in fiscal 1997. With combined circulation of 560,000, both magazines attract
companies such as America Online, Epson, IBM, Microsoft Corp. and Hewlett
Packard, among others, as its principal advertisers. In fiscal 1996, the SOHO
group carried 890 pages of advertising. The group also provides specialized
newsletters and books. It also has a presence on America Online and the World
Wide Web and sells sponsorships for both sites.
VIDEO AND NEW MEDIA (4% OF REVENUES)
FILMED ENTERTAINMENT AND 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 and develops products originated by third parties. SPI
orchestrates consumer marketing campaigns and manages the licensing of consumer
products and promotions for each franchise. SPI is also responsible for the
selection of video cassettes sold through the book clubs and for sales of books
and other products through non-traditional channels.
In fiscal 1996, the SPI-produced The Magic School Bus'tm' ('MSB')
television series aired its second season on PBS and completed production of an
additional 13 episodes for the third season. Thirteen additional episodes will
be produced in fiscal 1997, bringing the series total to 52. The series will air
daily in fall 1996. MSB, which has won numerous awards including an Emmy for
Lily Tomlin, is the most popular series for school-aged children on PBS. In
November 1995, SPI launched the Traveling Magic School Bus, an actual recreation
of the bus from the book and animated series, which through April 1996 has
traveled around the country visiting over 50 schools, libraries, retail stores
and book fairs, reaching nearly 250,000 fans. In addition to the continuation of
the domestic marketing and consumer products program for MSB, SPI initiated an
international licensing program during fiscal 1996 in conjunction with
independent licensing agents in the United Kingdom, Italy, Germany and France.
The series' television rights have been licensed in all major international
territories by Nelvana Ltd., Scholastic's international distributor. Warner Home
Video successfully continued to release the episodes of the first two seasons
domestically on video cassette. SPI co-produced its third and fourth in a series
of MSB CD-ROM's with Microsoft Corporation on Oceans and Geology. All MSB
CD-ROM's are in the top 20 best-selling titles for children.
In October 1995, the SPI-produced Goosebumps'r' TV series premiered with a
one-hour special on the Fox Children's Network ('FCN'). The first 13 episodes of
Goosebumps aired this fiscal year and was rated the #1 children's series on
television. The inaugural video cassette released by Fox Home Video in March
1996, the premiere one-hour prime time special, 'The Haunted Mask', was on the
list of top-selling videos when initially released. An additional 17 episodes
and four one hour specials have been ordered by FCN; two of the specials aired
in fiscal 1996, with the balance to air during the 1996/1997 broadcast year. The
success of the TV series has helped launch a very successful Goosebumps
marketing and consumer products program. There are currently 33 Goosebumps
licensees producing
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over 1,000 different products. In addition, during fiscal 1996, SPI was able to
secure major domestic promotional campaigns with General Mills and Kraft. Major
domestic consumer promotions planned for fiscal 1997 include four divisions of
PepsiCo (Taco Bell, Frito Lay, Pepsi and Pizza Hut), as well as the Hershey
Corporation. Saban International, on behalf of FCN, is currently licensing
Goosebumps TV rights internationally. During fiscal 1997, Goosebumps marketing
and consumer products programs will launch internationally in Australia, New
Zealand, the United Kingdom, Germany and Canada. The first Goosebumps CD-ROM is
expected to be released by DreamWorks SKG, in conjunction with their partner
Microsoft Corporation, during fiscal 1997.
Other Scholastic franchises in development for potential multimedia
exploitation include Animorphs'tm', one of the Company's new children's book
series. SPI also has a variety of original children's and family oriented
projects in development as the basis of future programming opportunities.
During fiscal 1996, SPI-produced properties, including The Magic School Bus
and Goosebumps TV series episodes, as well as the feature films Indian in the
Cupboard and The Baby-sitters Club, generated strong video cassette sales
through Scholastic's Book Clubs. Book sales through non-traditional channels
increased as a result of strong merchandising placement for the Company's
franchises in retail accounts as well as promotional premium book opportunities
working cooperatively with SPI's marketing group. These book revenues are
included in domestic book publishing revenues.
TECHNOLOGY AND NEW MEDIA
In fiscal 1994, the Company created a technology and new media division.
The mission of this division is threefold: (1) publish and sell educational
software and multimedia products to schools and homes; (2) support other
Scholastic divisions' technology efforts (including the creation and integration
of technology components into the Instructional Publishing group's
core-curriculum materials); and (3) explore and develop opportunities in
telecommunications and interactive networks, including the Scholastic
Network'tm', which is available to educators via America Online and the
Internet, as well as Internet-based applications for delivery of Scholastic
products and services.
The Company has published educational computer 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 after its classroom book
clubs. In fiscal 1997, the Company will launch 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, through a special arrangement with
America Online, the Scholastic Network'tm', the first online service developed
especially for educators and students. It offers compelling in-class experiences
for the kindergarten through twelfth grade market and will be available on the
Internet in fiscal 1997. Also in fiscal 1994, the Company initiated a corporate
presence on the Internet with a home page on the World Wide Web. Scholastic.com
provides users of the World Wide Web with an overview of the Company's
activities, resource libraries for educators, an education store and special
programming tied to Scholastic Network's content. In fiscal 1997, the Scholastic
Network'tm' will be part of Scholastic.com as a paid service.
Scholastic increased its video presence with the acquisition in fiscal 1996
of Weston Woods Studios, Inc., a producer of award-winning videos of animated
versions of children's books.
Revenues from video and new media group in the aggregate have historically
been less than 5% of the Company's revenues and profitability has been marginal.
The Scholastic Network'tm' has generated a loss since its launch in fiscal 1994.
INTERNATIONAL (16% OF REVENUES)
Scholastic conducts its international operations through six wholly-owned
subsidiaries located in Canada, Australia, the United Kingdom, New Zealand,
France and Mexico. The operations in France and Mexico are tests of school-based
distribution in these countries while the Company's other
8
subsidiaries publish and distribute children's books, magazines, supplementary
text products and educational software. In fiscal 1996, approximately 80% of
international revenues were derived from the sale of children's books.
The Company markets its products internationally in the same manner as in
the United States and, therefore, markets 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 distributes a substantial
percentage of United States originated Scholastic books, whereas the United
Kingdom subsidiary distributes very few. Scholastic products that were
originated in the United States account for approximately 40% of Australia's and
New Zealand's lines of children's books.
In fiscal 1996, the Company acquired School Book Fairs Ltd. ('School Book
Fairs'), the United Kingdom subsidiary of Pages Inc. The Company is in the
process of integrating School Book Fairs with its own school book fair business,
Scholastic Book Fairs, to form a single operating unit while continuing to
market the two separate and competitive book fair brands.
In fiscal 1994, the Company purchased the United Kingdom based Mary Glasgow
Publications, a publisher of foreign language and English language reading
magazines which are distributed throughout Europe and North America.
Scholastic's domestic classroom magazine division distributes these foreign
language magazines in the United States and Scholastic's Canadian subsidiary
markets these in Canada.
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 educational materials market, including one other national school
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, producers of programming, 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 educational
materials 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, 1996, Scholastic employed approximately 3,800 persons in
full-time jobs and 650 in hourly or part-time jobs in the United States and
approximately 1,000 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
countries where the Company has international subsidiaries. The Company has also
registered in the United States the names of each of its major domestic book
clubs, the titles of its major 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'r' and The
Magic School Bus'r'.
All of the Company's publications, including books, magazines and software,
are subject to copyright protection. Copyright and trademark infringement is
vigorously defended by the Company and, as necessary, outside counsel may be
retained to assist in such protection.
9
ITEM 2. PROPERTIES
The principal facilities of the Company are as follows:
- - ------------------------------------------------------------------------------------------------------------------
LOCATION USE SIZE OWNED/LEASED
UNITED STATES
New York, New York Offices 418,924 sq. ft. Leased
Jefferson City, Missouri Office and warehouses 1,257,262 sq. ft. Owned
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
Longwood, Florida Office and warehouse 42,000 sq. ft. Owned
Elk Grove, Illinois Office and warehouse 39,416 sq. ft. Leased
Lyndhurst, New Jersey Accounting and information 30,510 sq. ft. Leased
processing center
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
Bartlett, Tennessee Office and warehouse 5,550 sq. ft. Leased
INTERNATIONAL
Gosford, N.S.W., Australia Office and warehouses 119,007 sq. ft. Owned
Land only 10 acres Owned
Victoria, Australia Land and residence 24 acres Owned
Somersby, N.S.W., Australia Land only 17 acres Owned
Lindfield, Australia Office 12,411 sq. ft. Leased
Richmond Hill, Ontario,
Canada Office and warehouse 85,364 sq. ft. Owned
Office and warehouse 108,302 sq. ft. Leased
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 33,792 sq. ft. Leased
Leamington Spa, England Office 23,358 sq. ft. Leased
London, England Office 9,230 sq. ft. Leased
Sussex, England Warehouse 7,420 sq. ft. Leased
Somerset, England Warehouse 6,630 sq. ft. Leased
Paris, France Warehouse 4,779 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 fairs lease
various regional warehouse locations in the United States comprising 715,314
square feet in total. The Company also owns or leases other smaller facilities
and property in the United States, Canada, Australia, the United Kingdom, New
Zealand and France. Management believes that these facilities are adequate and
suitable for the Company's current needs.
See Note 5 -- 'Commitments' in the Notes to Consolidated Financial
Statements for information concerning the Company's obligations under all
leases.
ITEM 3. LEGAL PROCEEDINGS
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, 1996.
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'r'
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'r'-Nasdaq
National Market'r' system for the Company's Common Stock.
YEAR ENDED MAY 31,
---------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
HIGH LOW HIGH LOW
------------ ------------ ------------ ------------
First Quarter............................................. 66 3/4 52 1/4 46 1/2 35 1/2
Second Quarter............................................ 71 58 3/4 50 45
Third Quarter............................................. 78 3/4 65 3/4 53 3/4 45 3/4
Fourth Quarter............................................ 73 3/4 60 57 49 3/4
Year...................................................... 78 3/4 52 1/4 57 35 1/2
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 payments
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, 1996 were 3 and 6,000, respectively.
On August 18, 1995, the Company sold $110.0 million 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 Debentures offered pursuant to Rule 144A are
designated for trading in the Portal system of the National Association of
Securities Dealers, Inc. See Note 4 of the Notes to Consolidated Financial
Statements.
12
ITEM 6. SELECTED FINANCIAL DATA
Years ended May 31 (Amounts in thousands except per share data)
- - ----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
STATEMENT OF INCOME DATA:
Total revenues................................. $928,599 $749,891 $631,590 $552,277 $489,345
Cost of goods sold............................. 466,030 355,968 297,069 265,675 236,032
Selling, general and administrative expenses... 367,376 316,263 271,354 231,736 203,903
Other operating costs:
Goodwill, Trademarks, and License
amortization and depreciation........... 13,054 10,010 7,603 5,808 6,134
Impairment of assets...................... 24,304(1) -- -- -- --
Other charges............................. -- -- -- -- 10,291(2)
Operating income............................... 57,835 67,650 55,564 49,058 32,985
Interest expense, net.......................... 11,170 5,395 2,856 2,259 11,408
Net income..................................... 31,897(3) 38,578 24,794(4) 28,104 12,953
Net income per share -- fully diluted.......... $1.97(3) $2.37 $1.53(4) $1.75 $1.05
Weighted average shares outstanding -- fully
diluted...................................... 17,341 16,286 16,155 16,430 13,329
BALANCE SHEET DATA (END OF YEAR):
Working capital................................ $177,082 $136,775 $100,297 $ 62,997 $ 64,513
Total assets................................... 673,166 505,864 390,040 263,191 226,043
Long-term debt................................. 186,810 91,518 39,605 3,261 23,387
Stockholders' equity........................... 288,647 250,213 205,832 153,493 111,707
(1) Fiscal 1996 includes a non-cash charge relating to the impairment of certain
assets of $24,304. A significant portion of this charge was determined in
connection with the Company's early adoption of Statement of Financial
Accounting Standards No. 121, which requires an evaluation of the
realization of long-lived asset carrying values. This charge consists of the
unamortized prepublication ($10,809) and inventory ($13,495) costs of the
Company's K-2 math program, several older supplemental instructional
publishing programs and other selected titles. The fully diluted impact of
the charge is $0.88 per share.
(2) Fiscal 1992 includes a provision for nonrecurring relocation charges of
$4,100 relating to the consolidation of the Company's New York staff and
includes a provision for a nonrecurring charge of $6,191, relating to the
restructuring of the Company's financial commitment for theatrical motion
picture productions. The combined fully diluted impact of these provisions
is $0.46 per share.
(3) Fiscal 1996 net income and net income per share-fully diluted excluding the
$24,304 non-cash charge would have been $46,801 and $2.85, respectively.
(4) Fiscal 1994 includes a provision for a nonrecurring charge of $8,135 (net of
tax) with a fully diluted 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
$1,305 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 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
reflects 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 video and new media 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 Magic School Bus television series were
major contributors to this increase.
International revenues grew by 16% in U.S. dollars from $129.5 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 $316.3
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,
14
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 consists 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 the
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
totalled $32.1 million.
Earnings before provision for income taxes decreased 25% from $62.3 million
in fiscal 1995 to $46.7 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 $14.8
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.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues for fiscal 1995 totaled $749.9 million, an increase of
approximately 19% compared to fiscal 1994 revenues of $631.6 million.
Domestic book publishing revenues accounted for a majority of the Company's
revenues in both fiscal 1995 and 1994 and increased 21% from $428.3 million in
fiscal 1994 to $516.8 million in fiscal 1995. The increase in domestic book
publishing revenues resulted from double digit increases in book club, trade and
book fair revenues. The Company experienced increased volume in all of its
distribution channels for childrens books. Inflation-related price increases
also contributed, to a lesser extent, to the revenue increases. Book clubs
accounted for 49% of domestic book publishing sales. Growth in book clubs
resulted from additional teachers sponsoring Scholastic book clubs, the
expansion of book club continuity programs and, to a lesser degree, because of
inflation-related price increases and the selection by children of higher priced
items. Book fairs, the Company's second largest distribution channel, 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 on a per fair basis. The trade
or retail based distribution channel recorded more than a 60% growth, primarily
due to the success of the Goosebumps book series. In
15
addition, domestic book publishing revenues include the sales of instructional
materials to schools. Instructional publishing revenues remained virtually
unchanged from fiscal 1994.
Domestic magazine publishing revenues totaled $84.0 million in fiscal 1995
and were 15% greater than fiscal 1994 revenues of $73.0 million. Domestic
magazine publishing revenues are comprised primarily of advertising revenues and
circulation revenues. Advertising revenues increased 35% from fiscal 1994 to
$37.3 million in fiscal 1995. Circulation revenues remained virtually unchanged
from fiscal 1994. A substantial portion of the domestic magazine revenue growth
came from the Company's Home Office Computing magazine which experienced a 35%
revenue increase, in addition to the launch of the national 'Reading Together'
program created by the Company and sponsored by the Chrysler Corporation.
Domestic video and new media revenues increased 8% from fiscal 1994 to
$19.5 million in fiscal 1995.
International revenues grew by 15% in U.S. dollars from $112.3 million in
fiscal 1994 to $129.5 million in fiscal 1995. This revenue growth was led by
sales increases in Canada with strong trade sales in each of the other
subsidiaries combined with favorable currency translation.
Cost of goods sold increased 20% from $297.1 million in fiscal 1994 to
$356.0 million in fiscal 1995. Cost of goods sold as a percentage of revenues
increased slightly from 47% in fiscal 1994 to 47.5% in fiscal 1995 primarily due
to 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 1995 were as follows: printing and binding (30%), paper (18%),
royalty expense (11%), and editorial expenses (12%). The balance of cost of
goods sold includes amortization of prepublication costs, shipping and labor,
delivery charges, and other miscellaneous manufacturing costs. As a percentage
of total cost of goods sold, each of these components did not change
significantly from fiscal 1994.
Selling, general and administrative expenses increased by 17%, from $271.4
million in fiscal 1994 to $316.3 million in fiscal 1995 due to volume increases
in book clubs and trade and increased costs associated with the continued
expansion of the Company's instructional publishing business. Selling, general
and administrative expenses decreased as a percentage of revenues due to sales
mix (43% in fiscal 1994 and 42% in fiscal 1995). Marketing and promotion costs,
which include the costs of catalogs, direct mail, book club kits, book club
credits, and advertising, constituted approximately 58% of selling, general and
administrative expenses in both fiscal 1995 and in fiscal 1994. 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 $7.6 million in fiscal 1994 to $10.0
million in fiscal 1995. Other operating costs include the amortization of
intangible assets and depreciation.
Operating income increased 22% from $55.6 million in fiscal 1994 to $67.7
million in fiscal 1995. Operating income of the Company's domestic operations
improved in fiscal 1995 compared to fiscal 1994. Operating income profit margins
of domestic operations also improved reflecting significant growth in book
publishing margins and improvements in magazine publishing margins which more
than offset the increase in costs related to the instructional publishing
expansion. Operating income and profit margins for the Company's international
operations increased in fiscal 1995 compared to fiscal 1994 due to growth in the
Canadian subsidiary's businesses.
Net interest expense increased from $2.9 million in fiscal 1994 to $5.4
million in fiscal 1995. This increase was mostly attributable to higher debt
levels during fiscal 1995, which resulted from additional funding provided for
prepublication costs, capital expenditures, additional working capital to
support sales growth and, to a lesser extent, an increase in rates.
Earnings before provision for income taxes and the cumulative effect of
accounting changes increased 18% from $52.7 million in fiscal 1994 to $62.3
million in fiscal 1995.
Income tax expense increased from $19.8 million in fiscal 1994 to $23.7
million in fiscal 1995. Income tax expense for fiscal 1994 included a $1.3
million tax benefit to reflect the effect on net deferred income taxes resulting
from the increase in the federal tax rate from 34% to 35%. In fiscal
16
1995 and fiscal 1994, the Company's effective tax rates were 38.0% and 37.5% of
earnings before taxes, excluding the cumulative effect of accounting changes,
respectively.
Earnings before cumulative effect of accounting changes increased from
$32.9 million in fiscal 1994 to $38.6 million in fiscal 1995. The primary and
fully diluted net income per Class A, Common, and Class A Share and Common Share
Equivalents (excluding cumulative effects of accounting changes) was $2.38 and
$2.37, respectively, and $2.04 in each case in fiscal 1994. During the first
quarter of fiscal 1994, the Company adopted financial accounting standards on
postretirement benefits (other than pensions), postemployment benefits and
income taxes. The cumulative effect of these accounting changes resulted in a
nonrecurring charge of $8.1 million, net of tax. Including the cumulative effect
of accounting changes previously mentioned, net income for fiscal 1994 was $24.8
million, or $1.53 per share.
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. See Supplementary Financial Information in Item 8.
In the months of June, July and August, the Company experiences negative
cash flow due to the seasonality of the business. Historically, seasonal
borrowings increase during June, July and August, and generally peak in
September each year as a result of the Company's business cycle. Seasonal
reductions in debt levels in fiscal 1996 were more than offset by increases in
debt to fund (i) higher working capital levels resulting from revenue growth and
changes in business mix and (ii) business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents remained virtually unchanged for
fiscal years 1996, 1995 and 1994. In each of these fiscal years, the net cash
used in investing activities was funded from cash provided by financing and
operating activities.
Net cash provided by operating activities in fiscal 1996, 1995 and 1994 was
$50.6 million, $28.5 million and $37.6 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 resulting from both the
Company's higher revenue base and a change in business mix toward
receivable-based sales channels.
Cash outflows for investing activities were $154.4 million, $95.0 million
and $93.7 million for fiscal 1996, 1995 and 1994, respectively. Investing
activities primarily consist of prepublication and production cost expenditures,
business and trademark acquisition-related payments and payments for capital
expenditures and royalty advances. Prepublication cost expenditures in fiscal
1996 were $54.9 million, an increase of $9.6 million from $45.3 million in
fiscal 1995. The majority of this increase relates to the Company's expansion of
its instructional publishing activities through investing in the development of
a literacy program, expansion of the Company's science program and investment in
technology-related products. In fiscal 1997, the Company estimates that total
prepublication cost expenditures will approximate $43.0 million. Business and
trademark acquisition-related payments increased significantly in fiscal 1996.
Acquisition related expenditures of $32.1 million are primarily due to the
Company's acquisition of the assets of Trumpet Book Clubs, Inc., on January 23,
1996, the Company's acquisition of School Book Fairs Ltd., on March 6, 1996 and
the April 29, 1996 acquisition of all of the outstanding stock of Weston Woods
Studios, Inc. The Company's capital expenditures totalled $30.4 million in
fiscal 1996, $21.7 million in fiscal 1995 and $41.5 million in fiscal 1994. The
$8.7 million increase from fiscal 1995 to fiscal 1996 resulted primarily from
the Company's continued expansion of warehouse facilities and leasehold
improvements incurred as the Company continues to consolidate its corporate
headquarters in New York City. The $19.8 million decrease from fiscal 1994 to
fiscal 1995 was primarily due to the absence of construction costs incurred in
fiscal 1994 to complete the new corporate
17
headquarters. The Company estimates that its capital expenditures will increase
approximately $12.0 million to approximately $42.0 million in fiscal 1997,
primarily due to the expansion of its corporate headquarters. Payments for
royalty advances increased $5.5 million in fiscal 1996 as a result of the
Company entering into more multi-book agreements and paying generally higher
advances in order to remain competitive in the children's book club and trade
publishing industry. The Company expects further increases in author advances as
it extends its series publishing strategy combined with the renewal of existing
series. Preproduction cost expenditures increased significantly from fiscal
1995. The $11.3 million increase resulted primarily from the Company's
development of The Magic School Bus'r' and Goosebumps'r' television series.
Increases in investing activities were funded by cash flows from operations
and through borrowings under the loan agreement, which the Company and
Scholastic Inc., as joint and several borrowers, entered into on May 27, 1992,
and which was last amended on May 1, 1996 (the 'Loan Agreement') and under the
revolving loan agreement, which the Company and Scholastic Inc., entered into on
June 19, 1995 with Sun Bank, National Association (the 'Revolver') and which was
last amended on August 14, 1996 to increase the maximum borrowing availability
by $15.0 million to $35.0 million. Both the Loan Agreement and the Revolver
expire May 31, 2000. On August 18, 1995 the Company sold $110.0 million of the
Debentures which bear interest at 5.0% and mature on August 15, 2005. The funds
received in connection with the issuance of the 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 and the Debentures.
In fiscal 1996, 1995 and 1994, net cash provided by financing activities
was $104.2 million, $66.2 million and $56.1 million, respectively. Financing
activities consisted of borrowings and paydowns under the Loan Agreement and the
Revolver, the sale of the Debentures and borrowings and paydowns on lines of
credit, which resulted from overdraft agreements between the international
subsidiaries and various banks.
In fiscal 1996, 1995 and 1994, options to purchase a total of 165,579,
185,180 and 119,700 shares of Common Stock were exercised at aggregated exercise
prices of $2.1 million, $2.6 million and $1.0 million, respectively. The
exercise of options in fiscal 1996, 1995 and 1994 reduced current taxes payable
by $3.0 million, $10.0 million and $16.4 million, respectively.
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, 1996, 1995 and
1994............................................................................... 21
Consolidated Balance Sheet at May 31, 1996 and 1995.................................. 22-23
Consolidated Statement of Changes in Stockholders' Equity for the three years ended
May 31, 1996, 1995 and 1994 24
Consolidated Statement of Cash Flows for the three years ended May 31, 1996, 1995 and
1994............................................................................... 25
Notes to Consolidated Financial Statements........................................... 26-34
Report of Independent Auditors....................................................... 35
Supplementary Financial Information -- Summary of Quarterly Results of Operations
(unaudited)........................................................................ 36
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, 1996, 1995 and 1994
(Amounts in thousands except shares and per share data)
- - ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
Revenues................................................................. $928,599 $749,891 $631,590
Operational costs and expenses:
Cost of goods sold.................................................. 466,030 355,968 297,069
Selling, general and administrative expenses........................ 367,376 316,263 271,354
Other operating costs:
Goodwill, Trademarks, and License amortization................. 3,085 2,108 1,774
Depreciation................................................... 9,969 7,902 5,829
Impairment of assets........................................... 24,304 -- --
-------- -------- --------
Total operating costs and expenses........................ 870,764 682,241 576,026
-------- -------- --------
Operating income......................................................... 57,835 67,650 55,564
Interest expense, net.................................................... 11,170 5,395 2,856
-------- -------- --------
Earnings before taxes and cumulative effect of accounting changes........ 46,665 62,255 52,708
Provision for income taxes............................................... 14,768 23,677 19,779
-------- -------- --------
Earnings before cumulative effect of accounting changes.................. 31,897 38,578 32,929
Cumulative effect of accounting changes.................................. -- -- 8,135
-------- -------- --------
Net income............................................................... $ 31,897 $ 38,578 $ 24,794
-------- -------- --------
-------- -------- --------
Earnings per Class A Common and Class A Share and Common Share
Equivalents (excluding cumulative effect of accounting changes):
Primary............................................................. $ 1.97 $ 2.38 $ 2.04
Fully diluted....................................................... $ 1.97 $ 2.37 $ 2.04
Net income per Class A, Common and Class A Share and Common Share
Equivalents:
Primary............................................................. $ 1.97 $ 2.38 $ 1.53
Fully diluted....................................................... $ 1.97 $ 2.37 $ 1.53
Weighted average Class A, Common and Class A Share and Common Share
Equivalents outstanding:
Primary............................................................. 16,195,856 16,242,521 16,154,719
Fully diluted....................................................... 17,341,037 16,285,510 16,154,719
See accompanying notes
21
CONSOLIDATED BALANCE SHEET
Balances at May 31, 1996 and 1995 (Amounts in thousands except shares)
ASSETS
- - -----------------------------------------------------------------------------------------------------------------
1996 1995
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 4,300 $ 3,708
Accounts receivable (less allowance for doubtful accounts of $11,290 in 1996 and
$6,989 in 1995)..................................................................... 118,390 77,361
Inventories:
Paper........................................................................... 9,041 10,281
Books and other................................................................. 180,937 154,540
Deferred taxes....................................................................... 22,694 17,697
Prepaid and other deferred expenses.................................................. 15,118 15,866
-------- --------
Total current assets....................................................... 350,480 279,453
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................................. 6,310 5,873
Buildings............................................................................ 37,511 32,703
Furniture, fixtures and equipment.................................................... 53,852 40,760
Leasehold improvements............................................................... 48,482 37,052
-------- --------
146,155 116,388
Less accumulated depreciation and amortization....................................... 32,018 23,151
-------- --------
Net property, plant and equipment............................................... 114,137 93,237
OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs................................................................. 105,016 81,817
Goodwill and trademarks.............................................................. 41,594 9,507
Royalty advances..................................................................... 24,758 16,829
Other................................................................................ 37,181 25,021
-------- --------
Total other assets and deferred charges.................................... 208,549 133,174
-------- --------
$673,166 $505,864
-------- --------
-------- --------
See accompanying notes
22
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------
1996 1995
CURRENT LIABILITIES:
Lines of credit...................................................................... $ 20,933 $ 9,024
Current portion of long-term debt.................................................... 271 455
Accounts payable..................................................................... 63,148 52,412
Accrued royalties.................................................................... 19,074 13,509
Deferred revenue..................................................................... 9,216 11,809
Other accrued expenses............................................................... 60,756 55,469
-------- --------
Total current liabilities....................................................... 173,398 142,678
NONCURRENT LIABILITIES:
Long-term debt....................................................................... 186,810 91,518
Other noncurrent liabilities......................................................... 24,311 21,455
-------- --------
Total noncurrent liabilities.................................................... 211,121 112,973
COMMITMENTS
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.............................................................. 8 8
Common Stock, $.01 par value
Authorized-25,000,000 shares
Issued-16,331,698 shares (16,164,779 shares at 5/31/95)............................ 163 162
Additional paid-in capital........................................................... 194,785 189,563
Foreign currency translation adjustment.............................................. (140) (1,454)
Accumulated earnings................................................................. 130,643 98,746
Less 1,301,658 shares of Common Stock in treasury, at cost........................... (36,812) (36,812)
-------- --------
Total stockholders' equity...................................................... 288,647 250,213
-------- --------
$673,166 $505,864
-------- --------
-------- --------
23
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended May 31, 1996, 1995 and 1994 (Amounts in thousands)
- - --------------------------------------------------------------------------------
FOREIGN
ADDITIONAL CURRENCY TOTAL
CLASS A COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
------- ------ ---------- ---------- ----------- -------- -------------
BALANCE AT MAY 31, 1993............. $ 8 $159 $156,660 $ (1,896) $ 35,374 $(36,812) $ 153,493
Net income.......................... 24,794 24,794
Translation adjustment.............. (163) (163)
Stock options exercised............. 1 1,020 1,021
Tax benefit realized from stock
option transactions............... 1,503 1,503
Tax benefit recognized upon adoption
of SFAS 109....................... 25,139 25,139
Stock granted....................... 45 45
--- ----- ---------- ---------- ----------- -------- ----------
BALANCE AT MAY 31, 1994............. 8 160 184,367 (2,059) 60,168 (36,812) 205,832
Net income.......................... 38,578 38,578
Translation adjustment.............. 605 605
Stock options exercised............. 2 2,593 2,595
Tax benefit realized from stock
option transactions............... 2,558 2,558
Stock granted....................... 45 45
--- ----- ---------- ---------- ----------- -------- -----------
BALANCE AT MAY 31, 1995............. 8 162 189,563 (1,454) 98,746 (36,812) 250,213
Net income.......................... 31,897 31,897
Translation adjustment.............. 1,314 1,314
Stock options exercised............. 1 2,129 2,130
Tax benefit realized from stock
option transactions............... 2,993 2,993
Stock granted....................... 100 100
--- ----- ---------- ---------- ----------- -------- -----------
BALANCE AT MAY 31, 1996............. $ 8 $163 $194,785 $ (140) $ 130,643 $(36,812) $ 288,647
--- ------ ---------- ---------- ----------- -------- -----------
--- ------ ---------- ---------- ----------- -------- -----------
See accompanying notes
24
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended May 31, 1996, 1995 and 1994 (Amounts in thousands)
- - -----------------------------------------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 31,897 $ 38,578 $ 24,794
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation..................................... 42,482 24,003 21,699
Impairment of assets.............................................. 24,304 -- --
Royalty advances expensed......................................... 13,455 11,666 10,019
Provision for losses on accounts receivable....................... 9,565 6,614 3,716
Deferred income taxes............................................. (4,737) 2,643 (44)
Cumulative effect of accounting changes........................... -- -- 8,135
Changes in assets and liabilities net of effects from business
acquisitions and dispositions:
Increase in accounts receivable.............................. (49,164) (27,467) (22,385)
Increase in inventory........................................ (31,641) (42,767) (17,549)
(Increase) decrease in prepaid expenses...................... 1,470 (2,495) (3,410)
Increase in accrued royalties................................ 5,548 3,890 2,033
Increase in accounts payable and other accrued expenses...... 3,839 12,604 8,113
Increase (decrease) in deferred revenues..................... (2,678) 2,595 2,254
Other, net........................................................ 6,265 (1,411) 180
--------- --------- --------
Total adjustments....................................... 18,708 (10,125) 12,761
--------- --------- --------
Net cash provided by operating activities......................... 50,605 28,453 37,555
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepublication cost expenditures....................................... (54,924) (45,346) (34,533)
Business and trademark acquisition-related payments.................... (32,059) (7,760) (3,804)
Additions to property, plant and equipment............................. (30,362) (21,653) (41,494)
Royalty advances paid.................................................. (20,141) (14,592) (12,368)
Production cost expenditures........................................... (16,886) (5,606) (1,533)
--------- --------- --------
Net cash used in investing activities............................. (154,372) (94,957) (93,732)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver........................... 209,581 158,921 102,668
Principal paydowns on loan agreement and revolver...................... (224,220) (106,615) (66,068)
Proceeds from issuance of convertible debt............................. 107,250 -- --
Borrowings under lines of credit....................................... 53,930 45,250 41,070
Principal paydowns on lines of credit.................................. (46,728) (43,661) (38,474)
Tax benefit realized from stock option transactions.................... 2,993 9,989 16,369
Proceeds from exercise of stock options................................ 2,130 2,595 1,021
Payments of deferred financing costs................................... (692) (312) (439)
--------- --------- --------
Net cash provided by financing activities......................... 104,244 66,167 56,147
Effect of exchange rate changes on cash................................ 115 (57) 47
--------- --------- --------
Net increase (decrease) in cash and cash equivalents................... 592 (394) 17
Cash and cash equivalents at beginning of year......................... 3,708 4,102 4,085
--------- --------- --------
Cash and cash equivalents at end of year............................... $ 4,300 $ 3,708 $ 4,102
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL INFORMATION:
Income taxes paid...................................................... $ 22,251 $ 12,223 $ 3,478
Interest paid.......................................................... 9,775 4,952 2,404
See accompanying notes
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NATURE OF OPERATIONS
The Company has operations in the United States, Canada, Mexico, the United
Kingdom, France, Australia and New Zealand and the Company distributes its
materials through 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 (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, 1996 and 1995 was $24.9 million
and $18.8 million, respectively.
Royalty advances are expensed as earned or when future recovery appears
doubtful. The reserve for royalty advances was $18.4 million and $16.6 million
at May 31, 1996 and 1995, 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, 1996 and 1995 was $4.5 million and $3.1 million,
respectively.
26
INCOME TAX
The Company adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), 'Accounting for Income Taxes'. Under SFAS 109, deferred income tax
assets and liabilities are recognized for the expected future tax effects
attributable to temporary differences between the financial reporting and tax
bases of the Company's assets and liabilities, based on enacted tax rates and
other provisions of tax law.
OTHER ACCRUED EXPENSES
Other accrued expenses include a reserve for unredeemed credits issued in
conjunction with the Company's book club operations of $8.9 million and $10.3
million and accrued taxes of $9.0 million and $9.3 million, at May 31, 1996 and
1995, 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.
NEW ACCOUNTING PRINCIPLES
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), 'Employers' Accounting for
Postretirement Benefits Other Than Pensions' (See Note 8); Statement of
Financial Accounting Standards No. 112 (SFAS 112), 'Employers' Accounting for
Postemployment Benefits' (See Note 8); and Statement of Financial Accounting
Standards No. 109 (SFAS 109), 'Accounting for Income Taxes' (See Note 7). The
cumulative effect of these accounting changes resulted in a nonrecurring charge
of $8.1 million, net of tax, or $0.51 per share. Excluding the cumulative
effect, adoption of these statements did not have a significant effect on net
income in fiscal 1994.
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 to be 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 issued in October 1995. SFAS 123 permits
entities to record expense for employee stock compensation plans based on fair
value at date of grant or to utilize the intrinsic value method. The Company
plans to continue to measure compensation cost using the intrinsic value method,
in accordance with APB Opinion No. 25, 'Accounting for Stock Issued to
Employees'.
2. IMPAIRMENT OF ASSETS
Fiscal 1996 includes a non-cash charge relating to the impairment of
certain assets of $24.3 million pre-tax, $14.9 million 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 No. 121. This charge
consists of unamortized prepublication ($10.8 million) and inventory costs
($13.5 million) of the Company's K-2 math program, several older supplemental
instructional publishing programs and other selected titles.
27
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,
France and Mexico. As of May 31, 1996, 1995 and 1994, equity in the wholly-owned
subsidiaries in these countries was $40.8 million, $36.2 million and $37.2
million, respectively.
The following table summarizes certain information for the fiscal years
ended May 31, 1996, 1995 and 1994 regarding the Company's domestic and
international operations (in millions).
DOMESTIC INTERNATIONAL
OPERATIONS OPERATIONS CONSOLIDATED
- - -----------------------------------------------------------------------------------------------------------------------
1996
Revenues................................................................. $778.9 $ 149.7 $928.6
Operating income......................................................... 48.8(1) 9.0 57.8(1)
Identifiable assets...................................................... 565.9 107.3 673.2
- - ----------------------------------------------------------------------------------------------------------------------
1995
Revenues................................................................. $620.3 $ 129.6 $749.9
Operating income......................................................... 63.6 4.1 67.7
Identifiable assets...................................................... 423.6 82.3 505.9
- - ------------------------------------------------------------------------------------------------------------------
1994
Revenues................................................................. $519.3 $ 112.3 $631.6
Operating income......................................................... 51.7 3.9 55.6
Identifiable assets...................................................... 317.7 72.3 390.0
- - ------------
(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, 1996 and 1995 (in
millions):
- - ------------------------------------------------------------------------------------------------------------------
1996 1995
Loan Agreement and Revolver.................................................................. $ 74.0 $ 88.5
Debentures................................................................................... 110.0 --
Other debt................................................................................... 3.1 3.5
------ -----------
Total debt.............................................................................. 187.1 92.0
Less current portion......................................................................... (.3) (.5)
------ -----------
Total long-term debt.................................................................... $186.8 $ 91.5
------ -----------
------ -----------
A. 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, expanding the facility to $135.0
million, with a right, in certain circumstances, to increase to $160.0 million,
and extending the due date to May 31, 2000. On May 1, 1996 the Loan Agreement
was further amended. Interest charged under this facility is either at the prime
rate or .325% to .90% over LIBOR (as defined). There is a 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 covenants
related to debt and interest coverage ratios (as these terms are defined) and
limits dividends and other distributions.
B. REVOLVER
On June 19, 1995, Scholastic Corporation and Scholastic Inc., entered into
a Revolving Loan Agreement (the 'Revolver') with Sun Bank, National Association,
which provides for revolving credit
28
loans in an aggregate principal amount of up to $20.0 million. The Revolver has
covenants related to debt and interest coverage ratios (as these terms are
defined), limits dividends and other distributions and expires on May 31, 2000.
C. DEBENTURES
On August 18, 1995, the Company sold $110.0 million 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 are designated
for trading in the Portal system of the National Association of Securities
Dealers, Inc.
Interest on the Debentures is payable semi-annually on August 15 and
February 15 of each year. The Debentures are redeemable at the option of the
Company, in whole, but not in part, at any time on or after August 15, 1998 at
100% of the principal amount plus accrued interest. Each debenture is
convertible, at the holder's option any time prior to maturity, into Common
Stock of the Company at a conversion price of $76.86 per share.
The net proceeds from the sale of the Debentures were $107.3 million after
deduction of underwriting fees and offering expenses.
D. OTHER LINES OF CREDIT
The Company's international subsidiaries have lines of credit amounting to
$30.1 million at May 31, 1996. There was $20.9 million and $9.0 million
outstanding under these credit lines at May 31, 1996 and 1995, respectively. The
weighted average interest rate on the outstanding amounts was 7.5% and 7.6% at
May 31, 1996 and 1995, respectively.
5. 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 $20.5 million, $16.9 million and $14.2
million net of sublease income for the fiscal years ended May 31, 1996, 1995 and
1994, respectively. These rentals include payments under the terms of the
escalation provisions.
The aggregate minimum future annual rental commitments at May 31, 1996,
under all noncancelable operating leases totaling $119.1 million are as follows
(in millions): 1997 - $19.4; 1998 - $16.6; 1999 - $13.0; 2000 - $10.3;
2001 - $8.5; later years - $51.3.
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 remaining directors 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, 1996, there were 161,500 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.
No ISO's have been granted under the Stock Option Plan.
On September 22, 1995, the Company adopted the 1995 Stock Option Plan. An
aggregate of two million shares of Common Stock have been reserved for issuance
upon the exercise of options granted under this plan. For the year ended May 31,
1996, no options were granted under the plan.
29
On May 19, 1992, the Company adopted the Outside Directors' Stock Option
Plan (the 'Outside Directors' Plan'). At May 31, 1996, there were 3,000 options
available for grant under the Outside Directors' Plan.
Generally, options granted under the various plans may not be exercised for
one year after grant and expire ten years and one day after grant.
Activity under the various stock option plans for the fiscal years ended
May 31, 1996, 1995 and 1994 was as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
OPTION OPTION PRICE OPTION OPTION PRICE OPTION OPTION PRICE
SHARES RANGE SHARES RANGE SHARES RANGE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding -- beginning
of year................ 953,729 $ 1.14-47.88 1,067,159 $ 1.09-47.88 944,859 $ 1.09-35.25
Granted.................. 288,750 57.56-64.63 82,500 39.68-46.69 242,000 34.50-47.88
Exercised................ (165,579) 1.26-34.50 (185,180) 1.09-35.25 (119,700) 1.18-31.25
Cancelled................ (1,500) 34.50 (10,750) 34.50 --
--------- --------- ---------
Outstanding -- end of
year................... 1,075,400 1.14-64.63 953,729 1.14-47.88 1,067,159 1.09-47.88
--------- --------- ---------
--------- --------- ---------
Exercisable -- end of
year................... 643,250 1.14-47.88 737,479 1.14-47.88 774,159 1.09-35.25
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, 1996, 1995 and 1994, the Company issued 1,340, 891 and 1,044 shares of
Common Stock at per share prices of $74.88, $50.63 and $43.13, respectively,
pursuant to the Stock-For-Retainer Plan.
7. INCOME TAX EXPENSE
Consolidated income tax expense for the fiscal years ended May 31, 1996,
1995 and 1994 was based on earnings before taxes and cumulative effect of
accounting changes as follows (in millions):
- - ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Domestic........................................................................... $40.7 $ 61.3 $ 50.6
International wholly owned subsidiaries............................................ 6.0 1.0 2.1
----- ----------- -----------
$46.7 $ 62.3 $ 52.7
----- ----------- -----------
----- ----------- -----------
30
Income tax expense (benefit) for the fiscal years ended May 31, 1996, 1995
and 1994 consists of the following components (in millions):
- - ----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Federal
Current(1).................................................................... $15.1 $ 18.9 $ 17.6
Deferred...................................................................... (5.3) 2.8 (2.2)
----- ----------- -----------
$ 9.8 $ 21.7 $ 15.4
----- ----------- -----------
----- ----------- -----------
State and local
Current....................................................................... $ 1.7 $ 1.7 $ 1.1
Deferred...................................................................... (.1) (.1) 2.1
----- ----------- -----------
$ 1.6 $ 1.6 $ 3.2
----- ----------- -----------
----- ----------- -----------
International
Current....................................................................... $ 2.7 $ .4 $ 1.1
Deferred...................................................................... .7 -- .1
----- ----------- -----------
$ 3.4 $ .4 $ 1.2
----- ----------- -----------
----- ----------- -----------
Total
Current....................................................................... $19.5 $ 21.0 $ 19.8
Deferred...................................................................... (4.7) 2.7 --
----- ----------- -----------
$14.8 $ 23.7 $ 19.8
----- ----------- -----------
----- ----------- -----------
- - ------------
(1) For the fiscal years ended May 31, 1996, 1995 and 1994 federal current taxes
payable are $12.2, $9.1, and $1.2, respectively. The difference between the
current taxes payable and the current federal income tax expense for each
year is due to the 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, 1996, 1995 and 1994
results in effective tax rates of 31.6%, 38.0% and 37.5%, 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
(in millions):
- - ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Computed federal statutory provision............................................... $16.3 $ 21.8 $ 18.4
State income tax provision net of federal income tax benefit....................... 1.0 1.0 2.1
Effect of enacted federal tax rate change on net deferred tax assets............... -- -- (1.3)
Difference in effective tax rates on earnings of foreign subsidiaries.............. (.8) .1 .5
Charitable contributions........................................................... (2.0) (.3) --
Other -- net....................................................................... .3 1.1 .1
----- ----------- -----------
Total provision for income taxes.............................................. $14.8 $ 23.7 $ 19.8
----- ----------- -----------
----- ----------- -----------
Effective June 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
109.
The undistributed earnings of foreign subsidiaries at May 31, 1996 are
$31.7 million. It is the Company's intention to reinvest all remaining
unremitted earnings of its subsidiaries where permitted by foreign
jurisdictions. Determination of the amount of unrecognized deferred U.S. income
tax liability is not practicable. The tax on any distribution of such earnings
would be reduced by foreign tax credits.
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
31
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, 1996 and 1995 are as follows (in millions):
- - ---------------------------------------------------------------------------------------------------------------------
1996 1995
Deferred tax assets:
Accounting reserves....................................................................... $ 9.3 $ 8.1
Inventory accounting...................................................................... 9.0 3.3
Postretirement, postemployment and pension obligations.................................... 5.1 5.2
Theatrical motion picture accounting...................................................... 2.8 2.8
Other -- net.............................................................................. -- .8
----- -----------
Total deferred tax assets............................................................ 26.2 20.2
Valuation allowance for deferred tax assets.................................................... -- (.7)
----- -----------
Deferred tax assets after valuation allowance............................................. 26.2 19.5
----- -----------
Deferred tax liabilities:
Depreciation.............................................................................. 2.7 2.4
Other -- net.............................................................................. 1.4 --
----- -----------
Total deferred tax liabilities....................................................... 4.1 2.4
----- -----------
Net deferred tax assets.............................................................. $22.1 $ 17.1
----- -----------
----- -----------
8. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the 'Plan') which covers a
majority of all 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 members 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. In accordance with the provisions of
Statement of Financial Accounting Standards No. 87, (SFAS 87) 'Employers'
Accounting for Pensions,' the Company recorded an additional minimum pension
liability of $0.5 million at May 31, 1995. This liability is offset by an
intangible asset of an equal amount.
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,
1996 and 1995, the total expenses for these plans were $0.5 million and $0.4
million, respectively. Canada's pension plan was terminated on September 30,
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 fiscal years ended May 31,
1996, 1995 and 1994 are summarized as follows (in millions):
- - -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Service cost..................................................................... $ 1.4 $ 1.1 $ 1.6
Interest cost.................................................................... 1.2 1.1 1.1
Actual return on plan assets..................................................... (2.2) (1.5) (.6)
Net amortization (deferral)...................................................... 1.2 .8 (.2)
----------- ----------- -----
Total pension cost............................................................... $ 1.6 $ 1.5 $ 1.9
----------- ----------- -----
----------- ----------- -----
32
The funded status of the pension plans at May 31, 1996 and 1995, is as
follows (in millions):
- - --------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
ACCUMULATED BENEFITS PLAN ASSETS EXCEED
EXCEED PLAN ASSETS ACCUMULATED BENEFITS
------------------------ ----------------------------
Actuarial present value of benefit obligations:
Vested benefits.............................................. $ 13.1 $ 11.3 $ 1.8 $ 1.6
Non-vested benefits.......................................... .7 .6 -- --
----------- ----------- ----- -----
Accumulated benefit obligation.................................... 13.8 11.9 1.8 1.6
Effect of projected future salary increases.................. 1.8 1.4 .3 .3
----------- ----------- ----- -----
Projected benefit obligation...................................... 15.6 13.3 2.1 1.9
Plan assets at fair value......................................... 13.5 11.2 2.3 2.1
----------- ----------- ----- -----
Plan assets less than (greater than) projected benefit
obligation................................................. 2.1 2.1 (.2) (.2)
Unrecognized net gain........................................ 1.4 .6 .2 .1
Unrecognized net transition asset (obligation)............... (1.3) (1.4) .1 .2
Unrecognized prior service cost.............................. (1.0) (1.1) (.1) (.1)
Additional liability resulting from minimum liability
provisions................................................. -- .5 -- --
----------- ----------- ----- -----
Accrued pension cost included in financial statements............. $ 1.2 $ .7 $ -- $ --
----------- ----------- ----- -----
----------- ----------- ----- -----
Assumed rates:
Discount rate................................................ 8.0% 8.0% 9.0% 9.0%
Compensation increase factor................................. 5.0 5.0 7.0 7.0
Return on assets............................................. 9.5 9.5 9.0 9.0
Plan assets consist primarily of stocks, bonds, money market funds,
insurance contracts, and U.S. government obligations.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially all
of the Company's domestic employees may become eligible for these benefits if
they reach normal retirement age while working for the Company.
Effective June 1, 1993, the Company adopted SFAS 106 which requires that
the expected cost of providing these postretirement benefits be accrued during
the years employees render the necessary service. The Company recognized the
transition obligation at the date of adoption immediately as the effect of a
change in accounting principle. The transition obligation, a one-time noncash
charge, was approximately $10.3 million (pretax) with a related tax benefit of
approximately $3.8 million. Prior to adopting SFAS 106, the cost of retiree
health care and life insurance benefits was recognized as expense as claims were
paid.
The components of the net periodic postretirement benefit costs for the
fiscal years ended May 31, 1996, 1995 and 1994 are as follows (in millions):
- - -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Service cost....................................................................... $ .5 $ .4 $ .4
Interest cost on accumulated benefit obligation.................................... .8 .9 .9
----- ----- -----
Net periodic postretirement benefit cost........................................... $ 1.3 $ 1.3 $ 1.3
----- ----- -----
----- ----- -----
33
The components of the accumulated postretirement benefit obligation
included in other noncurrent liabilities at May 31, 1996 and 1995 are as follows
(in millions):
- - -------------------------------------------------------------------------------------------------------------------
1996 1995
Retirees....................................................................................... $ 6.7 $ 6.9
Fully eligible active plan participants........................................................ 2.0 2.0
Other active plan participants................................................................. 2.8 2.8
----- -----------
Accumulated postretirement benefit obligation.................................................. 11.5 11.7
Unrecognized net actuarial gain................................................................ 1.2 .2
----- -----------
Accrued postretirement benefit obligation...................................................... $12.7 $ 11.9
----- -----------
----- -----------
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 12%
with an annual decline of 1% until the rate reaches 5% in the year 2002. An
increase of 1% in the health care cost trend rate would result in increases of
approximately $1.4 million in the accumulated benefit obligation and $0.2
million in the annual net periodic postretirement benefit cost.
Effective June 1, 1993, the Company adopted SFAS 112 which requires an
accrual method of recognizing certain postemployment benefits such as severance.
The Company recognized the transition obligation, a one-time noncash charge, as
the cumulative effect of a change in accounting principle in the amount of $2.3
million (pretax) with a related tax benefit of $0.8 million.
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 ending May 31, 1996, 1995 and 1994, the
Company matched the employees' pretax payroll deductions (up to 6% of
compensation) 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
annually. 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, 1996, 1995 and 1994, the Company's 401(k) matching contributions were
$2.0 million, $1.9 million and $1.5 million, respectively.
34
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, 1996, and 1995, 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, 1996. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with 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
addressing 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, 1996 and 1995 and the consolidated results of its
operations, and its cash flows for each of the three years in the period ended
May 31, 1996 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.
As described in Note (1) to the financial statements, the Company changed
its methods of accounting for postretirement benefits other than pensions,
postemployment benefits and income taxes in the year ended May 31, 1994.
/s/ Ernst & Young LLP
Ernst & Young LLP
New York, New York
July 3, 1996
35
SUPPLEMENTARY FINANCIAL INFORMATION
Summary of Quarterly Results of Operations for the fiscal years ended May 31,
1996 and 1995
(Unaudited, amounts in thousands except per share data)
- - -----------------------------------------------------------------------------------------------------------------------
1996
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1) YEAR(1)
Revenues............................................. $135,191 $294,610 $216,085 $ 282,713 $928,599
Cost of goods sold................................... 78,816 134,620 108,150 144,444 466,030
Net income (loss).................................... (9,792) 31,122 8,889 1,678 31,897
Net income (loss) per share:
Primary......................................... (.62) 1.92 .55 .10 1.97
Fully diluted................................... (.62) 1.81 .55 .10 1.97
- - -----------------------------------------------------------------------------------------------------------------------
1995
FIRST SECOND THIRD
QUARTER QUARTER QUARTER FOURTH QUARTER YEAR
Revenues............................................. $ 87,065 $254,063 $179,930 $ 228,833 $749,891
Cost of goods sold................................... 51,569 112,000 85,230 107,169 355,968
Net income (loss).................................... (11,169) 27,320 7,974 14,453 38,578
Net income (loss) per share:
Primary......................................... (.72) 1.68 .49 .89 2.38
Fully diluted................................... (.72) 1.68 .49 .89 2.37
- - ------------
(1) The fourth quarter of fiscal 1996 includes a non-cash charge relating to the
impairment of certain assets of $24.3 million pre-tax and $14.9 million
after-tax. A significant portion of this charge was determined in connection
with the Company's early adoption of SFAS 121, which requires an evaluation
of the realization of long-lived asset carrying values. This charge consists
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. The fully
diluted earnings per share impact for the year was $0.88.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
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, 1996)
NAME AGE POSITION
- - ------------------------ --- ----------------------------------------------------------------------------
Richard Robinson........ 59 Chairman of the Board, President and Chief Executive Officer
Barbara A. Marcus....... 45 Executive Vice President, Children's Book Publishing
Margery W. Mayer........ 44 Executive Vice President, Instructional Publishing
Kevin J. McEnery........ 48 Executive Vice President and Chief Financial Officer
Ruth Otte............... 47 Executive Vice President, Media
Richard M. Spaulding.... 59 Director, Executive Vice President
Charles B. Deull........ 36 Senior Vice President, Legal and Business Affairs
Jean L. Feiwel.......... 43 Senior Vice President, Associate Publisher -- Children's Book Publishing
Ernest B. Fleishman..... 59 Senior Vice President, Education and Corporate Relations
Deborah A. Forte........ 42 Senior Vice President, Division Head, Scholastic Productions
Frank Grohowski......... 55 Senior Vice President, Operations
Hugh Roome.............. 44 Senior Vice President, Magazine Group
David J. Walsh.......... 60 Senior Vice President, International Operations
Lynette E. Allison...... 39 Vice President, General Counsel and Secretary
Helen V. Benham......... 46 Director, Corporate Vice President, Early Childhood Advisor
Claudia H. Cohl......... 56 Vice President, Professional Publishing
Larry V. Holland........ 37 Vice President, Human Resources
Raymond Marchuk......... 45 Vice President, Finance & Investor Relations
David D. Yun............ 48 President, Scholastic Book Fairs, Inc.
Leslie G. Lista......... 37 Corporate Controller
Vincent M. Marzano...... 33 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.
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. 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.
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, Connecticut 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.
Ruth Otte became Executive Vice President of 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.
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.
37
Jean L. Feiwel was appointed Senior Vice President -- Associate Publisher
of Childrens Book Publishing in December 1993. Ms. Feiwel joined Scholastic Inc.
in July 1983 and has served as Vice President -- Editor-in-Chief of 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.
Deborah A. Forte was appointed Senior Vice President: Division
Head -- Scholastic Productions in January 1995. Ms. Forte has been with
Scholastic since 1984 serving as a Vice President of Scholastic Productions,
Inc. until 1994 when Ms. Forte was appointed Executive Vice President,
Scholastic Productions, 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.
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 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.
David J. Walsh was elected Senior Vice President in charge of International
Operations for Scholastic Inc. in November 1983.
Lynette E. Allison has held her current position as Vice President, General
Counsel and Secretary with the Company since May 1988.
Helen V. Benham joined Scholastic Inc. in 1974. In 1996, she was named
Corporate Vice President, Early Childhood Advisor. In June 1990 she was named
Vice President and Publisher of the Early Childhood Division. 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 -- Professional Publishing. 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. 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-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 also appointed to the position of
Executive Vice President of SBF, Inc.
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.
38
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,
1996, 1995 and 1994.
-- Consolidated Balance Sheet at May 31, 1996 and 1995.
-- Consolidated Statement of Changes in Stockholders' Equity for the
years ended May 31, 1996, 1995 and 1994.
-- Consolidated Statement of Cash Flows for the years ended May 31,
1996, 1995 and 1994.
-- 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.(9)
(b) -- Amendment to the Amended and Restated Loan Agreement dated May 1, 1996.
(c) -- Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National
Association.(4)
(d) -- Amendment to the Revolving Loan Agreement dated August 14, 1996.(4)
(e) -- Overdraft Facility dated June 1, 1992, as amended on October 30, 1995 between Scholastic Canada
Ltd. and CIBC.(4)
(f) -- Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Citibank, N.A.(4)
(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.(4)
(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.(4)
(i) -- Indenture dated August 15, 1995 relating to $110.0 million of 5% Convertible Subordinated
Debentures due August 15, 2005 issued by the Registrant.(10)
10 Material Contracts:
(a) -- Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1,
1992.(10)
(b) -- Amended and Restated Retirement Income Plan for Employees of Scholastic Inc. effective as of July
1, 1989.(10)
(c) -- 1992 Stock Option Plan.(6)
(d) -- 1995 Stock Option Plan.(11)
(e) -- Non-qualified Stock Option Agreement dated July 16, 1987 between the Registrant and Joseph W.
Oliver.(3)
(f) -- Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc.(5)
39
EXHIBIT
NUMBER
------
(g) -- Amendment agreement dated as of April 1, 1993 between Ise Hiyoko, Inc. and Scholastic Inc.(8)
(h) -- Outside Directors' Stock Option Plan.(6)
(i) -- Non-Employee Director Stock-For-Retainer Plan.(7)
(j) -- Industrial Development Agency of the City of New York documents:
(1) Lease agreement dated December 1, 1993.(8)
(2) Indenture of Trust agreement dated December 1, 1993.(8)
(3) Project agreement dated December 1, 1993.(8)
(4) Sales Tax letter dated December 3, 1993.(8)
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:
-- Report on Form 8-K (Item 5) dated June 24, 1996.
(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 Registration Statement on Form
S-1 (Registration No. 33-36300) as filed with the Commission on August 6,
1990 (the '1990 Registration Statement').
(4) 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.
(5) Incorporated by reference to Amendment No. 1 to the 1992 Registration
Statement as filed with the Commission on February 21, 1992.
(6) 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).
(7) 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.
(8) 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).
(9) 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).
(10) 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).
(11) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-98186) as filed with the Commission on October 16,
1995.
40
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 23, 1996 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, Chief August 23, 1996
......................................... Executive Officer and Director (Principal
RICHARD ROBINSON Executive Officer)
/S/ RICHARD M. SPAULDING Executive Vice President and Director August 23, 1996
.........................................
RICHARD M. SPAULDING
/S/ KEVIN J. MCENERY Executive Vice President, Chief Financial August 23, 1996
......................................... Officer (Principal Financial & Accounting
KEVIN J. MCENERY Officer)
/S/ REBECA MARIA BARRERA Director August 23, 1996
.........................................
REBECA MARIA BARRERA
Director August 23, 1996
.........................................
HELEN V. BENHAM
/S/ FREDERIC J. BISCHOFF Director August 23, 1996
.........................................
FREDERIC J. BISCHOFF
/S/ JOHN BRADEMAS Director August 23, 1996
.........................................
JOHN BRADEMAS
/S/ JOHN C. BURTON Director August 23, 1996
.........................................
JOHN C. BURTON
/S/ RAMON CORTINES Director August 23, 1996
.........................................
RAMON CORTINES
/S/ ALONZO A. CRIM Director August 23, 1996
.........................................
ALONZO A. CRIM
41
SIGNATURE TITLE DATE
- - ------------------------------------------ -------------------------------------------- -------------------
Director August 23, 1996
.........................................
ANDREW S. HEDDEN
/S/ MAE C. JEMISON Director August 23, 1996
.........................................
MAE C. JEMISON
/S/ RICHARD A. KRINSLEY Director August 23, 1996
.........................................
RICHARD A. KRINSLEY
/S/ JOAN D. MANLEY Director August 23, 1996
.........................................
JOAN D. MANLEY
/S/ JOHN G. MCDONALD Director August 23, 1996
.........................................
JOHN G. MCDONALD
/S/ AUGUSTUS OLIVER II Director August 23, 1996
.........................................
AUGUSTUS OLIVER II
42
SCHOLASTIC CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 1996
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULE
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SCHEDULE II
SCHOLASTIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END OF
DESCRIPTION OF YEAR TO INCOME WRITE OFFS YEAR
- - -------------------------------------------------------------- ---------- --------- ---------- ----------
May 31, 1996:
Reserve for royalty advances............................. $ 16,591 $ 1,892 $ 120 $ 18,363
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for obsolescence................................. $ 18,186 $15,544 $ 10,007 $ 23,723
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for returns...................................... $ 19,839 $47,714 $ 39,899(1) $ 27,654
--------- -------- --------- ---------
--------- -------- --------- ---------
May 31, 1995:
Reserve for royalty advances............................. $ 14,777 $ 1,993 $ 179 $ 16,591
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for obsolescence................................. $ 15,604 $ 7,034 $ 4,452 $ 18,186
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for returns...................................... $ 14,887 $30,460 $ 25,508(1) $ 19,839
--------- -------- --------- ---------
--------- -------- --------- ---------
May 31, 1994:
Reserve for royalty advances............................. $ 13,186 $ 2,486 $ 895 $ 14,777
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for obsolescence................................. $ 12,887 $ 6,609 $ 3,892 $ 15,604
--------- -------- --------- ---------
--------- -------- --------- ---------
Reserve for returns...................................... $ 9,964 $25,239 $ 20,316(1) $ 14,887
--------- -------- --------- ---------
--------- -------- --------- ---------
- - ------------
(1) Represents actual returns charged to reserve.
S-1
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EXHIBIT INDEX
EXHIBIT PAGE
NO. 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.(10)............................................................
(b) -- Amendment to the Amended and restated Loan Agreement dated May 1, 1996........................
(c) -- Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National
Association.(4)...............................................................................
(d) -- Amendment to the Revolving Loan Agreement dated August 14, 1996.(4)...........................
(e) -- Overdraft Facility dated June 1, 1992, as amended on October 30, 1995, between Scholastic
Canada Ltd. and CIBC.(4)......................................................................
(f) -- Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Citibank, N.A.(4)......................................................
(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.(4).........................
(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.(4).......................................................................................
(i) -- Indenture dated August 15, 1995 relating to $110.0 million of Convertible Subordinated
Debentures due August 15, 2005 issued by the Registrant.(11)..................................
10 Material Contracts:
(a) -- Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1,
1992.(11).....................................................................................
(b) -- Amended and Restated Retirement Income Plan for Employees of Scholastic Inc. effective as of
July 1, 1989.(11).............................................................................
(c) -- 1992 Stock Option Plan.(7)....................................................................
(d) -- 1995 Stock Option Plan.(12)...................................................................
(e) -- Non-qualified Stock Option Agreement dated July 16, 1987 between the Registrant and Joseph W.
Oliver.(3)....................................................................................
(f) -- Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc.(6)............
(g) -- Amendment agreement dated as of April 1, 1993 between Ise Hiyoko, Inc. and Scholastic
Inc.(9).......................................................................................
(h) -- Outside Directors' Stock Option Plan.(7)......................................................
(i) -- Non-Employee Director Stock-For-Retainer Plan.(8).............................................
(j) -- Industrial Development Agency of the City of New York documents:
(1) Lease agreement dated December 1, 1993.(9).................................................
(2) Indenture of Trust agreement dated December 1, 1993.(9)....................................
(3) Project agreement dated December 1, 1993.(9)...............................................
(4) Sales Tax letter dated December 3, 1993.(9)................................................
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 Registration Statement on Form
S-1 (Registration No. 33-36300) as filed with the Commission on August 6,
1990 (the '1990 Registration Statement').
(4) 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.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-48655) as filed with the Commission on June 22,
1992.
(6) Incorporated by reference to Amendment No. 1 to the 1992 Registration
Statement as filed with the Commission on February 21, 1992.
(7) 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).
(8) 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.
(9) 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).
(10) 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).
(11) 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).
(12) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-98186) as filed with the Commission on October 16,
1995.
STATEMENT OF DIFFERENCES
------------------------
The service mark symbol shall be expressed as 'sm'
The trademark symbol shall be expressed as 'tm'
The registered trademark symbol shall be expressed as 'r'